What is Blockchain?
Will blockchain technology reinvent double entry accounting?
Accountants today use double entry bookkeeping to record transactions. Companies record financial information in central ledgers in a debits and credits format. At year-end, they hire auditors to review their records, who then verify and provide trust in the records and reasonable assurance that fraud did not take place.
What if there was a master ledger that recorded the transaction once and allowed all parties to see it?
In essence, that is what the blockchain does. The blockchain is a technology that maintains a record of transactions. The information is available to everyone. For privacy, the blockchain hides the identities of the individuals on the network.
Here’s an example:
Let’s say that there are ten people in a blockchain network and that person #2 sends person #5 $100. Everyone in the network verifies that person #2 indeed has $100 and records the transaction in the ledger. Each person has a copy of the shared, replicated and synchronized ledger. This is what makes blockchain a “distributed ledger”. When the first transaction gets recorded, a new “block” is created. Each block can only record a specific number of transactions. Once a block fills up, a new block must be created. After that, each block is cryptographically secured. This means no changes can be made to transactions that have already been recorded.
This technology solves three major problems.
It provides trust, which normally takes years to earn and develop.
It is transparent.
It delivers accountability, usually supplied by third parties.
Solving these three problems will make processing transactions more efficient. This means faster turnaround, increased profits, and happier clients.
Check out our related blog posts:
- Tax Guide to Cryptocurrencies – Part 1: Like Kind Exchanges
- Tax Guide to Cryptocurrencies – Part 2: Mining