In the eighth millennium BC, Sumerians created proto-writing systems for accounting. Arguably, the blockchain represents the most significant advancement in recordkeeping since then. Excel spreadsheets and databases have more in common with stone tablets than the blockchain, the only incorruptible ledger humankind has created.
The blockchain has the potential to reshape how we create, structure, and run organizations. To understand why, we’ll review the origins and purpose of recordkeeping. Second, we’ll examine the nature of the blockchain. Then third, we’ll hypothesize how blockchain-based businesses would operate differently from traditional firms.
Symbols, Contracts, and Violence
Sumerian accountants created symbols and proto-writing systems for a cherished purpose: taxation. By the third millennium BC, they developed more sophisticated writing for funerary inscriptions. Over time, the reasons to record data diversified. Today, an organization without multiple ledgers is almost impossible to imagine.
10,000 years ago, if you wanted to tax farmers in exchange for physical protection or services like irrigation, you had to know what they produced and how much of it. So, you created symbols to document that. And if you wanted your government to seem just and legitimate, you needed to record its rules, beliefs, and institutions (and for extra credit, ascribe authorship to a deity). So, you created more complex writing systems capable of relaying stories. And if you wanted people to obey those rules and conduct business (which made your state rich), you invented legal contracts and enforced them with the threat of state-sanctioned violence.
Recordkeeping hasn’t changed much over the millennia. Governments, businesses, and organizations still rely on ancient symbols, contracts, and monopolies on physical force to ensure that we play by the rules.
For that, we can all feel grateful. Outside a utopia, we need records and rules to ensure that people can’t murder their neighbors or cheat their business partners. When government personnel refuse to enforce our collective paperwork, the results are not pretty. Civilization is impossible without recordkeeping.
Limitations of the Paperwork Society
Our societies run on paperwork. It has enabled us to collaborate in government, the sciences, art, and entrepreneurship. But paperwork has limitations.
First, it’s expensive. Today, only lawyers have the proper training and knowledge to create enforceable contracts. Only accountants can ensure the accuracy of financial transactions and their observance of federal, state, and local laws. The creation and maintenance of ledgers require professional assistance.
Second, paperwork is corruptible — either because it suits some potentate’s agenda to doctor the record, or by accident — if the town hall burns down, the local registry is lost.
Third, paper records are open to interpretation. If two people disagree on a contract and one feels aggrieved, the dispute will likely go to a government court. One party might be fined or serve jail time sincerely believing he followed the contract. It’s possible to violate a paper contract intentionally or unintentionally.
Although we have developed better ways to keep records, the blockchain represents a significant change in recordkeeping and enforcement.
Why the Blockchain is Different
As I argue above, records have weaknesses. The king and his cronies, the unscrupulous bureaucrat, and countless other historical characters manipulated and reinterpreted records. The blockchain is the first incorruptible ledger.
Normally, entities or individuals own ledgers. Between multiple parties, tools like double-entry accounting decrease the risk that an owner will unilaterally change the ledger.
The blockchain is a ledger that has no ownership. It’s shared publicly, distributed among thousands of computers, and continually reconciled. Thus, the blockchain requires no middleman (like a government) to enforce compliance.
In fact, there is no central database for attackers to corrupt. An assault on a well-established public blockchain would be so wildly expensive that the perpetrators couldn’t expect a return on their investment.
Bitcoin, for better or worse, is the flagship blockchain. The Bitcoin brand name was initially tarnished by its adoption by underground dark markets, but as a public utility, it proved its mettle. Bitcoin has enabled nearly $100 billion worth of transactions to be made trustlessly, and peer-to-peer. No bank nor pseudo-bank (e.g., PayPal) involved. Bitcoin has been stolen, but never due to a problem with the blockchain itself.
Ethereum is the next evolution of the blockchain concept Bitcoin pioneered. It allows you to write “smart contracts” that enforce rules about how value (money, equity, digital goods, etc.) transfers between parties. Ethereum elevates the blockchain from an advanced ledger to a technology that can serve as an operating system for an organization.
Like the ledgers and contracts developed in the ancient world, Ethereum can record the terms of an agreement. But unlike the old records that depend on government enforcement, Ethereum enforces its own rules. Computer logic prevents any party from breaking the contract.
“Hype! There’s nothing here that couldn’t be done more easily with a good ol’ database!” I hear you cry.
The difference is, databases aren’t designed for Byzantine Fault Tolerance: a quality in a computing systems that solves the Byzantine Generals’ Problem. Imagine that you’re one of nine generals surrounding a city, and you need all nine generals to attack if you are to win. Some are known to be treacherous. How do you prevent a scenario where you attack, several generals defect, and your army is crushed?
With a database, whoever holds the password can unilaterally alter records. As such it’s hard to trust the contents of a database with valuable records without trusting the existing apparatus of enforcement. With Ethereum, logic (smart contracts) may be deployed which create records on the blockchain which cannot be amended without the consent of the majority of the ‘miners’ responsible for the upkeep of the ledger. These miners are dis-incentivized to lie about the true state of the ledger, because they earn ‘ether’ (Ethereum’s native currency) for running these smart contracts, and miner malfeasance would destroy confidence in the Ethereum network, and render their ether worthless.
This represents a true disruption in the way we create and keep records. I don’t use that term lightly—this isn’t a new way to take selfies—this is technology which is going to upend and disintermediate the established order. While we still need governments to protect our physical being and property, with Ethereum, we do not need governments, lawyers, and accountants to enforce the terms of a business contract.
As we’ve discussed, using Ethereum, we can encode business rules in smart contracts that are impervious to manipulation. Like the Bitcoin ledger, these smart contracts are distributed around networks of computers and offer some interesting business applications.
The intuitive example is a new startup. Let’s say two founders establish an S-Corp in Delaware. Normally, the lawyers will write 10,000 shares into the founding documents. The entrepreneurs will take a cut of the shares and then, if necessary, distribute some to investors, board members, and eventually strangers through public traded stocks.
Ethereum could capture that structure and those transactions without depending on Delaware or the U.S. for enforcement. It would enable the founders to distribute ownership without drafting new contracts that cause conflicts between existing owners (and cost tons of money).
Perhaps your imagination has kicked into gear. Could we establish businesses wherein influence over decision making is computed hourly based on performance? Could we there be ‘cloud based’ organizations coordinated online, with members in 50 different countries? Could valuables businesses emerge in virtual worlds creating cryptoproperty which trades for cryptocurrency? The answer is yes to all—there are teams testing these possibilities and many others.
Here’s one common misunderstanding though: blockchains do not have to be public to be useful. Bitcoin is a public blockchain, so anyone can look up any account and see how many bitcoin it contains and the transactions it has made. Banks, for instance, probably don’t want their clients’ records open for perusal. Instead, they’ll use private ‘chains to reconcile data across a multitude of computers either across their global internal infrastructure, or as part of a consortium.
Ethereum enables the execution of complex and automatically enforcing agreements to create immutable records of what happened, and ‘who’ was involved, without requiring a trusted intermediary. Clay tablets, followed by papyri, parchment, printing, databases, etc., have enabled organizations to minimize their risks and operate more efficiently. Ethereum is the next chapter in that story of recordkeeping.
Visions like these deserve skepticism. But assuming the concept of the blockchain itself experiences no cataclysmic failure mode, expect it to disrupt the traditional firm and automate jobs.
Unless you have a rare passion for punching expenses into QuickBooks, you’re probably rejoicing at the news above. Accountants, don’t fret: No matter what happens, you still get credit for the invention of writing.