Bitcoin: A 700-year accounting revolution

The world is running on double entry bookkeeping.

To understand Bitcoin as an accounting revolution is to open the hood of the world and try to find out whether the parts inside can be upgraded or replaced.

This article was jointly translated by Orange Book X NPC. This is perhaps the most memorable article we have seen recently.

Bitcoin is an accounting revolution that has enabled the currency revolution. From another perspective, this is the case:

Accounting revolution = technical

Currency revolution = social

Subversive technology will trigger social movements. If there is no social movement, then (by definition) these technologies are not destructive. Facebook, YouTube, and Airbnb are all technologies that change how we interact with friends, how to create content, and how to travel. Bitcoin is no different in this regard because it is an accounting technique that is changing our understanding and use of money.

This article will discuss Bitcoin in detail and how Bitcoin can provide simple but revolutionary advances in accounting. In order to let readers understand this better, we need to explore some basic background information.

The table of contents is as follows:

  1. A brief history of accounting + auditing
  2. Accounting + audit history trends
  3. In-depth introduction of Bitcoin + triple entry accounting
  4. Bitcoin bookkeeping vs. double entry bookkeeping
  5. Bitcoin + Lightning Network vs. Double Entry Accounting
  6. Meaning + conclusion

1

A brief history of accounting + auditing

Accounting and auditing have a deep history and it is worthwhile to discuss it for today's topic. The purpose of the discussion is: we need to understand how such areas have evolved over time, so that we can better build the design framework for Bitcoin.

Nowadays, many people use the "Pseudo-Punk" organization and its "Glorious Deeds" as the origin of the story of Bitcoin. However, if we look at it from a historical perspective, the invention of Satoshi Nakamoto has actually been thousands of years old. precipitation.

Below, we will review each of the milestones in this history and briefly talk about the significance of these milestones.

1.1

accounting

Compared to the current value record, what we initially need is the ability to communicate numbers. The exchange of numbers includes the following three modules:

  1. Nonverbal digital expression
  2. Verbal digital expression
  3. Written digital expression

Historically, all three expressions have originated from the same species: humans. Early humans naturally used their limbs to communicate. This habit has continued to this day. Commonly used parts include fingers, toes, joints and even ears. Different populations have established digital systems and have invented digital languages ​​that use limbs for expression, and the choice of limbs determines the layout of the numbers. For example, the two numbers "2" and "5" in the modern counting system are more important. In fact, you only need to look at your body and you will find that the answer is self-evident.

1.2

Save personal record

As human trade continues to evolve, the need to record transactions has emerged. Before the 14th century, the way of recording was simply to write a "ticket" and use some sentences or paragraphs to describe the nature of the transaction, including counterparty, goods, amount, and so on. At that time, the concept of “accounts” did not exist, and some were simply records that were typed according to the type of transaction in order to facilitate the digest of a large number of transactions (but the classification records of income and expenditure existed). At the same time, the way to add a column of money to the right of the transaction description is not universal, and the amount is only recorded in the transaction description. That is to say, there was no uniform standard for bills, accounts and accounting methods at that time.

In this era, the single-entry bookkeeping method dominates. For increasingly complex transactions, single-entry bookkeeping has become a financial disaster. Simply put, in single-entry bookkeeping, both parties will only record half of the transaction's content on their own account. This shortcoming has seriously affected the auditability of transaction records, and it is difficult to resolve disputes between transactions. Lack of traceability and a “network” woven by reliable accounting records, people are even more reluctant to expand their business.

Fortunately, there was a solution.

1.3

double entry

The quality of accounting records leaves a lot of room for improvement in the era of personal record keeping. Because the record kept by the single-entry bookkeeping method at that time is only for the party to the transaction to view. However, there has been a huge leap in the development of bookkeeping methods, and at the same time there has been a need for systematic accounting: because of the responsibility to external parties. Documenting transaction history with external users requires an effective, easy-to-follow approach that must provide auditable evidence tracking to identify accounting errors or fraud in the event of a dispute.

Duplex accounting satisfies this need in a simple and elegant way. The way of double-entry bookkeeping originated in Genoa, Italy in the 14th century, and then spread to other Italian cities and neighboring European countries. Luca Pacioli is a monk mathematician in Florence. He is known for promoting double-entry bookkeeping. His book "Summa de Arithmetica" (the book was originally called Summa de arithmetica, geometria, proportioni et proportiona lita "arithmetic, geometric, ratio Integration with Proportions, one of the earliest mathematical works of printing, includes a chapter on the newly discovered double-entry bookkeeping method.

