GAA Accounting

The Journal of the Global Accounting Alliance

Blockchain: a ledger you can bank on

While bitcoin attracted negative publicity in its early days, virtual currency networks such as blockchain and Ethereum have the potential to change the world.

By Emmet Kelly

Picture the scene: a locker room with an infinite number of lockers in a public place. Anyone can wander by. There are windows on each of the lockers so we can see if they are empty or contain something. Each locker has a key and a slot to pop things in. Anyone can use any of the lockers without disclosing their real identity.

If someone uses a key, they pop it in their wallet which is protected by a password. If they lose that password, they lose access to the wallet and, indeed, lose everything. Each locker has a window and a number on it. Anyone can look inside a locker and note the number.

This oft-quoted analogy describes how bitcoin transfers work. Bitcoin is the currency that sits on blockchain, the locker room.
The main concepts

A worked example: Sean wants to buy one bitcoin worth of gold from Sheila. Sheila sees that locker #212 is empty, notes the number and goes home. She tells Sean to use #212. He pops a single bitcoin through the slot, Sheila sees that it is there and sends Sean the gold.

Sean and Sheila remained anonymous. There was no bank, clearing house, fees or delays. Sean cannot get his money back. The transaction took place in a public place so everyone could see it happen. They could also note when it happened, the anonymous IDs of Sean and Sheila, and the amount transferred from Sean’s account to Sheila. Not only that, everyone in the public place has a record of all transactions that have ever taken place. Indeed, each block of transactions is time-stamped and shared with everyone in a chain – blocks going back in time. Hence the name: blockchain.

This simple story contains all the important concepts for perhaps the most revolutionary thing to hit the human population. Ever. Bigger than the internet. Bigger than the printing press. And much bigger than the double-entry ledger system. And it isn’t even as big as Ethereum, the next wave of Blockchain which has been described as “a decentralised platform for applications that run exactly as programmed without any chance of fraud, censorship or third-party interference”.

Digital fakery

When I was at college, I read an essay called ‘The Work of Art in the Age of Mechanical Reproduction’ which was written by Walter Benjamin in the 1930s. It describes how, in an age of copying machines (cameras, for example), art is devalued because there is an identical copy which working class people can view and interpret. The internet proved how powerful this idea was, with the near destruction of the music industry and the massive impact on film and TV. All art. All mechanically reproduced with a near perfect reproduction, or ‘simulacrum’, of the original. Indeed, the internet machine has until now facilitated all sorts of fakery, including identity and ownership of items of value like money. Fraud is a multi-billion dollar industry. Art has become passé. Intellectual property paranoia is rife. Fake facts are shaping elections, changing governments and even threatening the world. We therefore need blockchain because it can guarantee that a digital item is unique.

Blockchain is a robust architecture. Several currencies sit on it including litecoin, ripple, dogecoin and even cannabiscoin. But bitcoin – invented by the mysterious Satoshi Nakamoto, who no one has ever met – is the most popular and, as a currency, has risen massively in value over time.

But there are issues with blockchain. It isn’t really scalable as the blocks have got so big, they take up too much space on each machine (11 gigabytes currently); it is slow to grow (only 120 million transactions in total in comparison to, say, Visa which recorded 120 billion transactions in 2015 alone; a finite number of coins will be available; and it isn’t very eco-friendly with enormous amounts of electricity required to run it and decrypt new coins (also known as ‘mining’).

The next wave

Now enter Ethereum, a new cryptocurrency network invented by 23-year-old Russian, Vitalik Buterin. Vitalik worked at blockchain and addressed many of these architectural issues, but added elements that make it infinitely more powerful.

Time for another analogy. Did you ever see the film, Chitty Chitty Bang Bang? Of course you did. Do you remember the breakfast machine at the beginning? The egg rolls through a crazy Heath Robinson machine which trips off other machines cooking sausages, lighting the stove, laying out the bacon, toasting the bread and so on. That’s what Ethereum adds to all of the anonymity and transactional elements of blockchain – machines within machines which make things like loans, or ‘smart contracts’ possible. When X has paid Y over a defined period of time, the ownership of the entity can be transferred, or another machine process is triggered. It has a shared ledger too, sharing what has taken place in the cloud on a virtual machine.

Ethereum can process infinitely more data than bitcoin with a secure currency called “ether”. New blocks can be shared every 10-14 seconds, as opposed to every 10 minutes with blockchain. Programming can take place on Ethereum by building Ethereum apps, called decentralised apps or dApps. Indeed, new business entities running on the Ethereum blockchain are possible and they can be ‘decentralised autonomous organisations’ with no location or staff. But why is all this so important?

Cryptocurrencies permit people to buy and sell things. All they need is an internet connection and the capacity to remember the password for their ‘wallet’. This means that billions of people on the planet can now trade: people who speak different languages, people without bank accounts or credit cards. There is no clearing house required with a blockchain, and it just works. Yes, anonymity initially made the currency attractive to the criminal fraternity, but now you can buy beer and a host of other products with bitcoin – both offline and online.

This is fundamentally different and more important than the internet itself because it permits trade with a massive and previously disenfranchised portion of the plant – the unbanked. While the internet means you can look things up and be entertained by music and video, blockchain allows you to earn money. One would not need a degree in anthropology or sociology to know that the hunter gatherer came first – for food. Now everyone can hunt and gather and trade with everyone else via blockchain, not just those in developed economies.

But there’s another wonderful and even frightening impact, which is a correlation of everything discussed above: truth. When the fact of ownership – or indeed the existence of something – is irrefutable, history cannot be re-written. The ledger is proof, and everyone has a copy. It is better than the deeds of a house. Incorruptible.

If we go back to the devaluing of art in an age of mechanical reproduction, imagine all this was reversed. Imagine that the machine which afforded reproduction now affords, even enshrines, that a work of art is always the original. It is not a copy, and indeed could not be, given that the copy would have to exist on an older block and everyone has a copy of every one of these. A hacker would have to successfully compromise over half of the hundreds of thousands of computers running blockchain worldwide to forge a new consensus for their ‘fake’ block without anyone noticing. Good luck with that.

A new stage for humanity

I believe we are entering a new stage for humanity underpinned by the possibility of global economic transfers of products that not only benefit from high volumes and low margins, like music on the internet, but extremely low volumes. This permits rarity, if not uniqueness, and very high margin. It is also enabled by the perceived value of the product, which is underpinned by its rarity. Scarcity and uniqueness often underpins value, and extremely rare and important things are priceless.

Take the diamond industry as an example. As these rare gems are mined and transferred, hundreds of middle men take their slice of value and hopefully guarantee that they are not illegal ‘blood diamonds’ which fund pariah states. Blockchain is now being used to guarantee that what the consumer buys is indeed as described, with information including origin, quality and a host of other provenances embedded in the blockchain.

These efficiencies aren’t a fad and big business accepts this. IBM’s Hyperledger project, Amazon and all the banks are looking into it because blockchain avoids fraud and reduces the friction to transactions and manpower.

As for Ethereum, I personally can’t imagine its impact without taking regular naps – but I have a few brilliant ideas I am keeping to myself. I have patented them by popping their description in a public locker with a window in it for all to see, and carefully put the key in my cryptocurrency wallet. Now, where did I put that password?

Emmet Kelly is Head of Data Commercialiastion at AIB.

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