A look into how we’re just scratching the surface of blockchain, crypto, and triple-entry accounting
Although the ideas of cryptocurrency and blockchain have existed for years, it was Bitcoin’s recent sharp rise in value that brought these terms into the spotlight. After the digital currency reached almost $20,000 in early 2018, the market was ready for a wave of other cryptocurrency, blockchain, and microtransaction companies eager to take advantage of this new opportunity.
In this article, we are going to dive into what blockchain is, the concept of triple-entry accounting, how this impacts the world of money and finance, IoT and microtransactions, and lastly, some important forces that are driving blockchain expansion and adoption.
Blockchain Overview
First off, what is blockchain? Blockchain is the technology behind Bitcoin and it was invented for Bitcoin in order to create the first truly online virtual currency. At its core, it’s a data storage mechanism that’s implemented by a basket of technologies including distributed computers – so, the blockchain really exists all over the world without a centralized authority. In this model, those computers are working together to create a consensus to securely verify every transaction. By having a consensus mechanism, the blockchain is protected from having any one actor, good or bad, affecting it.
Because of the way these technologies work together, blockchain has certain useful characteristics. First, the blockchain is immutable, which means it’s unchanging. Once a transaction is appended or recorded on the blockchain, it’s impossible for it to be changed. Cryptography and the novel ‘proof of work’ algorithm at the heart of blockchain mean it is safe and that transactions recorded on it can’t be changed.
Another characteristic is that it is “trustless.” Like every transaction that occurs on the internet, the parties don’t really need to know each other or be in physical proximity to one another for the transaction occur. But unlike other types of transactions, say a credit card transaction, there’s no central authority required — the blockchain is the authority. That consensus mechanism and those computers working together are what creates that environment where two parties can transact with each other. No centralized authority or middle-man (nor their fees) is required.
Bitcoin uses the blockchain to create “money” on the internet and allow money to change hands. But once that blockchain is in place, it can be used for things other than money changing hands and any kind of contract or transaction might be recorded on the blockchain. The blockchain is ideally suited for these sorts of interactions because it’s distributed, has a consensus mechanism in place, is immutable, and is secure. These other transactions are referred to as ‘Smart Contracts.’
Blockchain for FinServ
From this concept of smart contracts come what is called the worldwide ledger, also known as a distributed ledger or triple-entry bookkeeping. Triple-entry bookkeeping expands on the concept of the 500-year old double-entry bookkeeping that is used by millions of businesses to successfully track their finances. What blockchain can add to that is a public entry on the blockchain that also represents that transaction. In doing so, you create a public, auditable record of a transaction which allows everyone to understand – very transparently – what’s happening with that business. This type of public, transparent interaction is central to a lot of the business applications being created around blockchain.
All of these capabilities demonstrate blockchain’s potential in the world of money and finance. Today, in the world of double-entry bookkeeping, you have centralized authority, arbiters, and ‘trusted’ outside entities that provide certification and transparency. When that system work (as it mostly does) those arbiters provide real value and have the ability to charge fees for providing that value. For the most part, we all agree to that because of the value in having someone who understands that transaction and can certify it is there. However, there are fees, and there’s inefficiency in all of us participating in the system.
Blockchain is a possible solution to that inefficiency created around the publicness and transparency needed for many types of transactions.
Another type of transparency and efficiency that blockchain may solve is the inefficiency of large financial institutions interacting with each other.
Large organizations, like banks and other financial institutions, have bureaucracy. Some of that’s regulatory, and some of it is historical or cultural. For example, in the purchase of a security or a money transfer between banks, there’s a lot that goes on behind the scenes (often inefficiently) that we don’t see. When you think back on some of the characteristics of blockchain, there is opportunity to reduce those inefficiencies. In a financial transaction driven by blockchain, there is the ability to remove some of the complexities of legacy financial transactions and, in doing so, the transaction becomes more efficient and more cost-effective for the consumer.
However, the real value is not just for consumers, but to financial institutions as well. These organizations are looking at blockchain as a way to modernize and operate more efficiently and bring down their costs. By having more of their business built on or around blockchain, their interactions with other banks and consumers can become more streamlined. Transactions can clear instantaneously on the blockchain without the need for paperwork and some of the other overhead that goes along with traditional transactions. In order for those things to happen though, systems have to be built, and the public watching has to become front and center.
Microtransactions, like cryptocurrency, have been around for quite some time, but just now is getting more attention. One of the original intentions for microtransactions was that you could click on a link and there would be a small amount of money transferred from you to the content creator. That’s never really come completely to fruition because of the need to have a third-party to certify the transaction. In these instances of extremely small transactions, it was never because fees (credit card or other) would always destroy the margin on any small transaction.
With blockchain technology and the removal of the middleman, microtransactions become a real possibility now. This is key to the value of the Internet of Things (IoT), where you may have two devices conducting small-value transactions. Now, with blockchain, it’s possible and cost-effective for this to occur. A prime example of this sort of interaction is a car going down the highway and potentially interacting with a tolling authority and being charged a small amount of money to use that road. That transaction could occur on the blockchain without those fees being charged which then becomes an actual IoT transaction as opposed to something that gets rolled up or charged by a credit card company.
Blockchain Implications for Society
Blockchain doesn’t just have implications for finances and IoT, but it may also play a role in civic life including world-wide economic inclusion and prosperity. In many parts of the world, people’s personal wealth is stored in things like livestock or land and not traditional financial tools or institutions. With the use of blockchain technology and the currencies based on it, a person’s identity becomes digital because some of their wealth is stored in assets that are tied to the blockchain. In doing so, they are suddenly able to access services they weren’t able to before. In turn, banks and other financial institutions are more interested in transacting with them and potentially loaning them money because they have a clear understanding who that person is and their financial status.
Another growing usage of blockchain is in the storage and control of information. Today, our personal information (search history, medical records, fitness tracker data) is controlled and monetized by third-parties. If our personal information is stored on the blockchain and linked to our digital identity, we would control who could access it. This would allow individuals to sell or lease their own information and get value in return.
Such a system also offers a more secure bulwark against identity theft, without the need for a third party monitor. The blockchain is the security and the monitor.
Another, non-financial record which we’d like to be correctly recorded (publicly, immutably, safely) is our vote in local and national elections. In today’s climate, there is great interest in ensuring free and fair elections around the world. Votes recorded on the blockchain offer a technological path to better, faster elections.
Conclusion
With all this growing groundswell around blockchain technology and digital currencies, there are naturally large forces at play driving some of these adoption scenarios. Where there is money to be made, businesses and free markets will be close behind. Whether you are looking at the value to consumers, the value to financial institutions, or the value to people participating in the economic systems generated through blockchain, organizations are looking to capitalize on this new value opportunity.
This has the potential to reduce economic disparities around the world as new businesses and consumers participate and gain access to financial services.
Blockchain will change the worlds of finance and personal security. As the boom of data generated through the IoT and connected devices continues to expand, and microtransactions become more of a reality of everyday life, blockchain will be a foundational building block for an entire new world of digital interactions and transactions. The capabilities of this new approach to security and finance are now in their infancy. The potential payoffs, once they reach maturity, are a new productivity boom, a universe of new commercial opportunities, and a boost to world-wide prosperity.