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6-WEEK ONLINE CERTIFICATE PROGRAM
Ever since double-entry ledgers were developed in the 1400s, they have been the backbone of the world’s financial system. A blockchain ledger may be regarded as the next evolutionary step of accounting and ledger technology. While it can be applied to accounting — and to great effect — blockchain technology moves well beyond mere financial data and can store any information in a distributed and decentralized manner. In addition to being decentralized and distributed, the data are also immutable, transparent, secure, and totally consensus-driven. Blockchain networks allow for the secure distribution and access of these ledgers across a network of computer systems (or nodes). Blocks (data chunks) within the blockchain are most commonly known for their use with cryptocurrency. However, they can be used for any data that must be organized, protected, and stored securely.
Blockchains deal primarily with data management. These data often require validation, like when transactions are made. More importantly, the process whereby blockchains manipulate data remains transparent and traceable throughout the distribution process.
When a new transaction occurs, that data broadcasts to the blockchain network, and a network of nodes must validate that transaction. These transactions group together into a single block, which gets added to the blockchain. Think of these blocks as entries into a ledger, with a corresponding timestamp for verification purposes. Each node within the blockchain now contains a duplicate, immutable record of that transaction.
This process of data manipulation springs blockchain forward as a viable candidate for smart contracts, among many other applications. Each block requires approval from all of the nodes, while only one node actually produces the computing power necessary to add another block to the chain. The encryption process critical to exchanging data from one form to another links blocks together and provides additional security measures. Source data can remain anonymous and private throughout the transaction through the use of hashing.
A decentralized ledger technology (DLT) removes the managerial structure found in centralized frameworks and distributes it among multiple stakeholders. In fact, blockchain represents a type of DLT that permits the verification of transactions without a central authority. Some of the most popular blockchain DLT networks include Ethereum, Hyperledger Fabric, and Quorum.
A hash establishes the source of decentralization within a DLT. These mathematical functions interlink blocks within the chain through cryptographic signatures. Hashes encrypt data on an individual scale as it enters the blockchain. This allows the data to maintain pseudo-anonymity and provides a secure vehicle for distribution. Compliance with the target hash allows for the addition of new blocks. Once the blocks join the chain, they are totally unalterable.
In many ways, the hash provides the structure necessary for the immutability of blockchain networks. Since future hashes must refer to previously established hashes, manipulating the data demands system-wide attention. However, changes to any of the blockchain networks immediately notify individual nodes, which can cause the blockchain to fork off.
Traditional ledgers exist as a centralized list of financial transactions. This revolving door denotes money coming in and money going out in its simplest form; assets equal liabilities plus owner's equity. However, such a ledger depends heavily upon human input for upkeep, management, and auditing.
In contrast, blockchain ledgers distribute these same ledgers to several computer nodes in duplicate form. Each block retains financial information linking to additional data within the chain. If a discrepancy ever occurs, the nodes within the network can pinpoint the individual node from which the incongruent data came.
When comparing traditional and blockchain ledgers, consider the transaction process itself. Banks and stock exchanges use a “business day” schedule. However, the sun never sets on the Blockchain Empire, as transactions are being recorded and memorialized on a 24/7/365 basis. Transaction fees apply in both instances, and blockchain ledgers allow users to incentivize speedy processing to ensure a continuous source of computing power. Since data remains pseudo-anonymous on blockchain ledgers, verification of the user’s legal identity takes a backseat to questions about fund availability.
Digitizing a ledger eliminates human errors as well. It can even improve efficiency, especially involving transacting parties across international borders. Blockchains themselves are often regarded as impervious to traditional hacking methods. However, centralized exchanges have had a series of difficulties with hacking, asset runs, and mismanagement.
Cryptocurrency proponents praise the popular alternative currency for its decentralized characteristics. Blockchain ledgers, however, provide the structure upon which cryptocurrencies flourish. Within this established system, cryptocurrency transactions retain the valuable features of blockchain, in addition to the freedom of nearly endless iterations.
Currencies worldwide require a consensus of value for successful implementation. When it comes to cryptocurrency, blockchain lends its immutability and security, as transactions require work and authentication for acceptance. Cryptocurrency miners gain rewards for contributing to the network rather than working to bring it down.
Compare public and private blockchain ledgers to those financial ledgers of nonprofit and for-profit businesses, respectively. To retain their tax-exempt status and corresponding transparency, nonprofits must report their financials as part of public records per the IRS. Anyone can request to see their ledgers, just like anyone can join and contribute to a public blockchain.
Public blockchains often call upon consensus mechanisms such as proof of work to provide security and immutability. However, these permissionless blockchains rely on the robustness of the blockchain technology to build and hold value. While they remain transparent in their dealings in a way that mirrors nonprofits, they do not restrict participation the way private blockchains do. Public blockchains suffer when it comes to transaction speeds, something the network makes up for when it comes to strong overall security measures.
Entrance into a private blockchain requires permission from those in control. This single authority eliminates decentralization but retains the other benefits of blockchain technology. This centralized relationship defines the provisions necessary for higher transaction speeds and increased scalability potential. In addition to an internet connection, participants require an invitation to take part in a private blockchain.
Private blockchains trade exclusivity for the more powerful security of a public blockchain. Though achieving trust between members is the responsibility of the decision maker, private blockchains do still use a consensus mechanism that requires the majority’s approval. Examples of private blockchains include Corda, Hyperledger Fabric, and Hyperledger Sawtooth.
Blockchain ledgers provide the trust, security, and efficiency necessary for successful digital transactions. Altering the blockchain would be a monumentally difficult task since a hacker would need to simultaneously change every single duplicated ledger within the system on each different node. The benefit of these proof of work and proof of stake protocols is that the energy and computing power needed to modify a blockchain is so large that the task becomes virtually impossible.
Efficiency and a competitive culture give blockchain the upper hand in contrast to reliance upon an outdated, burdensome system. The cost of using blockchain to authenticate and verify transactions may prove costly for miners. For everyday users, however, trusting the system requires less of a financial commitment.
With the increasing need for freedom from censorship, blockchain ledgers remove many of the restrictive practices of traditional ledgers to the benefit of the masses. A transparent approach goes a long way in earning users’ trust.
Despite the benefits of blockchain ledgers, inherent drawbacks of blockchain still exist. The question of technological cost remains, in addition to scalability concerns. The computing hardware to establish a node can often be expensive. Even then, the storage capacity required dwarfs many consumer-friendly setups on the market today.
New technologies also suffer from a lack of experiential knowledge necessary for successful and widespread growth. Regulations in blockchain technology, especially cryptocurrencies, are also lacking, leaving many to shelve the technology as a risky investment. It often takes a severe breach of good faith to prompt the birth of new laws and regulations and prevent those actions in the future.
The blockchain ledger is one of the most important accounting and data management advancements since double-entry accounting was invented. This leap into decentralized ledger technology provides opportunities for continued advancement in myriad other industries. To help train the next generation of professionals for the next generation of blockchain technology, the Wharton School created the Economics of Blockchain and Digital Assets course. The blockchain certification course features more than 80 videos, seven industry-leading case studies, three crypto valuation models, and more. For more information on the program or to enroll, visit our information page to learn more.
This article is for marketing purposes only and does not intend to represent the opinions of the program.
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