An Intro to Blockchain Technology
Providing near-instant digital asset transfer and security of data movement, blockchains are set to revolutionize the way we work and interact with one another.
Get ready for blockchains: the most revolutionary and disruptive technology to hit our profession since the advent of computerized bookkeeping. They’ll be used in the general market within the next three to five years. The World Economic Forum estimates 10% of global GDP will be stored on blockchains by 2025.
So what is a blockchain? Simply put, it’s a new type of digital ledger. Next month, we’ll take a closer look at the underlying technology, but here we’re going to explore the elegance of a methodology and platform that promises to dramatically change how we work and interact with one another.
All accounting is based on the premise of recording individual transactions in chronological order into ledgers. The ledgers co-ordinate common types of transactions for aggregation or reporting purposes. We have both dollar- and unit-based ledgers. Dollar-based ledgers record transactions that are part of the double-entry system of financial bookkeeping. Examples include ledgers supporting sales, purchases, accounts receivable, etc. As the name spells out, unit-based ledgers record transactions based on a unit and are not part of the double-entry system. Examples include ledgers supporting share certificate ownership, land registry, inventory quantity on hand, etc.
A blockchain digitally records transactions in chronological order. Where things get interesting is that there isn’t just one blockchain, but many. This means there is not one owner of the ledger who exclusively records each transaction. Each and every transaction is broadcast to participating computers on a peer-to-peer network so they can all record the transaction in their individual ledgers. Common consensus between all connected ledgers provides authentication and validation of each transaction recorded. Blockchain technology is what made cryptocurrency Bitcoin possible (Technophilia, May 2014).
The distributed aspect of blockchain technology means transparency is built into the platform, eliminating the need for a middleman or third party to maintain the database ledger. No longer will a government-appointed agency, a bank or third-party trustee control the one ledger of original entry because there is never one but always many, and each transaction is broadcast to all copies of the blockchain at the same time. It will have a fundamental impact on the way we interact with our government, our exchanges, banks and each other. Blockchain technology was originally something talked about by the anti-establishment seeking independence from central control. It is that but also so much more. Knowing that what I see is what you see reduces risks, enhances knowledge and allows for the creation of smart contracts. Soon organizations will be able to create invoices that pay themselves when a shipment arrives as both parties are always aware of each step of the transaction.
Blockchains will also be used to establish chain of custody in supply chains. Before long you’ll be able to know if the tomato you are purchasing truly came from a certified organic no-hormones farm. In fact, you’ll know which transport company delivered it and how many times it was handled before it reached your local grocery store.
The UK Government Office of Science has produced a wonderful five-minute video that’s well worth the watch. The moderator sums up the power of the blockchain in this way: “If the Internet brought us near-instant digital communications, then the blockchain brings us near-instant digital asset transfer, asset movement and security of data movement. That’s really important to everything in financial services, anything with property or anything with ownership, which is massive for the economy.”
This post was originally published in CPA Magazine