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The advent of blockchain technology in the year 2009 hascompletely revolutionised the digital space. The idea of creating auniversal, entirely decentralised network for carrying outtransactions of a myriad nature has forced us to re-think thecapabilities and limitations of the internet. While blockchaintechnology holds the future and the key to ensuring ease ofcarrying out transactions over the digital space, the same has alsoled us to contemplate some very pertinent questions as to thelegality of such transactions devoid of any laws or regulationsoverlooking the same. A blockchain network that is transnational innature also leads us to examine how our existing territoriallylimited laws can ensure supervision over transactions happeningover such a vast network.

The present series seeks to examine some of these ragingquestions that need to be discussed, deliberated and answered. Theseries has been divided and presented into multiple, separate,comprehensive parts, with each part dealing with a specificsubject. The first paper in the series is presented in three parts,wherein the first part will capture the intricacies of theblockchain network, its essential characteristics and types, whilethe second part will discuss blockchain from a legal perspectiveand will set out the measures adopted by various sectoralregulators in India, the third and final part shall discuss theinitiatives of various States in India in advancing theimplementation of the technology. The forthcoming parts in theseries aim to analyse the interaction of the technology withdistinct legal practices such as Data Privacy, Arbitration, DisputeResolution, Corporate Transactions, Intellectual Property Rightsetc.

As the world advances towards a digital revolution, it has ledto the birth of a decentralised world that seeks to self-govern andnot rely upon a central authority of power to sustain and survive.It is a world that is increasingly controlled by codes, hash,programming to name a few. This system of decentralised power overthe internet arises from a general mistrust of central structures,established rules of conduct (overregulation) and governance thatseeks to promote an era of digital anarchy.

The name 'blockchain' stems from its technical structure a chain of blocks. Each block is chronologically linked tothe previous block via a cryptographic hash. A block is adata structure that allows each system to store a list oftransactions/information. Transactions are created and exchanged bypeers of the blockchain network which modify the state of theblockchain. As such, transactions can exchange monetary amounts,but are not restricted to financial transactions only and evenallow the execution of arbitrary code within so called smartcontracts.1

Blockchain was created to support a uniform, secure,decentralised system for sustaining the transfer of value-basedcrypto assets. The technology that first made its appearance in2008 in a paper written by Satoshi Nakamoto2 (apseudonym), was directed towards creating a decentralised onlineeconomy which did not require a central authority to sustain orgovern the system, one that was beyond borders, and theirconcomitant rules and regulations. In essence, blockchaintechnology was as big of a revolution as the creation of theinternet, combining a rebellion against all sources of power withthe genius of cryptography so much so that it seems almost ironicalthat during the current times governments across the globe havestarted channelling the usage of the technology having realised thepotential it possesses. While Nakamoto's paper only sought toutilise blockchain technology for enabling the transfer ofcryptocurrencies, more specifically bitcoins, this is merely asingular application of the revolutionary technology. The geniusbehind the technology lies in the distributed ledger system that itworks on.

Interestingly, cryptocurrencies unlike tangible currencies areeasier to copy and may be re-utilised since these constitutecompletely digital transactions leaving no trace in the tangibleworld especially in absence of a central authority. This issue waswitnessed by DigiCash which was created by cryptographer DavidChaum in 1994.3 Digicash relied upon Chaum's companyto validate all transactions and unfortunately, when his companywent bankrupt in 1998, DigiCash went down with it.4

Blockchain showcased an elegant solution to this problem ofdouble spending and continued reliance on a central regulatoryfigure. Blockchain permitted mutually mistrusting entities toperform financial payments without relying on a central trustedthird party while offering a transparent and integrity protecteddata storage.5 Due to these properties, blockchain as atechnology has gained much attention beyond the purpose offinancial transactions with the technology being utilisedacross various fields and services, such as financial market, IOT,supply chain, medical treatment, voting, storage and decentralizedautonomous organizations to name a few.6

Blockchain, has been defined as a digital, decentralised(distributed) ledger that keeps a record of all transactions thattake place across a peer-to-peer network.7 Apeer-to-peer network allows all participants within the network toshare files, resources and data that does not separately require amain server computer.8 Blockchain may also be conceivedas a transparent distributed database that records details of alltransactions performed by the system'sparticipants.9

Put simply, a blockchain stores a record of information (asa ledger) that does not require a central authority to governthe network (decentralised). The technology is powered byan interconnected network of participants (nodes orminers), that lend to the network the unique characteristicsof being decentralised and distributed.

