In the beginning, blockchain technology’s sole use was for Bitcoin. This first truly decentralised digital currency launched an accelerating stream of innovations. For several years now, it has been leading the way for alternative means of payment (the summary of our 2014 crypto-currencies report is available here), through to smart contracts and DAO (decentralised autonomous organisation – our report on this is available here), up to, perhaps, a revolution in how the internet operates.

The power of protocols

The internet became possible thanks to the development of protocols. Communication protocols are essential for every computer network, because they provide the rules for how devices establish communication and exchange information. The best-known protocols that underlie the internet today are TCP/IP (enabling communication with another network-connected computer located anywhere in the world), HTTP (higher level protocol which is the basis of the World Wide Web, that we  experience daily) or SMTP (the basis for e-mails).

The internet’s primary purpose is the transmission of information. Its architecture does not, though, generally allow the use of protocols for storing data. Specific applications exist for this and are used extensively every day. The strength of internet giants such as Facebook and Google – providers of the most popular applications – depends on the ability to store and analyse huge amounts of data. Therefore, this information is, in practice, put at the disposal of the internet companies that collect it on their own servers and attempt to wrest from it sole benefits for themselves.

The growing economic role of data is without doubt and this increasing relevance is giving greater importance to regulations on this issue – including the planned European regulations  or the provisions of the general regulation on data protection (GDPR), which to some extent  attempt to restore control to individuals over their personal data.

The internet’s architecture, which is largely based on stateless protocols, therefore has tremendous economic consequences. It has largely led to the extraordinary development of companies that store and process data sent through the internet. This in turn has tangible legal consequences.

Decentralisation of the internet and the role of blockchain technology

Many visions of the future internet depend precisely on the change of method of storing and using data. Critics of the current situation point out that powerful internet firms (potent in terms of value, size, as well as significance for the digital economy) are, in effect, the guardians of the databases that they hold, while extracting maximum economic value from them. This, in turn, leads to a weakening of the role of ordinary users of the internet, who, in practice have no influence on which data is processed and how, even if it concerns them personally.

These reasons, among others, give rise to postulates for decentralising the internet, which would involve, for example, eliminating the monopolistic position of the current internet giants.

There are many indications that such changes to how the internet operates, could come about through blockchain technology and the solutions it inspires. This is because blockchains, such as Bitcoin and Ethereum, use their own protocols, which by definition would become the foundation for distributed structures. What’s more, their use makes it possible to create further decentralised protocols for specific applications (examples below).

One fundamental aspect of blockchain involves maintaining a shared state of matters. In the case of Bitcoin this is the history of all transactions in the crypto-currency. The transaction history should be identical on each computer (node) used to maintain the Bitcoin network. As for Ethereum, its objective is enabling the creation of any types of projects using a distributed consensus system – not just decentralised currencies, but many other more advanced products and services.

Examples: data storage and computing power market

A creative example of how the internet could change with the use of blockchain technology and solutions inspired by it, is provided by data storage decentralisation projects. Examples include IPFS or Storj.

Currently, it is possible to access data on the internet by specifying its location. This is usually achieved by using URLs. For example, our blockchain report is available at the URL address http://www.wardynski.com.pl/wp-content/uploads/2016/10/Wardynski-and-Partners-Blockchain-smart-contracts-and-DAO.pdf. The IP address behind “wardynski.com.pl” is 193.105.20.30, and the URL also points to the corresponding PDF file under “wp-content/uploads/2016/10/Wardynski-and-Partners-Blockchain-smart-contracts-and-DAO.pdf”. To access the specific information – in this case, the “Blockchain, Smart Contracts, and DAO” report – we need to know the URL address where they are located. If the party that controls it removes this information, we will not access it via that URL and will have to look for it elsewhere in the web. Each of us has encountered the problem of a broken link, which makes it more difficult to find the information we are looking for.

But what if information could be accessed by knowing what, rather than where it is? In that case, the information could be stored anywhere and by anyone. As a result, the role of centralised storage sites would lose much of their importance in favour of direct (P2P) transfers of data. In practice, this would contribute to a significant decentralisation of the network. This is the objective of the IPFS (InterPlanetary File System) project, which is intended to allow this type of access to data on the internet. IPFS uses blockchain technology, among others, as well as a native cryptocurrency (Filecoin).

