Blockchain Technology and the ledger system

Jun 10, 2020by Eduyush Team

Blockchain is revolutionary, maybe as revolutionary as the Internet. But it's certainly shaken to the core the financial industry and it's crucial to their future. They recognize it too because they're going out of their ways to take advantage of Blockchain and apply technology to capital markets. [The financial firms are scrambling to leverage Blockchain.] While pretty much every player in the financial world is developing or planning to develop some sort of Blockchain implementation. There were several early adopters or companies that got the jump on the rest of the industry. And these are a few of those players. As you can see, they're pretty significant players. [The early and current adopters are US Federal Reserve, Deutsche Bank, NASDAQ, Citibank, BNP Paribas, Goldman Sachs, Barclays, and UBS.]

Now learn more about the benefits and use cases of blockchain for finance professionals with ACCA's Certificate in Digital Innovation for Finance, Click here to read more

Blockchain technology and its benefits

But why, what are the various de facto innovations that Blockchain brings to the table? For starters, Blockchain's use of encryption in a novel way is used to enhance security. And that's extremely important in the financial world. The use of mutual consensus provides verification of transactions across a distributed network. Providing an elegant solution to avoiding problems like hacking and double-spending. The decentralized nature of Blockchain negates the need for third parties usually required to provide consensus or transaction processing. And fewer intermediaries means lower markup and greater profit.

The idea of smart contracts is extremely attractive to financial and other companies because not only are they protected from any modification. [The use of smart contracts provides code instead of data in ledger, which allows specialized instructions.] Code can be attached to the Blockchain ledger providing special instructions. Perhaps a certain transaction will trigger the attached code to execute and perform some sort of meaningful function in the outside world. Blockchain all but guarantees data efficiency, integrity, and universality. And its quick, near real-time processing and updating, is of great interest to organizations that have had to use traditional methods that aren't nearly as expedient. There are numerous technological benefits of Blockchain from real-time data to real-time transactions.  Transaction efficiency, transparency, fraud prevention, reduced data errors, reduced risk, and dispute resolution. In the Blockchain, items that aren't normally given a value in the real world can have value. Things like contracts and invoices can have real value attached to them.

And there's a better overall start to finish process when working with Blockchain. Meaning that with its data integrity, lack of intermediaries, non-repudiation, and error-free transaction processing. The overall process is much smoother than traditional practices. So what's in store for the future of Blockchain? Well, we're already seeing the future in the sense that it's already starting to happen. The technology is either being used or will be used to create simplified processes. Standardize processes, move assets, move ledger transactions, move ownership, and asset in real-time or near real-time. Establish shared flat ledgers, reduce transaction costs, reduce client maintenance costs, and customize business rules.

Future Opportunities

The current use cases are still fairly nascent, even the obvious one, Bitcoin. Same as smart contracts and data storage blockchains. But there are many possible implementations of blockchain already in play.

But real opportunities need champions, the early adopters, pioneers, change agents, and thought leaders, that's how blockchain will expand and evolve. The obvious beginning of blockchain's future growth lies in the way it handles data. That's the big benefit of blockchain. It holds a complete and non refutable record with the ability to store data that won't change or be susceptible to change. And you can view data properties and metadata on the blockchain without revealing sensitive information. So it has the ability to provide useful information that can still be controlled. But what could be done to enact change?

Well, first, focus on the strengths of blockchain. Its distributed ledger, the way it supports mutual consensus, and its compelling security.

Here are just a few of the targeted uses of blockchain technology, the ones we already know about. And as you can see, there are plenty of them. Everything from regulatory compliance to the Internet of Things to supply chain management to taxes. [The uses of the Blockchain technology are regulatory compliance, records management, assets management, identity management, big data, auditing, transparency, accounting, Internet of Things, know your customer, money laundering prevention, P2P transactions, supply chain management, voting, and taxes.]

This list will keep growing. And here some of the industries that have already identified blockchain for adoption. Financial is the obvious one along with capital markets, but governments and non-government organizations, energy, healthcare, manufacturing, insurance, real estate, media. [This list also includes the banking industry.] They're all industries that are or will be developing blockchain solutions.

Finally, here are some of the actual use cases we're seeing, things already being done or created. Currency exchange, Cryptocurrency, Application development, Data content, Secure messaging, Land registration, Home automation, Medical records, Marketplaces, Car leasing, and Ride-sharing. It's pretty incredible, isn't it? One has to wonder how far this world changing technology is going to take us.