A blockchain network is a multi-layered dimension in itself withseveral systems or nodes connected to the network, with nothird-party interference or control. A node could be a laptop, acomputer, or even a small server. Each node over a blockchainnetwork stores the entire record of transactions over the network.These nodes are linked together by a software protocol whichgoverns the blockchain network.

If we are to draw a parallel between a banking system and ablockchain, the similarity lies in the fact that both systems needto store information with respect to transactions. While banksstore the information on a private and centralised system, thestorage system in a blockchain is completely different and uniquewith the entire blockchain functioning as a giant, decentralisedledger that stores information.10 Each node over ablockchain network stores a copy of the information/transactionsover the network, such that there is no central single systemserving as a ledger for the information. The records so saved getsautomatically updated whenever a new transaction is added to ablock.

Interestingly, while a technical glitch in the central server ofa bank that stores the records of all transactions might cause amassive uproar, the same would just never happen on a blockchainnetwork because even if one 'node' (i.e. a system)fails to function or experiences a glitch of some sort, theremaining network of nodes would still hold a copy of the recordsin the ledger. Another major difference between a bank ledger andthe decentralised ledger is that while all nodes have access to therecords stored over a blockchain network the same is not the casein a bank ledger which is subject to restricted access and anysteps to access the records without authorisation might land one inprison. This system also allows all nodes over the network tovalidate and authenticate each and every transaction before it canbe stored on a block.

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The above figure is a classic representation of a decentralisedledger. Alice who wants to send cryptocurrency over the network toBob will have to do the same through a network of nodes spreadacross the globe. Once the transaction has been validated through aconsensus mechanism, the records maintained by every node over thesystem will get automatically updated.

Certain set of nodes who perform a more specialised function arereferred to as 'miners'. A 'miner' is a node in thenetwork who works towards authenticating a transaction. Simply putminers are nodes who have invested in higher levels of programming,specialised mining software and computer power that enables them tocarry out extremely complex computational tasks in order tovalidate a transaction. While all miners are nodes, all nodes mayor may not be miners.

Any person who wishes to join a blockchain network as a mineronly needs to create an account over a platform that gives accessto the network, and additionally invest in specialised computersoftware and programming powers. Upon doing the same, the person(or in essence his system) may become a miner and thereafter mayparticipate in validating transactions. In reality, it is not theindividual miner who authenticates the transaction, rather it isthe system that performs extremely complex tasks using hashingfunctions (SHA-256) towards authenticating the transaction. Theprocess of performing SHA-256 hash twice to arrive at a winninglottery number which is less than a target threshold, which in turncan then be used to authenticate and add new blocks of informationto the blockchain, is known as mining. In exchange for the task ofauthenticating, miners are incentivised with a block reward by thenetwork.

Blockchains possess the capacity to function on a transparent,public network, where the identities of nodes and miners are hiddenaway with private keys and encryptions. Every node over the networkhas a public key and a private key that are paired together. Whilea public key is visible to all and could be considered akin to anemail address, the private key is more like a password and ispossessed by the node only. The private key attaches authenticityto any information sent out by the node or any transaction made byattaching a digital signature to the transaction and the privatekey is only known to the miner/node it belongs to.12

For a transaction to be validated over a blockchain network,each miner over the network performs the SHA- 256 hash twice in thehope that the said hash will provide a number lesser than a targetthreshold. Essentially, it is like performing a long mathematicaldivision and hoping that the number arrived at is a single digit.The miners/computers are expending huge amounts of energy hopingthat it would randomly pick a winning lottery number (and not amathematical puzzle as is commonly misunderstood) which will allowthe miner to claim that they have the next block and thus entitledto the next block reward.13

Hashing is an integral part of the process because it assistsother nodes in authenticating or tracing the transaction. Whilemining and hashing techniques are complicated and a detailedexplainer on these is outside the purview of this paper, it is safeto say that mining involves a game of trial and error by each mineruntil one hits the jackpot by creating a valid hash andauthenticating the transaction. A miner's system has to keepgenerating hash numbers till one wins the gamble. The Bitcoinnetwork typically uses the Secure Hashing Algorithm 256 (SHA-256)that performs the task of reducing every input transaction to afixed output length of 256 bytes. This means no matter the inputlength of the data, the output length is always fixed.

Before the block with the validated information can be added tothe blockchain, the same has to be verified by a majority of nodesover the system. These nodes run a simple calculation in order toensure that the hash output so generated is valid and abides by thenetwork protocol. This system of verification ensures that onlyauthentic data has been stored on a block. Once the block has beenverified, it is added to the network.

