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Introduction to Blockchain technology and the tokenization phenomenon

Blockchain technology has been on the rise for 13 years now (2009). For many users, it is still new or even difficult to understand. The truth is that it is a reality that has not been regulated to date, but requires a minimum of knowledge and an approach from a legal point of view.

This will be the first of a series of posts published in the aim of using a simple and more accessible way to explain what this Blockchain technology consists of, what we know as "Tokenization" and the most important legal aspects it consist of.

What is a Blockchain technology

As a matter of facts, Blockchain technology is configured as a database. It is digital, immutable, shared, synchronised and decentralised. This technology allows the database to be located in the device of each user (node). The feature requires validation of each modification by the rest of the users; subsequently it does not depend on a central authority. It was created by Satoshi Nakamoto, the pseudonym of one or more people who preferred not to reveal their identity. Its first practical application was the purchase of a pizza.

What was the purpose of Blockchain technology?

The purpose of this technology was to achieve an electronic payment between individuals without the need for the intervention of intermediaries, thus saving the economic and time costs and obtaining the guarantees and security of a mathematical system.

Evolution of Blockchain technology

Reviewing the evolution of blockchain technology from its origin to the present, we can see that the first "Bitcoin" blockchain, version blockchain 1.0, was only intended for carrying out transactions. In other words, transmissions of Bitcoins between two "bitcoin addresses", each of which designates a subject, which are reflected in a kind of summary or document that is made after encrypting or encoding the transaction and which results in the "hash".

What is a hash?

Without going too deeply into computer or technological concepts and in order to understand what we mean when we talk about hash, it is necessary to know that Blockchain means "chain of blocks", each block integrates a group of transactions and each transaction is encrypted or summarised in a hash. The blocks are linked together, with the result that the "final or closing hash" constitutes the initial hash or first annotation of the next block.

Merkle Tree

In addition to the "chaining" of blocks, the differentiating elements of this first blockchain are: The so-called "Merkle Tree". This security element allows the hashes generated for each transaction to be combined with each other, creating a kind of tree and allowing any alteration that may occur to imply a variation of the Merkle Tree. This prevents the manipulation or falsification of any element by a hacker, as it would be detected, achieving an "unmodifiable" system.

Traceability within the blockchain

Finally, with this blockchain, the "traceability" of documents is achieved. It means that we can track or trace all the operations that a subject has carried out on the network since acquiring their first bitcoin. However, this total transparency that seems to emerge from the element of "traceability" is limited by the fact that it is possible to trace an asset, but not the identity of the person who owns it.

Other popular blockchains

As a result of this first blockchain, others were created based on its elements. The best known is undoubtedly the "Ethereum" network, blockchain version 2.0, which also has its own cryptocurrency. Hence, "Ether" is more complex, in addition to carrying out transactions on "ethers", creates and hosts Smart Contracts, which we will go into more specifically in our forthcoming publication.

Afterwards, another feature called "Ripple" was created, which is configured as a payment protocol for financial institutions. It is a network for institutional payment providers and allows instant international payments with any cryptocurrency, although, like the rest, it also has its own cryptocurrency, XRP.

Finally, and within the most popular blockchains, we also find "EOSIO", a decentralised blockchain infrastructure that offers a set of tools similar to those of computer hardware. This one aims to facilitate the development of decentralised applications (DApps) (blockchain version 3.0). "Stellar", closely linked to Ripple with a practically identical objective, to facilitate cross-border transactions with the target of making them faster, more secure and lower cost, but it is managed by a non-profit foundation.

Blockchain version 3.0 is running currently. This is focused on the development of DApps or decentralised applications.

What are DApps, blockchain 3.0?

DApps are a special category of applications based on blockchain technology that operate in a decentralised network. The data generated by these applications is hosted on a network of computers that allows the information to be kept secure and accessible. The main difference between a Dapp and an App lies in the centralisation. In an App all decisions will be made on a central server and there is a manager with access to this data who can modify it. However, in a decentralised application there is no single manager who controls the application because it does not depend on a central server and the users themselves are the managers of the application.

Do you want to know more about the legal aspects of the technology that is flooding the world's markets? Reach out for us. The legal team of Carrillo Asesores will study your specific case, we will be delighted to assist you with the technological development of your company.

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