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The Blockchain Revolution Is Not What You Think It Is

By Todd Mei PhD | Crypto U Education | 11 Jan 2023


Ledger

While many of us are preoccupied with cryptocurrencies, we tend to underemphasize the importance of the public ledger feature of blockchain technology. It’s revolutionary as an accounting system. And that’s nothing to scoff at. Advances in accounting have led to significant social transformations.

  • Single-entry accounting has been traced back to the ancient civilizations of the Mesopotamia (as early as 4100 BCE) and is recognized by scholars as one of the key reasons for their longevity.
  • Double-entry accounting is an innovation of the Renaissance, first credited to an Italian monk named Luca Pacioli (1494).

And so to the present.

The blockchain introduces a triple-entry accounting system which heralds a new age in transparency.

The Innovations and Limits of Single-entry Systems

Single-entry accounting systems merely record debit and credit events in one column. While providing a record, they do not give a sense of outstanding balance since there is no way to easily calculate how each entry is affecting the sum.

So, for example, in a single-entry system there is no easy way to see that a payment to Geraldo of $50, a receipt of $200 from Dolly, a receipt of $25 from Chuck, and a payment of $1000 to Francine leave an outstanding balance of $825 (ok, the math is easy enough, but imagine 50 entries).

Another drawback of the single-entry system is that one person or agency maintains control of the books. And this becomes a huge issue with respect to transparency and authority. The authroity tells you what you owe, and you have no way of contesting this.

The Innovations and Limits of Double-entry Systems

Double-entry systems provide a way to balance the books. There are two separate columns in a double-entry system that show debits (usually on the left) and credits (usually on the right), thus allowing the overall balance to show by way of addition and subtracting. In other words, the double column system allows for a running tally and update to the overall amount.

Double-ledger system from Investopedia

In addition, double-entry systems make it easier to see whether an oustanding account has been paid. Assuming totals are run periodically in small enough blocks (in the absence of computer records), an accountant can determine if an error has occurred or if an account is outstanding simply by looking at the difference between the sum of the debit column versus the sum of the credit column.

Theoretically, double-entry systems are kept not only by agencies and governments but by everyday people. Each one of us has access to a double-entry system in the form of our bank account. If someone comes to us to say that we didn’t pay them back, we can point to a debit from the account to show, for example, a check was paid on a certain date and in a certain amount.

However, as we have seen with corporate scandals (such as, Enron) double-entry systems can be manipulated (or “cooked”) to falsely represent the value of a company. Why? Where there is a lack of a corresponding or clear counter-measure of one double-entry system (as in the case of the bank account above), figures and amounts can be hidden by the person or agency in charge of the accounting books.

Enter the blockchain, which provides this counter-measure in the form of a permanent (immutable) and publicly accessible ledger.

What Is a Blockchain?

While there are many different blockchains — e.g. Bitcoin, Ethereum, Solana, Avalanche, and so on — there is one blockchain technology. Despite there being many blockchains, in essence a blockchain is just a long list.

Imagine a thread with post-it notes attached to it. Each block is like a post-it note added to the thread of other notes. Those blocks are added on a regular basis (10 min for Bitcoin). The thread itself links the notes into one big list, so it’s the chain for each block.

Hence: block chain.

There are three items in this metaphor that need some explanation: the notes, the string, and the hand applying the notes to the string. Let’s go in that order.

What are the “post-it notes,” exactly?
They’re just a list of all the transactions that have occurred. On Bitcoin, it’s a list of who sent how many coins to whom (and when they sent them).

What’s the “thread” in this analogy?
For standard blockchains (we’ll talk about alternative ledger technologies below), the threading is done by a hashing algorithm. To explain, we’ll need to take a step back for a second and develop some high level concepts. Let’s start out with a “relationship.”

Jim and Jen are siblings. That “sibling” relationship is a property or characteristic that is well defined enough to explain how they and only they are related. Notice, “sibling” is bi-relational while “brother” only goes one way: Jim is a brother to Jen but not the reverse (unless Jen decides to change her gender, or Jim does).

Functions are also one way relationships. They’re more specific though. They have an input and output structure. How much you pay to ship a package is a function of how much it weighs. The more weight in, the more you need to pay (unless it’s Amazon prime, in which case someone will act as “slave labor” to ship your package because Jeff Bezos is making them).

Algorithms (for our purposes) are functions. They can have a lot of input factors, but only one output. The algorithm itself is the set of rules for what to do with that input. For example: measure the weight in pounds and multiply by 1.5 to get the cost in dollars. A 2 pound package is thus $3 dollars to ship.