Every validated transaction is stored on a block which is thenadded to the chain. Each block over a network comprises of fourcomponents: (a) Timestamp; (b) Nonce & Difficulty; (c) Hash ofthe present block; and (d) Hash of the previous block.

When a miner attains the winning lottery number, it generates aunique hash number that attaches validity to the transaction. Ahash is a unique 64 digit hexadecimal number that operates as aunique fingerprint for each block. Instead of searching for acertain transaction in a network of thousands of blocks, everytransaction can simply be traced through its uniquehash.14 The hash so generated is authenticated by amajority of nodes over the network, once authenticated thetransaction gets recorded in a block.

A block does not simply record the hash of its own data, it alsostores the hash of the previous block. However, the first block ina blockchain (called the 'Genesis Block') cannot pointtowards the hash of a previous block. The Genesis Block depicts theprevious hash value as 0.15 This feature lends toblockchain network a certain amount of authenticity, sincemodifying the hash of a particular block would necessarily requiremodification of the hashes contained in all other preceding blocksover the network. Accomplishing this would require a node or aminer to possess extremely fast computational power that changesthe hash numbers of the blocks faster than they are created.

In addition to the hash, each block over the blockchain networkalso consists of a nonce number. This number is appended to theblock header, and miners must guess this nonce number through trialand error in order to get through to the hashvalue.16

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A blockchain network has no centralised authority to govern andregulate the system. All the decisions over the network have to bemade by the network of nodes by reaching a consensus. The consensusmechanism may manifest itself in several ways over a blockchainnetwork. For instance, consensus may be said to be achieved when amajority of the nodes validate the hash generated by the miner andcreate a consensus that the block should be added to the blockchain(the proof-of-work consensus).18 This consensus is ofutmost significance on the network due to the lack of a centralauthority.

This consensus forms the grundnorm upon which the blockchainsubsists. However, in some cases, the nodes may be unable to cometo a consensus as to a certain transaction. This is where a'fork' or a split is created. A fork results in creation ofa new chain of blocks stemming from the previous chain. The forkcreated may be a soft fork, one that does not alter the validity ofthe old chain, however, it may also be a hard fork, one wherein thenew chain cannot be validated with the old rules, and a consensusis needed as to which chain of blocks shouldprevail.19

The diagram below elaborates how a transaction is undertaken ona bitcoin network:

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Blockchain networks carry a unique set of characteristics, fewbeing:

Like the internet, blockchain network transcends borders andfunctions seamlessly. Nodes over a blockchain network may be spreadacross the globe each possessing a copy of all transactions takingplace over the network. This decentralised network of nodes spreadacross the globe constitute the real authority over a blockchainnetwork responsible for keeping the network up and running. Thereis no central authority governing the activities over the network,no central server holding all records together. The nodes over thenetwork operate together in-tandem with each other to verifytransactions, adding a block to the chain, and serving asindividual ledgers with updated record of all transactions takingplace over the network.

The blockchain network functions on a pre-defined consensusmechanism. The consensus that has to be reached among the nodesover the network accords to the network its unique characteristics,constituting the ability to remain decentralised, and renderingdata stored over the network non-repudiable. For validating andrecording a new transaction over the network, a consensus of nodeswould have to be achieved. The consensus mechanism allows users totrust the network without the need of knowing the identity of othernodes.

The soul of a blockchain network lies in the fact that there isno central power figure in the system. If we imagine a blockchainnetwork to be a nation in itself, it would be a nation run by theindividual citizens all of whom have equal power to run the same,build aspects that they want, and most importantly simultaneous anduniform access to information. Relying upon the same analogy, on ablockchain network, citizens are replaced by the individual nodesin the system. All of these nodes have equivalent and universalpowers. All of them have the capacity to authenticate or validatetransactions broadcasted over the network, although they mustcompete to achieve the valid hash.

While the records of transactions stored on a block areaccessible to all nodes over the network, the data stored on ablock cannot be modified or deleted. If data over a block is indeedto be modified or deleted, it would require a consensus of morethan half the number of miners or nodes over a system, that is,about 51% of the system would have to collude in order to attainthe objective.21 This would mean convincing a majorityof anonymous nodes over the system to tamper the data, which on theface of it may be challenging.

Also, since all records are stored with a unique hash and everyblock is timestamped, tampering with one block will trigger therequirement to modify all the previous blocks which will requiremassive computational power especially in order to attain 51%consensus.22 This unique characteristic essentiallymakes a blockchain network tamper-proof and resilient to change.This may be of great benefit in several sectors (especiallyfinancial sector) that must necessarily rely upon the tamper proofnature of records, for instance, banking and financial sectors.

