A ledger is a historical record.
The status of a ledger is the state. The current status of a ledger is the current state, which could be referred to as state (S). The state of a ledger tells us information like account balances.
A transaction on the ledger is a state transition. A transaction takes the state (S) and transitions it to a new state (S’). The output of the state transition function is the new state (S’).
Blockchain is a ledger. It is a historical record.
In cryptocurrency, the state is the ownership status of all existing coins. For instance, Bitcoin uses blockchain to record the state of all bitcoins. A blockchain is a set of addresses and the state is the location of all coins across the set of blockchain addresses. A state transition is the movement of coin(s) from one blockchain address to another. Having a ledger for cryptocurrency prevents the “double spend problem.” In other words, it prevents transaction senders from spending coins that do not exist.
Blockchain is a distributed ledger. Distributed is a technical term for shared. Every computer (node) in the blockchain network has a copy of the ledger. Blockchain is a system of shared recordkeeping. It is a distributed ledger technology (DLT) designed to accurately record transactions and share that ledger among a network of users.
Blockchain is decentralized. The decentralized characteristic of blockchain means that the ledger is maintained by the network rather than a trusted third party. Because blockchain is decentralized, every blockchain must have a consensus system for reaching agreement on the distributed ledger. The consensus system is the process of validating proposed transactions for addition to the ledger.
Blockchain combines a state transition system with a consensus system. The state transition system maintains the order of transactions. The blockchain is constantly being updated to represent the latest state of the ledger. The consensus system ensures that everyone agrees on the order of transactions.
A “blockchain explorer” can be used to view transactions and the state of a public blockchain. Etherscan is an Ethereum Blockchain Explorer. Clicking on an address will show the current amount of ETH in the Ethereum address. This is the current state of the ledger.
The Relationship between Blockchain and Accounting
Consider the term “ledger” and think about the relationship between Blockchain and Accounting.
In accounting, a ledger is a record of bookkeeping entries. It shows an account’s balance at the beginning of an accounting period of time, debits and credits during that time, and the balance at the end of that period.
Accounting is the process of recording financial transactions (i.e., keeping “account”). It involves measuring, processing, and summarizing information and then sharing (reporting) that information with key stakeholders.
Modern accounting was invented in 1494 by Italian Luca Pacioli, who first described the system of double-entry bookkeeping used by Venetian merchants. Luca Pacioli advanced the technology of accounting by developing a clear and repeatable method of accounting.
In a sense, blockchain is an accounting technology. It is a distributed ledger technology. But the technology of blockchain was only developed in the last 30-50 years.
If we continue to transition to a digital economy with electronic payments, it is likely that we will see the growing use of digital currency. Transactions in digital currencies will likely be recorded on blockchain, so blockchain will be an ideal technology for doing the accounting associated with these transactions. Blockchain has the potential to transform modern accounting.