Blockchain: an innovative tool for enhanced transparency

November 2022 | EXPERT BRIEFING | FRAUD & CORRUPTION

financierworldwide.com

The blockchain became popular alongside the rapid growth seen in cryptocurrencies. And though it was the cryptocurrencies that initially captured the most interest, users quickly began to realise that the real treasure brought about by this new technology is not the crypto assets as such, but the underlying technology that safeguards and makes transaction records reliable and trustworthy: the blockchain.

The first real use case that was seen was that of Bitcoin in 2009. An anonymous person or group of persons called ‘Satoshi Nakamoto’ programmed a decentralised data network, on which only the cryptocurrency ‘BTC’ (Bitcoin) could be transacted. The revolutionary thing about this was that not only was a new currency created, but an entire network through which it could subsist was also created and, within that network, an incorruptible means of issuing that currency.

Furthermore, users, specifically miners, were rewarded for helping to keep the network in use and decentralised. The emergence of the blockchain and Bitcoin raised a number of questions. How can the number of Bitcoins to be issued already be established? Can there be a financial or social system in which no authority intervenes? What would happen if the technology were to ever become mainstream?

Since 2009, the blockchain has continued to improve and evolve. Users from all over the world started to operate in blockchain networks, by buying cryptocurrencies, tokens and so on.

Today, the blockchain is becoming much less associated with cryptocurrency; rather, it stands on its own two feet. What began as a decentralised data network created specifically to validate transactions between users of a particular currency, and to progressively manage the monetary issuance of the same without any authority interfering, has mutated, finding other uses both inside and outside of the crypto world. After the founding of Bitcoin, other cryptocurrencies were created in a similar fashion, though some of them decided to go further.

Ether, which today is considered the second most important cryptocurrency, was created in 2015 when the Ethereum network was programmed. Today, this network is one of the most popular and innovative because of its versatility. Within this network is the cryptocurrency ‘Ether’, as well as a variety of other currencies known as ‘stablecoins’, which may be tied to the dollar and serve to make investments or purchases within the network and to support ‘smart contracts’.

What differentiates the Ethereum network from others is its ability to host decentralised digital protocols or platforms. These protocols are included in the network blocks, and they are part of it as if they were just another transaction, validated by the users participating in it. This innovation has made Ethereum the host of thousands of projects, protocols and programmes, such as decentralised gaming apps with crypto rewards, non-fungible tokens (NFTs), decentralised autonomous organisations (DAOs), and all kinds of decentralised finance (DeFi) tools, such as virtual wallets, lending protocols, coin swaps and so on. This range of options, all made possible by Ethereum, has indicated that blockchain technology is here to stay.

‘Validity’ is the key word that has driven the growth of blockchain technology into the business world, as demonstrated by Ethereum’s role in the growth of smart contracts within its network. A smart contract is a protocol that runs within a blockchain, meaning that this contract works like any other transaction within the network. All users have access to its information, which makes the contract validated by decentralised majority consensus; it is unmodifiable and automatically enforceable.

Once validated by users, the contract is registered in the network and its clauses will be automatically executed when the agreed requirements are met. The contracts themselves can be programmes that can handle money, store information on the blockchain and execute different actions depending on the system.

Blockchain as a resource for transparency

Perhaps the most relevant characteristic of blockchain is its trait as a ‘verified ledger’. Considering the level of security that the blockchain can bring to transactions, we are seeing that, for example, real estate is being ‘tokenised’, facilitating small investments to be directed to real estate properties allowing security and access to small investors. Through tokenisation, it is not a property that is being bought and sold; rather, it is the rights identified in the token that represent certain rights over a real estate property.

Some companies are already taking steps to implement tokenisation, convinced that a measure of this magnitude would leave no room for internal corruption. If this were carried out at the state level, citizens could ensure that the operations carried out by our leaders are legitimate and necessary, and the users themselves would oversee validating these operations, immortalising them in the network. There would be no room for speculation, trust or debates about what was done and what was not. Everything would be recorded. In this way, public bids could be controlled, recording all the budgets offered, the distribution of the national budget could also be made transparent, and even monetary issuance would be recorded in the database. All decisions of world leaders would be exposed to the decentralisation of information.

DAOs

DAOs are, as the name implies, organisations or companies that are not managed by a particular person or group of people. There are no chief executives, bosses or managers within a DAO, instead they are governed by a programming code that aims to fulfil certain functions. The main idea behind DAOs is that, once created by its founders, a code is programmed in the form of smart contracts so that it can function automatically and fulfil the purpose for which it was created without human intervention, decentralising any kind of decision-making power. There are many benefits to this type of organisation, starting with offering the public a transparent service, since all the code of the smart contracts is registered in the blockchain. There are also financial benefits, as being automated will reduce the number of bureaucratic issues.

On the other hand, one of the most innovative points of this type of structure is the role of the tokens issued by them. Though DAOs have no human intervention in their operation, they can issue their own tokens, which fluctuate in price through the supply and demand algorithm. These tokens, in addition to an economic value (in crypto), have the value of one vote for each token, which allows any user to participate in the DAOs’ policy when planning on a change in the programmed code of its operation. The more tokens owned, the more votes they carry. Once again, power is decentralised and trust in decision making at the top is eliminated. With this system, everyone can participate and there are no secrets – anyone can read the code recorded by the blockchain and see what is going on inside the company.

DeFi

With respect to DeFi, the objective is simple: to be able to offer the same financial services that are offered today, but without the intervention of banks or centralised financial structures. Ethereum is currently the blockchain that hosts the DeFi universe, with hundreds of smart contracts and protocols designed to offer these services in a decentralised way, as well as a variety of cryptocurrencies and stablecoins that expand investment options. In this form, each user can benefit from the other without the need to rely on a banking authority that will ask for vast quantities of data to carry this out. Protocols that need to manage money work with decentralised liquidity pools to provide as much transparency as possible, adjusting price rates using a supply-and-demand algorithm.

Throughout human history there have been many moments of significant change. Technological innovations have changed our ways of communicating, living and working. The emergence of the blockchain may be a key inflection point. The different uses of blockchain technology could change the centralised world we live in. Today, we are presented with a golden opportunity to evolve toward simplicity, efficiency and transparency.

Javier Canosa is a partner and Bruno Banfi is an associate at Canosa Abogados. Mr Canosa can be contacted on +54 11 7091 2121 or by email: jc@canosa.com. Mr Banfi can be contacted by email: bruno@canosa.com.

Javier Canosa and Bruno Banfi

Canosa Abogados