CPAs Should Learn About the Accounting Duality of Blockchain

Accounting on/around the blockchain is both SIMPLE and DIFFICULT.

If you are CPA and new to crypto, you might be interested to learn about the accounting duality of blockchain

In summary, accounting on/around the blockchain is both SIMPLE and DIFFICULT.

It is simple because blockchain is already a ledger of all the transactions that have taken place since its genesis and amongst all its participants (addresses).

But, an accountant is rarely interested in all the transactions on the entire blockchain. More often, one cares only about the transactions involving a specific participant — your client!

However, the raw blockchain nodes housing the duplicate copies of the complete ledger do not have a ready-to-go list of just the transactions you wish to explore.

If you were limited to using only the native RPC “language” of the blockchain, you would have to read all the millions/billions of blocks and transactions to filter out those that involve the address (list) you received from your client.

Such filtering is easier with access to metadata (transactionIDs) generated by the wallet apps used by your customers. Yet, it might not be appropriate to utilize them during independent financial audits aiming to encompass all possible transactions.

The blockchain nodes don’t have additional sublists of transactions in order to minimize data storage (and HDD costs). Nodes “must” hold duplicates of all transactions to revalidate every new transaction as they are submitted to the network: this duplication-for-validation is one of the mechanisms that enables the decentralized nature of the blockchain network because each “node” is able to revalidate everything and does revalidate everything indeed. Therefore, nodes don’t rely on a separate “elevated” authority to regulate validity of transactions and prevent double spend of coins.

In Jan 2024, the full record of all history for Ethereum mainnet takes up 3.5 to 15 terabytes of data (per Chainstack’s https://chainstats.org/) depending on node version and configuration. Guessing a 10% increase for the purpose of sublists across 10,000 duplicates could be 3500 additional terabytes of costs to infrastructure providers (in AWS 1 TB = ~ USD 100/mo).

Please follow our publication to get notified about our next post in the “blockchain accounting duality” series which will cover account balances and addresses.

In practical terms, this data filtering/processing for accounting has resulted in a Cambrian “explosion” of applications to manage financial activities on/around the blockchain. In many cases, these apps build additional indexes for addresses specific to their users or their clients. Thus far, we’ve come across: Accointing, Bitwave, Bizzllet, CoinLedger, consola.finance, Cryptio, Cryptoworth, Headquarters (HQ.xyz), Integral, Koinly, Ledgible, NODE40, Request Finance, SoftLedger, TaxBit, TokenTax, TRES Finance, and ZenLedger.

Please consider continuing into Part 2 of my duality series which covers considerations about blockchain addresses and their balances.