Another example of a project whose long-term goal is the decentralisation of the internet, is Golem. It is to arise through a global, decentralised supercomputer whose computing power will be contributed by the created network’s participants. A distributed computing power market where anyone can buy or sell their computing power could change the internet. In the case of Golem, the Ethereum blockchain is being used for the construction requirements of the network as a transaction layer.

These types of projects are at early stages of development and may not end in success. However, there are ever more of them and their combined efforts are heading in the direction of changing how the internet works. Many of them were created thanks to the development of  blockchain technology, both in terms of technological aspects and the ability to build distributed commercial networks. Funding streams of hundreds of millions of dollars are also flowing to them, showing how much hope and enthusiasm is being placed in these projects.

The Web 3.0 Idea

Decentralised data storage, or the ability to benefit from computing power across a distributed network, will become one of the exclusive pillars of Web 3.0. The concept of a third generation web holds many meanings. The most common involves a new network structure in which users own created content and data and interact directly (through no intermediaries) with other users, applications, and devices.

This new network will arise out of the following evolution:

• Web 1.0 mainly involved a one-way distribution of content from one set of entities (web site authors) to others (readers). At this stage of the web’s development, most users remained passive recipients of content.
• Web 2.0 is the network that we know today, which has become a much more interesting place due to social media, the easy sharing of data, joint production of content and services based on the shared economy. Users actively create content, although typically through the services of intermediaries, many of which are gigantic companies.
• Web 3.0 is taking shape before our very eyes. It is to become a distributed network in which users, applications, and devices will interact with each other – not only in terms of communication, but also economically – in a way that does not require the involvement of other players. Data will remain under the complete control of its owners, while at the same time capable of easy sharing. Web 3.0 is supposed to be very secure because its critical locations will not depend solely on individual players.

Web 3.0 will be comprised of various elements, many of which could be created using blockchain. These include services that are currently centralised, or are difficult to establish without the involvement of central players, such as:

• payment systems,
• digital identity systems,
• DNS – domain names system, etc.

Therefore, there is much to suggest that blockchain and similar technologies may become the foundations of Web 3.0. Open platforms, such as Ethereum, could constitute a distributed, shared infrastructure for the new, decentralised internet. Although we do not yet know which solutions will eventually gain greatest popularity, one can assume that at least some will be based on blockchain technology.

Legal challenges of the new internet

It is likely that we won’t see any systemic changes to internet architecture soon. The above technologies are in early stages of development. Nevertheless, it is proceeding very quickly. This progress will see growing challenges to law.

The pace of growth of the significance of legal issues may be even greater than that of the technologies themselves. The internet’s spread was preceded by several decades of research and the building of technical infrastructure, while legal aspects began to have an actual role only at the end of that period, when increasingly sophisticated applications began to be created on this infrastructure. Nonetheless, currently, we may be in a different situation.  Development is under way in parallel in the areas of technology (e.g. infrastructure) as well as in its specific applications. This is leading to situations in which entire economic models are being built on a new, as yet unready (e.g. unstable and non-scalable) infrastructure.

An excellent example was provided by The DAO, which could be described in simple terms as a decentralised investment fund that was set up in 2016 using the Ethereum blockchain. The spectacular collapse of The DAO, which had raised funds of around $150 million (this figure is much higher currently due to the increase in the value of ether), shows the potential tragic consequences of building solutions – primarily business ventures – on the fast-growing but not necessarily fully-ready blockchain infrastructure. We have written about The DAO and the associated difficult legal challenges, in the “Blockchain, Smart Contracts and DAO” report.

In addition to the legal challenges associated with the rapid growth of blockchain-based solutions, despite the lack of sufficient infrastructure, we will have to measure up to more fundamental legal problems that blockchain-based networks present.

An example of such a problem is the difficulty of assigning legal liability to any particular party. This is a universal legal issue related to the many uses of blockchain technology. At present, internet architecture enables (although sometimes with difficulty) the identification of entities responsible, for example, for placing given content on the web. It is also relatively easy to block access to content (e.g. by blocking IP addresses, filtering domain names, or URLs). Web 3.0 will make it much more difficult both to locate the party responsible for actions taken on the internet and to block the content.

Moreover, the new, decentralised and secure (using numerous cryptographic technologies) internet will cause many problems with the practical enforcement of rights. One can see this already at the level of applications such as instant messengers using message encryption or in blockchain-based distributed systems for exchanging value (such as cryptocurrencies).

Web 3.0 will, therefore, not only open a new chapter in the history of the internet, but will also bring fresh challenges for law.

Jacek Czarnecki