Thousands of years ago, ancient Mesopotamians first developed accounting practices for the purpose of keeping a written record of money and barter transactions. In the intervening millennia, advances in technology and theory has allowed accounting to evolve into an art and a science. The most recent “upgrade” has enabled a revolutionary overhaul of accounting as we know it.
In 2008, an unknown person (or persons) using the pseudonym Satoshi Nakamoto created the first digital currency, Bitcoin. Nakamoto’s groundbreaking whitepaper Bitcoin: A Peer-to-Peer Electronic Cash System paved the way for the establishment of a multi-billion dollar[i] global industry via a distributed database known as a blockchain.
A blockchain is a decentralized public ledger system that stores digital information chronologically in the form of “blocks.” These blocks are inherently linked (“chained”) to one another, and each block plays a role in facilitating anonymous and secure transactions between users, while providing monetary rewards to those who help maintain the public ledger. This chain of blocks contains a record of every single transaction ever in the history of a given cryptocurrency (“coin”). Cryptocurrency coins are virtual assets created by the process of “mining,” which is essentially the process of a computer algorithm solving a complex mathematical equation to validate a single block of the blockchain (think of a batch of transactions), and subsequently broadcasting this record to all other computers connected to this global network (each computer being a “node”). This process creates a single distributed public ledger across thousands of nodes around the globe. If a computer is able to solve the complex equation (via “cryptography”) and prove to the network that its equation validates a block (“proof of work”), the computer’s operator is compensated with a combination of a per-block reward of newly minted coins--“block reward”--and a small percentage of the transactions contained within the block--the “mining fee.” The newly-minted miner rewards tend to decrease over time on a schedule as the monetary value of the coin tends to increase, giving cryptocurrencies an economically deflationary appeal. The monetary value of a coin stems from the active trading between users on public coin exchanges. Technically, cryptocurrency mining creates inflation; however, using Bitcoin as an example, the inflation is controlled. For example, the mining reward for successfully “solving” the first ever block started at 50 Bitcoins, and at every 210,000 blocks (approximately every four years) the mining reward is cut by 50%, up to a total maximum supply around 21,000,000 Bitcoin. As of July 31, 2017, we are currently in block #478446, and the mining reward today is 12.5 Bitcoin (equivalent to approximately $35,000).
The revolutionary aspect of blockchain technology rests in the triple entry accounting concept. Triple entry accounting tweaks the double entry by including a cryptographic seal by a third entry. Today, a seller and a buyer maintain two separate sets of accounting records. A seller books a debit to account for cash received, while a buyer books a credit for cash spent in the same transaction. This is where the blockchain comes in. Rather than these entries occurring separately in independent sets of books, they occur in the form of a transfer between “wallet” addresses within the same distributed public ledger. This process creates an interlocking system of enduring accounting records. Because the entries are distributed and cryptographically sealed, falsifying them in a credible way or destroying them to conceal activity is practically impossible. How it is impossible, well… keep reading!