Notice how that algorithm is reversible. If I know someone paid $3 and I know the rules of the algorithm, I can figure out that they must have shipped a 2lb package. Some algorithms aren’t reversible in that way. One sort of such non-reversible algorithm is a hashing algorithm.

Of course, there are different kinds of hashing algorithms and Bitcoin uses the SHA-256 algorithm. The point, though, is that the algorithm can’t be reversed, so a person can’t undo the blockchain (unless they use a Sybil attack, explained below). The “thread,” that links the blocks is thus the result of Bitcoin’s use of that hashing algorithm.

Specifically, the current block uses the previous block’s hash inside it. That way, it is linked to the previous block’s irreversible hash and everyone will know whether it’s been tampered with (see image below).

Blockchain hash process

What’s the “hand” in this analogy?
These are the “miners” or (more generally) validators of the blockchain. In Bitcoin’s case, they apply computational resources in a competition to validate the blockchain. If successful, they are rewarded for their efforts in Bitcoin — or what’s called proof of work validation.

A note on alternative ledger technologies: Not every blockchain secures the chain by using a hashing algorithm. Some use other computational methods. The most famous of these other methods is the Directed Acyclic Graph (DAG) approach that Iota Tangle (MIOTA) uses. For our purposes, the only thing you need to grasp about these structures is that because a DAG goes in one direction and can’t be reversed, it can serve in the role of a hashing function.

Why Is a Blockchain Immutable?

With standard blockchains, there are two parts at work: the hashing algorithm and the incentive structure for blockchain validation rewards.

The hashing algorithm prevents people from rewriting the blockchain directly. Remember, you can’t reverse it.

But there is a “loophole” of sorts. Each block is validated by a competition and then a voting verification process afterwards. If you spent enough money to gain 51% (or more) of all of a blockchain’s voting power, then no matter who validated the block, you could override it.

Blockchain designers want to prevent that kind of override, which is called a Sybil attack. They disincentivize that in two ways. First, it is extremely costly to get 51% of the vote. For Bitcoin, you’d have to spend tens of billions of dollars to do it. Second, as soon as you did, people would lose faith in the blockchain and all the money you spent in acquiring those votes would evaporate.

That makes it irrational, from a financial perspective, to override a blockchain. But what if you were just malicious?

Blockchains have decentralized autonomous organizations that facilitate updates for the code running the blockchain. Should something like this happen, and there have been other sorts of errors, they have historically voted to invalidate the attack and reset the blockchain to a point in time prior to the attack.

The Age of Triple-entry Accounting

Accounting made accountable.

So now imagine a public and immutable record of financial transactions. That record would more or less count as a triple-entry system acting as a master record of everything taking place (on a blockchain). And that pretty much is what the blockchain (as a ledger technology) is about. Here’s an example from the Ethereum blockchain where transactions are listed according to wallet addresses:

Etherscan screenshot

It becomes very difficult to hide transactions and, moreover, to cook the books when there is an objective “truth record”. While blockchain technology provides a layer of privacy, anonymity is not absolute. Nefarious and malicious actors have to go quite far to ensuring anonymity by using something like onion routing technology.

There are obviously substantive questions about privacy at issue here. I don’t think it’s just a matter of considering individual freedom. It’s more about understanding a broad concept of freedom (not anchored in the Myth of Self-sufficiency). Notwithstanding these important philosophical questions, what the blockchain provides with respect to institutional financial transactions is a good. It provides accountability in the domain (i.e. finance) where responsibility is typically something ignored, forgotten, or unnecessary.

This, of course, assumes that people conducting these transactions (like banks and businesses) are in fact using blockchains. I think that this use-case is inevitable given how transparency and accountability are not only becoming increasingly important with respect to verifiable sources. But as well, in our age of social technology where so-called natural and organic interaction is mediated and often complicated by technological media, blockchain transparency lends a level of expectability and trust to social interaction — a significant ingredient for social cohesion that J. S. Mill identified in his essay on Utilitarianism.


This article originally appeared on Medium is a part of the Crypto Industry Essentials educational program presented by The Art of the Bubble.

Though this article is credited to me, it contains some written material by Sebastian Purcell, PhD from his The Art of the Bubble education series on cryptocurrencies.

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Todd Mei PhD
Todd Mei PhD

Todd is a former Associate Professor of Philosophy with over 16 years of research experience in the philosophy of work and economics. He is currently the lead researcher and writer for the Web3 consultancy group, 1.2 Labs.


Crypto U Education
Crypto U Education

Cypto U is a series of blogs providing educational content for crypto enthusiasts. Content and lessons have been taken from The Art of the Bubble and 1.2 Labs.

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