Imagine an electronic spider web. It’s built around a spreadsheet—regularly updated to facilitate commerce—and spread across a computer network. The network becomes active when someone requests a transaction. It adds the transaction to the existing network once it is verified.

The preceding is a simple explanation of Blockchain, a developing technology that some associate with cryptocurrencies and others with supply chains. The process is novel and not without critics.

Blockchain technology is often associated with Bitcoin, a decentralized digital currency that emerged a decade ago. Yet blockchains are more than electronic skeletons for cryptocurrencies such as Bitcoin or the faster Ethereum. They are commercial systems used by public companies.

Unfortunately, in their new book Blockchain and the Law, Primavera De Filippi and Aaron Wright do not chronicle this recent commercial history. Rather, they focus on the technology, organization, and potential regulation at the heart of this innovation.

How it works / The authors’ description of blockchain-based “smart contracts” is the highlight of the book. They describe the technology in detail. Bitcoins are transaction bundles of electronic data grouped into “blocks” that are linked together to form “a sequential, timestamped chain” of information. Each block contains a database “header,” the components of “a unique fingerprint (or a hash) of all transactions … along with a timestamp and—importantly—a hash of the previous block.”

Hashes are generated using cryptographic functions invented by the National Security Agency that bundle transactions “in a block as a string of characters and numbers … uniquely associated with that block’s transactions.” Ultimately, cryptocurrencies are “just a series of bits stored in the memory of one or more machines.”

Blockchain relies on cryptography. Cypherpunks argued in the late 20th century that encryption was a tool to protect individual liberty. In 1976, Stanford cryptographers created the concept of “public–private key cryptography” to address the need for secure key distributions. In 1978, MIT cryptographers created an algorithm to securely broadcast private keys using prime factorization. With Bitcoin, participants must solve a mathematical puzzle using a solution that meets the system’s protocol. This “consensus algorithm” is security against fake transactions or altered records emerging in Bitcoin’s blockchain. The blockchain uses economic incentives: Bitcoin miners receive a Block reward” (piece of Bitcoin) each time they create a legitimate hash.

Depository free from regulators / There are private (permissioned) and public (permissionless) blockchains. The authors focus on the latter, arguing their “pseudonymous nature” cause concern when “deployed in heavily regulated areas” such as banking. They contend blockchains suffer from “one important drawback: trust is fickle.” Pseudonymity “may embolden parties” to buy drugs, launder money, or commit tax evasion.

Blockchain’s “tamper-resistant” nature creates “complications” for regulators. Yet blockchains “handle basic economic transactions at lower costs, with higher degrees of reliability and potentially greater speeds.” They “store data, messages, votes, and other” information in digital format, creating “a shared depository of information” that could “crack open the flow of information, powering new peer-to-peer file-sharing applications, decentralized communication platforms, and social networks.” They “could affect governance itself,” supporting organizational structures that “promote more democratic and participatory decision making.”

Blockchains are “particularly potent” as algorithmic systems integrating storage and computation layers. They can store other information, including computer programs known as smart contracts that allow parties to “enter into a binding commercial relationship” using code and software “to manage contractual performance.” The authors envision a future where existing bureaucratic systems would be replaced by technocratic systems relying on “code-based rules that ultimately constrain human behavior and discretionary choice.”

Ethereum was the first blockchain to enable smart contracts, while eBay and Craigslist use them “to support and coordinate the sale of goods.” Blockchains increase the transparency of over-the-counter derivatives markets. Financial firms “memorialized the economic terms of credit default swaps using a blockchain-based system to provide parties with insight into trade details, counterparty risk metrics, and potential financial exposure.”

More ambitious projects could emerge in the future. A smart contract has controlled a drone’s trajectory “without the need for a centralized middleman to manage the device.” Robust blockchain property rights systems could manage and control devices on the “Internet of Things”—the internet connection of such devices as home appliances—supporting “autonomous and self-sufficient” objects. Blockchain may lead to “autonomous machines that do not rely on any central operator,” resulting in “emancipated, AI-driven machines, which could be used for either positive or dangerous ends.”

Blockchain and government / Smart contracts can also be used to create alegal systems. Yet regulation creates its own unique challenges. Regulating “too soon” would provide markets’ guidance but “stamp out potential benefits.” By contrast, waiting “too late” may allow “socially objectionable aspects … to emerge.”

The authors attempt a risk–reward balance, arguing blockchains “exhibit dual, competing characteristics.” Risks include digital currencies that “have gained a foothold with those seeking to evade existing laws and regulations” and reduced privacy if governments censor commercial or political activity. This issue is “exacerbated by the fact that, once data has been stored on a blockchain, it can no longer be unilaterally modified or deleted.” The internet “could become progressively more unruly” in a blockchain-dominated world. Commercial banks could suffer if digital currencies shrink balance sheets, “depriving them of needed revenue.”

Rewards include blockchain’s appeal to entrepreneurs in nations without stable currencies, businesses seeking efficiencies, and shareholders interested in facilitating consensus. They also appeal to government units, protecting against cybersecurity attacks, managing Illinois’s land registry and Estonia’s birth and marriage records system. Tax collection could be “streamlined.”

De Filippi and Wright acknowledge all “regulatory approaches discussed here are incomplete solutions.” They cite Harvard law professor Lawrence Lessig’s “pathetic dot theory”: individual actions can be “controlled or affected” via laws, social norms, market forces, or architecture. Potential laws include “blockchain neutrality” and “extensive regulatory constraints on software development.” Governments could shape social norms within a blockchain community. The authors cite the end-to-end principle: networks should be as simple and general as possible, leaving intelligence at the network’s “edges.” Regulators could respect the principle or “adopt a more restrictive regulatory regime.”

De Filippi and Wright conclude that the best way to regulate a code-based system “is through code itself.” They worry that Blockchain liberation could cause us to live “under the yoke of the tyranny of code,” yet they leave unanswered the crucial question of whether regulators have the knowledge to write code, let alone balance the myriad issues raised in this book.