After the publication of Luca's work, the world witnessed the widespread spread of double-entry bookkeeping. But there is no objection in the process. Accountants across Europe have repeatedly tried to refute double-entry bookkeeping or invent a "new, improved" accounting system, but with little success. In the end, double-entry bookkeeping has been recognized by the peers and retained because it can better reflect the nature of the transaction through the records “giving” and “accepting”. In addition to early success and a basic accounting framework, double-entry accounting also requires years of iteration. An example of several instances that need to be iterated, including:

  1. The total amount of the borrower and the lender must be equal
  2. At the end of the period, transfer the remaining profit to the capital account (undistributed profit → retained earnings)

Those who have been trained as accountants naturally know that these two points prove the development of double-entry bookkeeping over the past 600 years. Despite tremendous progress, the double-entry bookkeeping itself and the GAAP (General Accounting Standards) and IFRS (International Financial Reporting Standards) built on it are still evolving.

Note: The use of double-entry bookkeeping is also accepted by more people for formal audits of accounting records.

1.4

Triple entry accounting

The arrival of the millennium also brought about an evolution of the accounting field in the millennium: the triple entry. The focus of our discussion is the triple entry bookkeeping method proposed by Ian Grigg.

Grigg describes it as: an accounting system that provides security for the high-frequency use of users and users. This system incorporates financial encryption techniques such as digital signature receipts and traditional accounting mechanisms such as double entry accounting. In addition, the system creates three sets of entries, two of which are entries for traditional double-entry accounting, and the other is an additional entry provided by the “initiator”. The entry is provided by the "Initiator" in the form of a digital receipt for the transaction and signed by the "Initiator" to create a "Primary Content of the Event" record, which is kept by all third parties.

A “signature receipt” is also a record of the main content of the transaction

Note: Alice and Bob are counterparties and Ivan is the “initiator”

Grigg puts forward some ideas that deserve our attention. For example, the transparency of the system plays an important role in tracing the “clear relationship between participants”, but on the other hand, it requires anonymity to ensure personal privacy. He also talked about the advantages of digital receipts at the information level and its disadvantages in terms of processing power.

In general, it is hard to come up with this great theory at Christmas 2005. But it is estimated that most people in the world have not noticed this paper. However, I guess this paper that nobody cares about is likely to spark a spark of thought with the design of a decentralized electronic cash mechanism three years later. It's no coincidence that a very famous white paper published in Halloween 2008 is not far from the time between Grigg's article.

2

Accounting + audit history trends

A brief review of accounting and audit history can give us a better understanding of human progress in integrating and documenting value. In this section, we will list some trends throughout the accounting and audit history, adding some additional background information to the history of accounting and auditing. In this way, we will better understand the core part of building an accounting system, so that we can compare the advantages and disadvantages of various accounting programs. The most obvious trends in history include:

Tamper protection

If the record is easily revoked or changed, the accountant cannot trace the value flow by time.

Example: The Cuban Billing scribe began recording commercial transactions on clay plates as early as 2600 BC. These clay plates are then baked and sorted to keep the documents permanent.

Redundancy

This feature of the accounting system is the backbone of preventing mistakes and fraud. Redundant settings such as financial controls help maintain internal accounting quality, and independent third-party audits provide an additional layer of support for identifying problems.

Example: The ancient Egyptians realized redundancy in their financial transactions by assigning two different officials to account for separate accounts in each transaction.

transparency

Without some degree of transparency, accountability cannot be ensured.

Example: In ancient Greece, elected finance officials carved their accounts on the stone for public scrutiny; more public transparency and accountability cases can be found in publicly traded stocks: public release audited and accepted Review of the quarterly report, annual report.

Adaptability

As a technology, accounting has a very good transaction record to adapt to the needs of the times. Entrepreneurs also try to expand their business scope through better accounting methods. If accounting technology lacks adaptability, it will hinder any economy. increase.

Example: Pacioli uses this book to record entries as “General Ledger”. This book is seen as a sort of "conversion record" because the medieval monetary system has almost no unity. The records in the "General Ledger" are converted into a single unit of account and subsequently recorded on the journal.

Today, GAAP and IFRS are also evolving to address the complexities of new discoveries.

Push

Accounting systems and the economies they support have a degree of reflexivity. Accounting systems need to adapt to change to support entrepreneurs, and improved adaptation can also promote further economic expansion and prosperity.

For example, the birth of double-entry bookkeeping is precisely the beginning of the Renaissance, which marks the transition of society to modernity. There is a view that the establishment of such a bookkeeping system provides a powerful impetus to advance the world in this period.

