Versatility, trust, security, and scalability: with all these words, and many more, blockchain can be defined, a technology that arrived hand in hand with Bitcoin and is poised to play a significant role in the future. It’s highly likely that, at some point, you’ve heard of it, but do you know exactly what it is and why it’s so important? Linked to the handling of large amounts of data, its impact is already being felt in a multitude of sectors such as finance, commerce, intellectual property, or even education.
At its core, blockchain technology is like a giant digital ledger that records all transactions transparently, securely, and in a decentralized manner, thanks to, among other things, the use of cryptography. To understand what it is, how it works, and what impact it has and will have on all kinds of future systems and transactions, we spoke with Alfredo Muñoz, professor of Commercial Law and director of the Diploma of Advanced Specialization in Blockchain at the Complutense University of Madrid.
P：Professor, let’s start with the most obvious. Can you provide an overview of what blockchain technology is and represents?
R:Basically, blockchain is a type of distributed ledger technology (DLT), meaning that it allows us to share existing information with the entire network of nodes (computers) of which one is a part. Each time information is added, it is shared among all those nodes, and each of them theoretically has a complete copy of the information generated in that ledger. This is what happens, for example, in Bitcoin: each member, each node has a complete copy of that blockchain network and all transactions [which allows for the quick and secure transfer of crypto-assets]. It is also information that cannot be modified or manipulated because each time new data is added, a hash (a mathematical algorithm) and a timestamp are generated indicating the specific date and time that a certain content was introduced.
And what does that mean? Well, initially, all the information inside is immutable. If something needs to be modified, you can do it in a second block; you can say “in the first block I made a mistake,” or “that transaction needs to be modified,” because the information is accumulated by blocks. Imagine a court: the information you gather from the proceedings of a court hearing remains in blockchain, and no one can manipulate it anymore. And the same goes for banking transactions.
P： But can false information be introduced?
R:The information you introduce may be false, but if necessary, it is information that you can verify was introduced and identify when it was done. Regulation eIDAS 2, which is about to be approved in the European Union, recognizes distributed registers and, if certain conditions are met, grants them legal effects. And this is important because it means that, with blockchain, it will not only allow us to incorporate transactions but also to judicially authenticate them.
P： What is the role of cryptography in blockchain networks?
R:What cryptography does is encode the information and prevent it from becoming vulnerable. By encoding it, we ensure that only the issuing party and the recipient can open it, with their access keys. Therefore, cryptography allows us to shield, protect that information when making any transaction, whether it’s for an asset like Bitcoin or transmitting a simple file.
P: So, it ensures both data immutability and communication security.
R: Exactly. Communication and transactions alike. Keep in mind, we’ve had Bitcoin for 15 years, and it’s never been hacked, thanks to a combination of technologies including cryptography.
P: What are the applications of this technology across different industries?
R: The first and most impacted sector is undoubtedly finance. We first heard of blockchain through Bitcoin, which is now an investment asset but was originally intended as a payment network. Additionally, in 2022, the pilot regime regulation was approved, allowing us to create securities markets using blockchain technology for quoting, trading financial instruments, equity, or corporate debt. It’s worth noting that it enables decentralized (peer-to-peer) transactions, meaning between individuals, without intermediaries. This is significant because, in a centralized ledger, I always have to go through the central node; if I make a bank transfer from one account to another within the same bank, I have to go through the central node, so to speak, I have to “ask for permission”.
Furthermore, another emerging application involves transferable trade documents. For example, when you order a container from China to Europe on a cargo ship, the goods it carries are represented by a document called a bill of lading. However, this is a paper document because we’ve always operated with paper. Sometimes, this container may arrive at the port of Valencia, but the document hasn’t arrived yet, resulting in significant costs because the goods may need to be stored at the port until the document arrives and verifies its authenticity. Well, blockchain technology is now being introduced for this purpose.
Thanks to the immutability of information, traceability, and auditability of data, it also serves as an excellent mechanism to combat money laundering. Moreover, in terms of intellectual property, and thanks to timestamping, it provides evidence of the existence of any file registered in a DLT, proving its unalterability and traceability, thereby safeguarding copyright. Additionally, in the field of educational certifications, immediate and direct validation of any qualification registered on the blockchain by the issuing entity can be performed.
P: Then there are the so-called smart contracts.
R: Yes, but it’s important to clarify that although they’ve been translated literally as such, they aren’t necessarily contracts (although they can be) and they aren’t “intelligent”. They’re more like mandates, self-executing codes introduced by a programmer so that the order is executed upon being introduced into the blockchain network. It could be any kind of provision: for example, I can tell a smart contract that, every 31st of the month, if an employee is still registered with a company, it should pay them their salary. What this mandate, located on a blockchain network, in a distributed ledger, does is check whether that person is still registered, and if that condition is met, it pays them.
However, it could be any type of order. I could tell it that every time the humidity drops below 50% in my garden, it should activate the sprinklers. So, the smart contract goes to the Internet of Things (IoT), where it checks the humidity, and executes the order if the conditions are met. And it could involve, for example, closing the gates of Retiro Park at a certain time unless there’s daylight.
P: Are blockchain networks always decentralized?
R: Not always. There are distributed ledgers, or blockchains, that are centralized and others that are decentralized. Bitcoin, for example, is one of the latter. And what determines that? The possibility for users to have sovereignty in decision-making. Blockchain allows you to create decentralized finance communities to vote on, make, and execute decisions on agreed terms.
However, it’s true that, until now, decentralization has been quite relative. Blockchains are distributed, but a large majority are quite centralized: the future digital euro, for example, will be centralized by the European Central Bank (ECB) and the national central banks of the member states, as they will be responsible for it.
P: What other advantages does blockchain technology offer?
R: Firstly, it not only reduces costs but also potential conflicts of interest: when a company’s administrator makes a decision, it must be in the company’s best interest, but ultimately the decision is made by them.
Additionally, with blockchain, we can audit all information because it’s traceable and immutable. Some use it solely as a database to trace their product, for example, to insert information and create a record that contains secure information that no one has tampered with.
Thirdly, in smart contracts, it enables what we call atomic operations: those that cannot be separated, so that when I deliver something, I must receive the consideration instantly. And if there’s no consideration, I don’t deliver whatever it is. In a traditional securities market, when selling or buying a stock, the asset (i.e., the money) can take more than two days to arrive. With blockchain, operations are done in real-time, eliminating financial risks.
P: Does blockchain have challenges or limitations?
R: Well, there are many. A huge challenge is regulatory, because we need regulations to standardize how blockchain is built and the standards of networks and assets, so that they have legal certainty and are interoperable. Secondly, there may be high energy consumption, although this depends on how the network is configured and its volume. Then there’s lack of knowledge, and that’s why blockchain education is essential in these matters, for judges, prosecutors, legal service providers, entrepreneurs… If we insert the digital euro into this technology, we’ll need to learn quickly. And lastly (but not least), there are cybersecurity risks.
Specialized training is essential; you have to read a lot, and you have to read for yourself. But be careful, because there’s a lot of smoke in this sector too: some offer unreliable information and products that don’t really justify blockchain. But in Spain, there are very good centers and professionals. If you don’t know, you have to find a specialist because this is a complex technology, and you have to know the three pillars on which it stands: technological, regulatory, and economic (the business model realm).