A Closer Look: Blockchain Primer

“Blockchain” is in the news – and it’s coming to our industry. The promises and potential benefits are significant. So are the challenges. Accounting and audit (A&A) professionals may not need to be experts in this area, but they would do well to be conversant to answer questions and keep an eye on both opportunities and risks.

The basics: What is a blockchain?

A blockchain is a continually updated, transparent, immutable, distributed ledger of economic transactions on a peer-to-peer network. Today’s ledgers are owned, reconciled, and maintained by each entity that enters into a transaction. A distributed ledger, like blockchain, is designed to exist in the cloud and to be accessible by all members of the chain, and to be updated subject to a set of rules that typically includes the agreement of all members of the chain.

It may help to think of a blockchain as blend of a ledger and database. Because it is a decentralized or distributed ledger, no one member of the blockchain has control of the chain nor the ability to manipulate it. Using open source technology and peer-to peer networks, a blockchain processes, settles, encrypts, and stores relevant transaction details allowing members to use it as the “single source of truth” for the transactions (blocks) in the chain.

How blockchain technology works

Members of a blockchain agree to the operation of that blockchain including the members’ roles, levels of visibility, and governance rules. Rather than each of the members maintaining their records, a blockchain is mutual, with each member sharing the same ledger of transactions or blocks. When a transaction occurs, the terms are sent to the members of the blockchain who agree that the terms are correct.

Once approved, the “block” is added to the “chain.” Because buyer and seller have to collaborate on transaction details (e.g., amount, date, quantity, payment made) there’s no confusion about the transaction’s terms. These processes occur and are recorded in real time:
• A transaction (e.g., sale of goods) is represented online as a block;
• The block is broadcast to every member in the network;
• Members of the network agree/approve that the transaction terms are valid;
• The block is then added to the chain- the ledger which provides an indelible and transparent record of the transactions; and
• Once approved the goods and money move.

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CCHEditorial

CCH Editorial, a Wolters Kluwer Company

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