Exclusivity

Accounting has always been an area dominated by educators, and the threshold for entry is high.

For example: In the early days of double-entry bookkeeping, the number of accountants in a country can be counted by two hands. Later, as the number of people increased, accountants who did not have sufficient education or training were prohibited from practicing. Today, if you want to become a CPA, you not only have to pass the exam, but you also need to have enough work experience and the threshold is improving step by step.

Simplicity

A potential rule in accounting and auditing is that the procedures used to describe the transaction should only be as complex as the transaction itself requires. Simplicity is the key to preventing mistakes (beforehand) and supervision (afterwards). In addition, simplicity increases the likelihood that an accounting plan will be adopted.

Example: British accountant Edward Thomas Jones created a billing system in the late 18th century, claiming that it would subvert double-entry bookkeeping. His so-called groundbreaking system uses 10 columns instead of 2 columns and is said to provide a stronger guarantee of preventing ledger data errors or fraud. But the system is too complicated, and even if it is used, the system does not improve the integrity of the ledger.

3

In-depth introduction of bitcoin and triple entry accounting

Among the accounting system features described in the previous section, the three most important features should be (1) tamper resistance, (2) redundancy, and (3) transparency.

With Grigg's instantiation of triple entry accounting, real-time transparency has become a significant improvement over perfect double-entry bookkeeping. By creating a receipt ("event-led record"), a certain degree of extra redundancy is represented by another innovation in Grig's proposed system, which will be stored by 2 parties + "issuers" (third-party verifiers) .

However – only 3 parties store receipts, and the possibility of loss still exists. In addition, the deliberate handling of the receipt also implies that “there may be problems”. Although it sounds like a rehash, but because Grigg's system has not completely solved the tamper resistance and redundancy problems in the paper published in 2005, it still needs some work to perfect the Grigg system to truly achieve the "bulletproof" level. .

This is where Nakamoto is cutting. Through a small adjustment to the Grigg system, Nakamoto completely solved the tamper-proof and redundancy problems left in the triple entry accounting.

So how did he/she get this problem?

The process of providing the signature of the sponsor on the receipt becomes a game of the game. Through gamification, competition for verification rights and signature rights is clearly motivated by profits. The opportunity to profit from it gives external parties a self-serving appeal for third-party verification services, and this demand has brought about a huge redundancy upgrade.

Surprisingly, the redundancy of Nakamoto's triple entry accounting provides an engine for mitigating its legacy tamper-proof problems. The mechanism used to accomplish this is called the Workload Proof (PoW).

In general, proof of work (POW) requires an uncountable and costly effort to prove that the work is done to arrive at a particular conclusion. In the Nakamoto Satoshi scheme, the work of Bitcoin is done by repeating the hash calculation of the data subset of the relevant block + a random number (nonce) in order to find a hash below the required network difficulty target. value. The hash value itself can be verified by other third party verifiers in the bitcoin network and eventually as a "receipt signature" for each issued receipt (ie, block).

The cost of hashing is in the form of electricity, which is used to drive Hash Computing Machines (ASICs), and this cost makes the main record of tampering events (ie blockchain) a costly thing. The coinage reward (new coin) + transaction fee for each block published/accepted by the network as a profit motive.

The following two figures clearly summarize the solution to this tamper-proof and redundancy problem:

4

Bitcoin bookkeeping vs. double entry bookkeeping

The difference between Bitcoin's triple entry bookkeeping and Pacioli's double entry bookkeeping is that the difference between the two is beyond the three characteristics mentioned in our previous discussion. In this section, we will explore in detail the differences between the two systems, the impact of the existence of Bitcoin on accounting, and whether the two systems will replace each other or complement each other.

The table below lists the main differences between Bitcoin and double entry bookkeeping:

Double bookkeeping vs bitcoin

At a higher level, the differences between these systems can be summarized into three categories: (1) flexibility, (2) scalability, and (3) the strength of assurance that can be provided. However, these categories are not all created side by side. The flexibility and scalability characteristics of each system will ultimately lead to different strength guarantees. The former reflects the specific way of distinguishing Bitcoin from traditional accounting systems, while the latter is more illustrative of the “significant innovations” that you show when you combine all of these factors together. This great innovation will be our focus in the rest of this section…

Please keep in mind that the world is running on double entry bookkeeping. The advantages of this double entry are predictable because it is a highly flexible, scalable and concise system for recording/communicating value. In addition, when errors and fraud occur, there are also audit trails for identifying errors. A certain degree of financial control provides a means to prevent these problems (beforehand) and to allow external auditors to function (after the fact) after they have discovered the problem.

