ILTACON 2022: What Legal Professionals Need to Know About Blockchains
A highlight of Day One of ILTACON included the session Blockchain – Are You Prepared for DeFi, NFTs, and DAOs? with Joe Raczynski, manager, Technical Innovation Services. The session provided a blockchain overview and explored cryptocurrencies, smart contracts, decentralized finance, and non-fungible tokens (NFTs).
Legal Current had the opportunity to talk with Raczynski after his session, and below is a recap of the conversation.
Legal Current: Why is it important for legal professionals to understand how blockchains work?
Raczynski: If you plan to practice as a legal professional beyond the next three plus years, blockchain is critical to understand. Blockchains are a fundamental shift in the way we think about control and proof. They can help people track provenance, view records, and execute contracts. It is a fundamental shift in the way we will transact with code acting as the unbiased middle between two entities. It has the potential to be very powerful. If you are on the transactional side, there is little question in time, you will interact with blockchains for almost any legal document. It will certainly help in the automation components of workflow going forward. As you can imagine, litigation will certainly ensue as questions around the above become central to disputes.
LC: Can you share a short history of blockchain and key ways to participate in it?
Raczynski: Blockchain was initially considered a ridiculous notion – the idea of a digitized ledger beholden to no single owner. However, the evolution of blockchain from joke to genuine is stark. For example, the top 50 banks in the world have unified in the realization this technology could disrupt the financial industry.
For those newer to blockchain technology, here’s a brief history: In its simplest form, the term “blockchain” refers to a peer-to-peer network of computers running a common software protocol that includes a database replicated on each computer connected to the network, where each user interaction (other than a query) is recorded as a new entry. Each computer is called a “node,” while the database is often referred to as a “distributed ledger.” In its most simplistic sense, blockchain is a distributed database based on code.
People will participate with the exchanging of digital tokens, cryptocurrency, NFTs, DAOs, ticketing, identity, and almost anything else that require some verification between two parties.
LC: Explain what decentralized autonomous organizations are and how smart contracts are used to enforce the rules governing them.
Raczynski: A DAO (decentralized autonomous organization) is a revolutionary change in the manner that people and businesses can organize. Leveraging blockchain technology, it is a decentralized model of control and governance. The essence of a DAO is transparency, clarity of rule, and process-driven decisions – primarily utilizing smart contracts on distributed ledgers. Once a DAO has been established, via a blockchain, participants take ownership of its token, which allow them to participate in the system. Token holders can propose changes, and vote on those changes, with the subsequent actions being taken “leaderlessly.” There are no CEOs, CFOs, CTOs, only code and community.
Central to any discussion of blockchain and its legal impact is understanding “smart contracts,” a term that has been around for decades but in this landscape has a specific meaning. A smart contract is a few lines of computer code that creates an “if/then” statement, e.g., “if Amazon® stock is at $2,000 on January 1, 2019, then sell it.” What is special about smart contracts on the blockchain is that once an agreement has been reached by two parties, it is programmed onto the platform and becomes self-executing and immutable – without any human intervention.
LC: What impact are blockchain technologies making on the FinTech and LegalTech spaces?
Raczynski: The next building block for this vision is transforming the financial industry. Decentralized finance (DeFi) is reimagining what the industry could look like without intermediaries. By its nature, blockchain removes third parties because the code and underlying math does the verification. Currently, DeFi has hundreds of billions of dollars locked into various blockchains, using smart contracts and cryptocurrency.
For example, in DeFi, if I wanted to earn 20% interest on my cryptocurrency (my money), I could sign a smart contract within my digital wallet telling the blockchain to hold in custody the money for an agreed period, netting me 20%. Nearly every imaginable financial instrument is being ported over into DeFi.
What is pivotal is that you can establish complex financial ecosystems that run based on rules, thus eliminating the need for traditional third parties, like banks and brokerage houses. These rules can dictate action, lock-in value, automate transactions, and create immense efficiencies in the marketplace at a fraction of the cost of our current systems.
LC: How are NFTs and the metaverse evolving, and how is the regulation landscape keeping up?
Raczynski: The next stage of blockchain, cryptocurrency and DeFi are non-fungible tokens (NFTs). They represent anything physical or digital registered to the blockchain. NFTs give an asset a unique code – or hash or name – that can be checked and is verifiable on that digital ledger. We will use this to prove ownership of assets, such as the deed to your house. Recently, NFTs have taken the art and music world by storm. Billions of dollars of digital art have been purchased in the last year. As we move into the metaverse, an eventual virtual place for business and entertainment, those assets will have even more value in virtual homes or in a digital Times Square. It is surreal to contemplate, but this will happen in the next handful of years, all enabled by blockchain.
Currently, the only regulation that exists starts with cryptocurrency and the DeFi space. NFTs are so new, there is very little guidance. As for the metaverse, it is going to be amazing to see how regulators will address it.