Creating the Everything Ledger

Blockchain Concepts: The Transaction Receipt

In preparation for a micro-course on the Blockchain, the enabling technology behind Bitcoin, I explored the concepts that make it work. This is the second in the series. Here is the first.

I’ll be honest: I’ve always considered accounting to be just about the dullest subject under the sun. Looking at the subject through the fresh perspective of the Block Chain, I now consider it to be a remarkable low-level technology, pregnant with possibility. Ledgers are most interesting in how they matter to our future–they don’t just record transactions, they enable new categories of social interactions. And today the ledger is in the midst of an explosive Network Age reinvention.

While an accounting ledger is fundamental to running a single business, giving people and organizations the confidence to invest in the future, ledgers are even more transformative when used across lots of businesses, hewing to accounting conventions like double-entry bookkeeping. Many activities we take for granted and that are core to the economy have been directly enabled by the ledger, such as the ability to sell shares on a public market, merge with other companies, and obtain lines of credit.

In fact, they are the closest thing we have to a universal business API, a common interface that allows us to recombine market activities and assets in an infinite variety of ways. And rules of accounting allow us to interact with them programmatically.

Ledgers are like an API because they provide a standard way to query an organization for empirical facts about its financial situation. While these answers may arrive in summary form–say, a balance sheet or profit and loss statement–those are really just outputs made possible by the underlying structure and line-by-line completeness of the trusty ledger.

Consider Maria’s Pizza, the premier pizzeria in Ledgerville, BC. They run a tight ship, paying an anally retentive (but colorfully tattooed) bookkeeper to ensure the books are up-to-date and orderly. This year they needed to raise some money from investors to expand into the suburbs, so they took the step of having their books audited by Angst & Jung (A&Y), an accounting firm that looks through the records and offers their independent validation that things are as they should be. A Good Housekeeping Seal of Approval.

The investors, knowing A&Y’s reputation for being honest and thorough auditors, are content that the numbers they’re looking at in Maria’s prospectus are solid. They’re able to put up the necessary capital without having to do their own separate audits. Later, a bank offers up a line of credit based on this same audit.

This seems mundane, but it’s actually kind of magic: the API allows external parties to query the objective truth about the business (in this case A&Y) with minimal friction, which in turn allows these services to offer value-added services such as certification. It’s an incredible business lubricant.

Hyperlinking Transactions
Say that Maria buys a stainless steel soft-serve ice cream machine from Freeze-o-Matic, Inc, for $5000. Maria’s books show a decrease in the credit column of $5,000, while Freez-o-Matic shows a corresponding increase in its credit column of the same amount. The two merchants’ records appear as mirror reflections of each other; as money leaves one account it goes into the other account. To paraphrase Newton’s Third Law, for every transaction there is an equal and opposite transaction.

Of course, the information is trapped in mutually exclusive ledgers. These are not open APIs, but very closed ones, exposed to outsiders only rarely, like when an auditor is needed. Maria’s Pizzeria and Freeze-o-Matic (and their other trading partners) get no benefit from their inherent interconnectedness. They’re doomed to duplicate each others’ work in their own ledgers.

Perhaps we can learn something from the IRS, which in its tax audits may sometimes follow the money trail from one company’s ledger to another’s to check against money-laundering and the like. If the IRS sees a cash deposit labeled as a loan (debit), they make sure the sender of that cash labeled the transaction as a loan as well. If the sender marked the cash as payment for services rendered (income) this would signal an error or falsification.

Let’s imagine what it might be like if our two companies had public, Web-based ledgers. In this fantastical case, Maria’s expense entry would contain a hyperlink that, when clicked, leads to the corresponding entry in Freeze-o-matic’s account showing equivalent income.

So we just linked two records between two double-entry systems. Now imagine linking transactions between all ledgers in this way to create a giant Web of accounts. We could track the global flow of money, understand which products and services are thriving (or dying), detect corruption, and ensure accuracy to an unparalleled degree.

On the other hand, what a mess!

It’s hard enough to get a single ledger to be both up-to-date and accurate. Businesses hire bookkeepers and still make mistakes. Many of us individually don’t bother to balance our personal checkbooks. This virtual global ledger is filled with broken links and unmatched entries. There would be vast missing sections where the gray market operates, and wherever people pay (and are paid) in cash but keep no records.

It is, to put is bluntly, conceptually beautiful but practically useless if we can’t trust in the veracity or completeness of the individual ledgers.

The Power of a Receipt

But what if there was a single global ledger that didn’t require individuals or organizations to maintain their own accurate accounting, where the transaction receipt is the update to the ledger.

Whoah. Let’s unpack this. The key is to recognize how duplicative it is to have every party doing their own double-entry accounting when we have mutual validation between ledgers. Look again at our linked transaction:

What’s awkward here is that each ledger expresses the world from its own perspective–the labeling asserts that these are my assets, my liabilities. To create a global ledger we need to reconfigure this information into a statement that is equally valid for anybody looking at it.

The answer is surprisingly simple: we can communicate the same information, but far more elegantly and objectively, with a receipt that memorializes the transaction.

MARIA’S PIZZERIA SENDS USD$500 (CASH) TO FREEZE-O-MATIC FOR SOFT-SERVE MACHINE (ASSET)

This compressed transaction record can later be auto-expanded into double-entry statements in the accounting systems of both parties (an easy job for software). Consequently, receipts like this can be the basis for one big, network-based ledger, distributed across and including all the participants in the economy. This would be a list of all the transactions in the economy, showing movement of money and assets between accounts.

…
102. BOB SMITH SENDS $14.25 (CASH) TO MARIA’S PIZZERIA FOR LARGE PIZZA (ASSET)
103. MARIA’S PIZZERIA SENDS $75.14 (CASH) TO DOTTIE’S DAIRY FOR 20 LBS CHEESE (ASSET)
104. BOB SMITH SENDS $250 (CASH) TO GOLDRUSH CASINO FOR 250 CHIPS (ASSET)
…

This looks a lot like how a stock exchange, for instance, records trades. But here we’re applying that same approach to ledgers of very different kinds. Suddenly it becomes clear how we could, if we wanted to, begin to structure a Global Ledger of Everything.

What was true with an economy built on individual ledgers–that they enable many essential kinds of collaboration and exchange–is far more true in a Global Ledger of Everything, which would keep all records in balance, and allow anyone to query the system to find stuff out.

But with this behemoth-scale idea, we have ourselves a very interesting can of worms. Who records the receipts? How can we know they’re all correct? How do they avoid getting hacked?

What kinds of new activities suddenly become possible?

I’ll begin to answer these very questions in upcoming installments.