In summary, the double-entry bookkeeping method has achieved great success and will continue to serve us. However, it has an obvious flaw: the guarantee of data integrity. In the accounting profession, the strength of assurance provided by double-entry bookkeeping is called “reasonable assurance”. Although the “reasonable assurance” indicates that the audited accounts are highly reliable, it does not guarantee that the ledgers are completely accurate, but “sufficient” and accurate.

Take the accounting/audit of cash balances as an example. This is the area with relatively low risk in the audit business (and the most comparable asset on the balance sheet to Bitcoin). External audits have increased confidence in cash balances by requiring banks to issue confirmation letters (a paper/digital report that takes 24 hours to several weeks to get from a bank that holds client funds).

Audit reports from external third parties such as these are considered highly reliable audit evidence because it can be assumed that the only way to support counterfeit balances is by-string. Since auditors have no reason to suspect fraud, they are unable to access the bank's accounting system, and the reports provided may not show any signs of fraud, so stringing is difficult to detect.

The purpose of this example is to show that even in the simplest case, it is impossible to fully guarantee the integrity of the accounting data in the double entry bookkeeping method. This is where the problem lies, and Bitcoin will be one of the biggest leap in accounting history…

Bitcoin is the first accounting system ever to provide absolute assurance of ledger data. Unlike double-entry accounting, Bitcoin does this through its flexible, highly redundant protocols and networks that provide convenient third-party verification. From an accounting point of view, the speed at which verification from an independent party occurs is very important because it reflects from a costly and slow verification mechanism to being lightweight to the user, and at all times Just a "click" verification of the paradigm shift. Simply put, it separates old, separate internal accounting and external audit functions by combining them into a single, indivisible product.

It should be pointed out that “absolute guarantee” is not a natural attribute of all public blockchains, but only when the network invests enough resources. The investment in these resources enhances the tamper resistance and redundancy we discussed earlier, and few (non-bitcoin) public blockchains meet this standard. This ability to provide absolute assurance is critical to any encrypted network that wants to run for a long time. Because entrepreneurs only choose accounting programs that have proven to be highly reliable.

More importantly, classic double-entry bookkeeping and Bitcoin triple entry bookkeeping are complementary in nature. A quick glance at the tables provided in this section reveals that Bitcoin fills some gaps in the double-entry bookkeeping method that are a welcome addition to accounting services on the market today. It should also be noted that Bitcoin (accounting unit) can be compatible with both Bitcoin networks and dual-entry accounting software running locally. This is not the case with legal tenders such as the US dollar, the euro or the pound, which can only be used as part of a complete accounting system (double entry bookkeeping). In the next section, we will explore further the implications of this distinction.

5

Bitcoin + Lightning Network vs. Double Entry Accounting

Critics have long believed that Bitcoin will always be a network just getting started because it cannot expand. These opponents further believe that the second-tier solution is just a dream that will never be realized. Fortunately, since the beginning of 2019, the lightning network's rapid expansion in terms of user volume, number of nodes, number of channels, and BTC capacity has proven that lightning network is not an unreachable dream.

On the surface, Lightning Networks looks like an extra payment track that helps expand Bitcoin's trading power. This description is accurate, but the real question is "why can it achieve higher throughput?". From an accounting point of view, the answer is that Lightning Networks represents the iteration of traditional double-entry bookkeeping, and more specifically, a bitcoin local double-entry bookkeeping format.

Before we discuss the lightning network further, let's update the table below based on the previous section:

Double Account Recording vs Bitcoin vs Lightning Network

We can see from the above table: From a guarantee point of view, the lightning network represents the middle ground between double-entry bookkeeping and Bitcoin triple entry. This compromise in establishing the middle ground comes at the expense of the simplicity and flexibility of traditional double-entry bookkeeping. Therefore, double-entry bookkeeping is still relevant and useful in the accounting mechanism of the Bitcoin + Lightning Network.

For an extended tiered approach, the importance of double-entry bookkeeping is that accounting and auditing principles are followed during any financial statement audit. Separate + aggregated amounts below a certain importance threshold will be ignored, as the assurance of the accuracy of the small balances usually provides additional confidence in the relevant financial situation.

Bitcoin and Lightning Networks can shift to smaller redundant transactions to the less redundant accounting + audit layer. When the lightning network channel is closed, you can always switch back to the bitcoin chain with a simple click of the button to get absolute Guarantee.