What is the Blockchain Ledger

A ledger is a compendium of transactions and originally a ledger was a book filled with a series of transactions in the order they were created. Well, today a ledger is an electronic collection of files but it has the same purpose as a physical ledger. In bookkeeping, a ledger is a place where final business transactions are registered, known appropriately as the final entry. And entries in a ledger are two-way, each transaction having payments in, credits, and payments out, debits.

Entries are categorized too with Assets, Equity, Expense, Income and so on. In Blockchain technology, the ledger is a digital entity in the Blockchain. And, like general ledgers, the Blockchain stores information. Transactions are in, information from a source, and out, information to a source. When you make a Bitcoin transaction, for example, that transaction is stored in a ledger. And like ledgers, the Blockchain ledger can store detail on transactions, the who, what, where, why, how, and much more. The Blockchain ledger is distributed containing public information and everyone on the Blockchain has a copy of the ledger.

And the Blockchain ledger is a chain of hashes, numerical codes that verify and guarantee the integrity of data in the Blockchain. It's worth noting that since hashes verify data, you cannot change Blockchain/ledger transactions without changing hashes as well. And that's an important aspect of Blockchain's security. This is a basic understanding of how ledgers store transactions and it starts with a transaction being created. For example, in Bitcoin, a Bitcoin wallet purchases Bitcoins using a private key. And then, the transaction is broadcast to the network. In the case of Bitcoin, approximately every ten minutes. Transactions aren't encrypted at that point because the Blockchain/ledger needs to see them. And every client has to record and establish ownership of the transaction, in this example, Bitcoins. Then, the transaction is validated. And finally, it's added to a block in the Blockchain ledger.

What is the Triple Entry Accounting in the blockchain ledger

Blockchain technology uses the triple entry method of accounting, here’s a comparison to the traditional forms of accounting in single or double entry formats

  • Single-entry Accounting which is usually only applicable to small organizations with simple transactions. For example, a home budget, a checkbook in the old days. Only one entry is made for a transaction, which is why it's called single-entry.
  • Double-entry, is the common method for most businesses, from small to large organizations. And the approach is that every transaction must have an in and out.
  • Triple-Entry Accounting, which is how Blockchain works, is really Double-entry plus one. So it's similar to Double-entry. And it represents transactions between two parties, the buyer and seller. Transactions have a signature, that's the third party. It validates the transaction and uses cryptography to secure the information. So in Bitcoin, you can think of the third party as the Bitcoin wallet. And you can think of triple-entry as having a credit, a debit, and a receipt that contains the transaction information.

Difference between Local and Blockchain Distributed Ledgers

A ledger is a compendium of transactions. They're essentially business records of categories like assets, liabilities, credits, and debits. And ledger items can include things like cash, credit, expenses, and tax. Businesses often use multiple ledgers to track assets and transfers, store and monitor ownership, record business activity. And ledgers act as a record of a business itself.

Ledger transactions include numerous players, employees, suppliers, clients, professionals like lawyers, accountants, and auditors. And it goes without saying that business ledgers are managed and controlled by a business. It's the responsibility of businesses to maintain ledgers and their integrity. Local ledgers are a single copy that resides in a specific place, and they can be physical or digital. While copies can be made of a local ledger, the prime version, the original, is considered the sole item of record.

And drawbacks of local ledgers include their tendency to be prone to error, the risk of being subject to malicious activity like fraudulent modification, and they're also difficult to recover if data loss occurs.

With distributed ledgers, on the other hand, multiple copies can be distributed to many locations or parties. And that could mean two computers on a network. That's the essence of Blockchain's distributed technology. There's no one owner or controller. And as with local ledgers, the integrity of the ledger is imperative, and therefore consensus is imperative.

There has to be at least a plurality that reaches an agreement. The obvious example of a distributed ledger is Bitcoin. And the benefits of distributed ledgers include their data integrity, the reduced risk of corruption, and the security that they provide. And there are drawbacks to distributed ledgers. The distribution of ledger has to maintain consensus. So unlike a local ledger that could be updated quickly, distributed ledgers tend to be updated more slowly. And distributed ledgers are less attractive in real-world trading scenarios because of that.

Now learn more about the benefits and use cases of blockchain for finance professionals with ACCA's Certificate in Digital Innovation for Finance, Click here to read more

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