While all blockchains operate in a similar manner, blockchainsmay be of three types depending upon the extent of accessibility tothe system:

Blockchain technology constitutes one of the most potent digitalrevolutions of our times and it is here to stay. With consistentresearch and efforts on in the field in order to make it morecompatible with distinct sectors, the technology is bound to beclosely tied up with digital advancements in the near future.

While the technology may prove to be quite beneficial whenapplied across sectors, certain concerns may arise. While theinherent decentralised, tamper-free nature of the technology lendscertain benefits and advantages to the network, the samecharacteristics also bring forth a plethora of challenges. Theseconcerns arising from the interplay of the technology with the lawand various sectoral regulators shall be discussed in the secondpart of this paper.

Footnotes

1. Karl Wst & Arthur Gervais,Do you need a Blockchain?, (April 27, 2020, 10:33 am), https://eprint.iacr.org/2017/375.pdf.

2. Satoshi Nakamoto, Bitcoin: APeer-to-Peer Electronic Cash System, (April 28, 2020, 11:01am), BITCOIN.ORG, https://bitcoin.org/bitcoin.pdf.

3. Aaron Wright & Primavera DeFilippi, BLOCKCHAIN AND THE LAW 19 (2018).

4. Id.

5. Supra note 2.

6. Iuon-Chang Lin & Tzu-Chun Liao,A Survey of Blockchain Security Issues and Challenges,INTERNATIONAL JOURNAL OF NETWORK SECURITY, Vol.19, No.5, 653-659(2017).

7. Blockchain: the next innovation tomake our cities smarter, (May 18, 2020, 11:10 am), FICCI-PWC,http://ficci.in/spdocument/22934/Blockchain.pdf.

8. James Cope, What's aPeer-to-Peer Network?, (April 27, 2020, 13:30 PM), https://www.computerworld.com/article/2588287/networking-peer-to-peer-network.html.

9. Balamurali K., 2020: an Era ofb-Governance Blockchain, 21ST NATIONAL CONFERENCE ONE-GOVERNANCE - COMPENDIUM OF SELECTED PAPERS, 2020, DEP. OFADMINISTRATIVE REFORMS & PUBLIC GRIEVANCES, GOVT. OF INDIA, 69,73.

10. The Economist, Blockchain TheNext Big Thing, Or Is It?, (April 27, 2020, 13:30 PM), https://www.economist.com/special-report/2015/05/07/the-next-big-thing.

11. CB Insights, What is BlockchainTechnology?, [image], (April 27, 2020, 13:30 PM), https://www.cbinsights.com/research/what-is-blockchain-technology/.

12. Leon Di, Why do I Need a Publicand Private Key over a Blockchain? (June 08, 2020, 19:13 PM),https://blog.wetrust.io/why-do-i-need-a-public-and-private-key-on-the-blockchain-c2ea74a69e76.

13. Keir Finlow Bates, https://www.linkedin.com/feed/update/urn:li:activity:6678487266249314304/.

14. Online Hashcrack, Hashing inBlockchain Explained, (April 27, 2020, 15:00 PM), https://www.onlinehashcrack.com/how-to-hashing-in-blockchain-explained.php.

15. Medium, What is Genesis Block andWhy Genesis Block is needed?, (May 16, 2020, 10:00 PM), https://medium.com/@tecracoin/what-is-genesis-block-and-why-genesis-block-is-needed-1b37d4b75e43.

16. Jake Frankenfield, Nonce(May 16, 2020, 10:00 AM) https://www.investopedia.com/terms/n/nonce.asp.

17. Hash of the previous block,[image], (May 9, 2020, 8:45 pm), https://www.mdpi.com/J/J-02-00021/article_deploy/html/images/J-02-00021-g002-550.jpg.

18. Investopedia, Consensus Mechanism(Cryptocurrency), (May 16, 2020, 14:30 PM), https://www.investopedia.com/terms/c/consensus-mechanism-cryptocurrency.asp.

19. Geeks for Geeks, BlockchainForks, (May 15, 2020, 11:57 PM), https://www.geeksforgeeks.org/blockchain-forks/.

20. How Bitcoin TransactionsWork?, [image], (June 10, 2020, 13:28 PM), https://janzac.com/how-bitcoin-transaction-works/.

21. The Economist, supra note10.

22. Aaron Wright, supra note 3,at 36.

23 Darya Yafimava, What areConsortium Blockchains and What Purpose Do they Serve?, (April29, 2020, 9:00 AM), https://openledger.info/insights/consortium-blockchains/.

Originally published 6 August2020

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

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