6

Meaning + conclusion

6.1

Bitcoin as the ultimate accounting tool

Bitcoin is likely to become the center of accounting. why? Because bitcoin (accounting unit) is fully compatible with all three parts of the accounting suite, legal currency can only access a single part. Visually, this difference is as follows:

French currency accounting suite

Since fiat currencies are not based on encryption technology, they are unable to obtain the full capacity of the billing + guarantee strength provided by the cryptocurrency. Stabilized coins do not have such qualifications because they have a huge centralization dependency problem. Stabilizing coins represent only dollars that exist outside the chain (or, in some cases, "supposedly" outside the chain).

This difference means that when Bitcoin matures, it will be more useful than legal tender, because Bitcoin has more ways to reliably measure value for more companies in the future. There are more effective accounting model methods to calculate value in different fields, which means that there will be new companies centered on Bitcoin, and the legal currency can only be out of reach.

Finally, the "Complete Bitcoin Accounting Suite" blueprint may provide some clues to address concerns about future low-level rewards.

If Bitcoin becomes the center of accounting and becomes the ultimate source of value-based truth, the demand for Bitcoin is likely to strongly support the security of the network.

Those who believe that "high transaction costs will kill bitcoin are used" cannot understand the strength of the guarantee provided by Bitcoin, nor can it understand the ease with which Bitcoin can do this.

Simply put – Bitcoin is very cheap compared to other alternatives that offer high guaranteed strength.

Bitcoin is a vehicle built for the lunar mission, but we are giving it the treatment of a motorcycle.

Extra thought: From a currency perspective, Bitcoin may not be considered a "Unit of Account", but from an accounting point of view, it is already the most important final account unit.

6.2

The blockchain paradigm is here

This is not a problem that many people spend a lot of time thinking about.

However, there are still some people looking to speculate on alternative forms of distributed ledger technology (DLT).

If these other distributed accounting models are designed to subvert the blockchain model, they need to provide equal/stronger (1) simplified accounting value or (2) the guaranteed strength that the blockchain model has provided.

I think this is unlikely to be achieved because the blockchain model is very simple (Zhong Bencong only explained 6 sentences in the Bitcoin white paper) and under the correct implementation + resource commitment to the network, the blockchain provides Warranty is almost absolute.

6.3

Bitcoin's most basic value proposition

We have heard various reasons why Bitcoin may be valuable.

Some of these reasons include sound currency, hedging of central banks, and so on. These are all correct, but all are provided outside the network itself.

So far, I have not seen the true most basic level of value proposition for the Bitcoin network and its accounting unit "BTC". By establishing a basic value proposition, we can enter a broader discussion in the social field.

So before the end of this article, we will try to explain briefly below:

Bitcoin is valuable because they are irreplaceable, scarce incentives, as a glue for the novel distributed triple entry accounting scheme, by combining currency + accounting + third party verification into one Implemented in software-based products.

The reality is that there is a need to use the software because it provides an absolute guarantee for calculating value transfer/storage, a value proposition that has not appeared on the planet and cannot be provided by other accounting systems.

Bitcoin's accounting program is also unique because it provides users with powerful utility-based attributes such as anti-censorship and anti-asset forfeiture.

These features make Bitcoin a popular value storage tool for "aggressive uses and users", and because of its digital + open build, people can access it more easily.

The combination of accounting + utility guarantee + digital / open construction makes Bitcoin an ideal tool to protect the current monetary system and ultimately a good candidate for a "sound currency" of market choice.

6.4

Final thought

The double-entry bookkeeping accounting method has existed for 600-700 years. From the textile industry of the industrial revolution to today's space travel company, it has provided a lot of support for various enterprises.

This accounting scheme has existed for more than 99% of the business built on it and provides almost uncalculated value. Based on this, the question that still deserves our consideration is: How many times the value of the investment in the first 10 years of the double-entry bookkeeping method has been generated?

Why do you need to think about this? Because we can now get the investment workload certificate + triple entry bookkeeping opportunities through Bitcoin. From an accounting perspective, Bitcoin is unique in its ability to provide absolute assurance and is completely undervalued by the market.

During the 2015-2016 period, the nonsense about “blockchain, not bitcoin” scared people away from accounting, but now, it is time for us to fully understand the beasts in the accounting field of Bitcoin.

This powerful accounting layer allows us to agree with Bitcoin in all likelihood, and will continue to push Bitcoin forward in the ongoing global currency war. Therefore, all participants must understand Bitcoin as a revolution in currency and accounting.

(Finish)

Original: https://medium.com/@permabullnino/bitcoin-an-accounting-revolution-40efcb903d7b

OF: Decentralized Credit (DR / CR)

Translation: Eric@橙皮书, Leo@NPC, xy@NPC

Proofreading & Editing: Retric@Orange Book

Source: Orange Book