The Evolution of Accounting
From Sumerians to triple-entry we were looking for efficient ways of building trust and effective solutions for trading and exchanging value. How did blockchain contribute to that? Expand your knowledge with the BTCMEX Blog!
Economists have been exploring people’s behavior for hundreds of years. How we make financial decisions, how we act individually or in groups, how we exchange value. They’ve studied institutions that facilitate our trade, like marketplaces and corporations. There’s a new technological institution that has already changed the ways of evaluating assets – it’s called the blockchain.
Despite the fact that the technology is relatively new, it’s a very logical continuation of a human story in terms of accounting and ways of lowering uncertainty about each other while exchanging value.
The earliest examples of single-entry accounting date back to the Sumerians about 5000 years ago on cuneiform tablets. These systems were simple but effective. You just put one note in a ledger. This was the beginning of accounting and trading itself. But single-entry accounting isn’t very good, as you need to trust the second party. There was no way to verify, no way to audit, no way for two people to agree.
It wasn’t until the 1400s that the single-entry system really started to show its age though. For the first time, you had boats that could travel from near and far. That meant they could trade with people they’d never met. The trust issue arose, and new solutions were needed to improve trading.
That time port city-states like Venice became the center of the ancient world and the nexus of the world trade. By the 1400s, a Franciscan friar finally codified the double-entry system and it swiftly became the standard with the merchants. All thanks to the invention of the printing press. This opened up world trade. Now goods could flow easily to all the empires of the old world.
Modern financial accounting is based on a double-entry bookkeeping system. In the double-entry accounting system, at least two accounting entries are required to record each financial transaction. It refers to a system of bookkeeping where every entry to an account requires a corresponding and opposite entry to a different account. The double-entry has two equal and corresponding sides known as debit and credit.
What revolutionized the accounting system is triple-entry bookkeeping, conceived and explained by Japanese academic Yuji Ijiri in 1982, and further developed by Ian Grigg in the 2000s. Grigg’s ideas were still based on trusting the third party while using the shared ledger and didn’t come to life until Satoshi Nakamoto’s Bitcoin whitepaper introduced using blockchain without the need for trust.
Triple-entry is often described as double-entry + cryptography. Triple entry accounting is an enhancement to the traditional double-entry system in which all accounting entries involving outside parties are cryptographically sealed by a third entry, automatically eliminating the middleman or institution from the transaction.
Cryptography implemented into a distributed system creates the first practical implementation of triple-entry bookkeeping. The discovery of double-entry accounting resulted in the industrial revolution 500 years ago, triple-entry accounting opens new horizons for the contemporary monetary system. Everyone has the exact same copy of the global decentralized ledger and the same copies of debits and credits moved, for example on Bitcoin blockchain – the pioneering peer-to-peer cash system. The third-party, in this case, is every network participant, who agree on the consensus that the transactions actually happened. Here we have the debit, the credit, and the confirmation by the Bitcoin network. The third entry in the system, entered into the blockchain, is both a receipt and a transaction. It’s proof that something happened between two parties, which goes beyond the receipts that each party holds in double entry.
Triple-entry has the potential to solve multiple problems including voting falsification. It can be the simplest and most promising use case is for issuing stock. The fundamental breakthrough of the blockchain tech is that it solved the Byzantine Generals Problem, a situation where involved parties must agree on a single strategy in order to avoid complete failure, but where some of the involved parties are corrupt and disseminating false information or are otherwise unreliable. Digital trust in finance is not science fiction anymore with the triple-entry accounting system implemented in blockchain and first used in Bitcoin.