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Digital ledgers are a relatively new topic, but ledgers are not.
Since the introduction of Bitcoin in 2009, people around the world understood that there was an alternative way to do finance. As time passed, we simply realized that the new technology wasn’t just for digital currencies, but it could be used for anything that could be recorded.
If blockchain can be defined as a digital, immutable ledger, imagine what kind of implications this can have for activities that need to record data and transactions all the time – businesses.
I created a whole course on how blockchain can be useful for businesses that want to raise funds, and how they can do that by designing the right crypto tokenomics, but let’s step back.
Where do blockchains come from?
The answer is... ledgers!
Yes, ledgers have certainly been around for a long time! But the evolution of technology has turned them into something altogether new. Today, using blockchain, our ledgers can now keep detailed digital records that are cryptographically secure, and automate your business transactions at the same time using just one, single tool.
In this article you’ll learn:
- A little bit of history of old-fashioned ledgers
- How ledgers work
- How digital ledgers disrupted the traditional economic and financial systems
- What are the benefits of digital ledgers – especially for businesses
History of ledgers – An overview
To understand modern digital ledgers, we need to understand the old fashioned ones first.
Ledgers have been around for thousands of years. The ancient Sumerians recorded ledgers on clay tablets, like the one shown below, which is dated around the year 3000 BCE.
Specimens like these tell us that accounting may have been invented before the development of writing!
These early simple ledgers were just invented to record transactions.
A 'transaction' is just the technical term to describe an exchange or transfer of countable resources.
Transactions typically refer to exchanges between individuals, but we can extend the concept to account for resource transfers between parts of a larger or more complicated business.
The value of simple ledger use is clear.
Ledgers are record-keeping devices that allow us to preserve data about a series of historical business events, which we can then review later as we need.
This allows us to do things like evaluate what happened in the past, plan better for the future, and keep track of our outstanding agreements. So, let's look at the system a little more closely; at something that most people won't think about, but that ends up becoming very important to understand blockchain.
How do ledgers work?
In this image we see that four beetroots are being exchanged for cash. Let's call it a dollar. After that exchange, the seller has four beetroots less, and $1 more. We can record this transaction on the ledger, but notice that the exchange itself has happened, regardless of what is (or isn't) recorded in the ledger.
That physical fact stands independently of anything that my ledger says.
The transaction and ledger entries are independent events.
They can happen separately to each other and do not affect each other. But you can also use ledgers in a more active way: to decide or control transactional activities.
A case familiar to many of you will be how we use a card to withdraw cash from an ATM.
When we do this, a transaction request is submitted to the bank's digital ledger. This ledger is examined (or in computing speak "read"). A programme then determine whether the requesting user has sufficient funds: if they do, their transaction request is executed.
Take a moment and look at this flow chart.
The logic implied here is completely different to what we had before. There is no direct independent path from the transaction request to its execution.
The transaction now depends on the state of the ledger, the values that this ledger contains. In this sense, the ledger controls the decision of the outcome for this transaction.
And then there's actually one more thing we left out in the situation where the transaction is approved and executed, we update or write to the ledger to take this latest transaction into account.
So notice that this means that we are still using the ledger as a record-keeping device as well. In fact, we have to. If we did not update the ledger for approved transactions, it fails to function as a control for limiting user withdrawals that exceed the amounts they have deposited.
I've chosen a modern electronic example here, just because it's familiar to you. But none of this actually has to be digital. All we're talking about here is how we use the ledger to organize your business process.
These methods were being used by the earliest banks well before the invention of electricity.
If ledgers can be used as control devices that long ago, what significance does a digital ledger have over a traditional one?
The important detail is not that the ledger is electronic or digital, but that these properties make the tracking and control capabilities of a digital ledger much more powerful.
Read, write, and decision actions can all take place much faster.
The advantages of digital ledgers
It’s not just a matter of speed, but also a matter of automation – something that can help you save LOTS of time and money.
Let’s have a look at some of these automation advantages that are brought by digital ledgers:
- Programmability - the control rules are codeable
- Fewer human mistakes - complex logic is precise and repeatable without error
- Greater flexibility - the possibilities are as open ended as code itself
- Transactions and ledger entries occur as a single - without separation!
And there's more...!
But to grasp some of the more radical implications... we need to leave some of our older preconceptions about ledgers behind. Historically, ledgers have always been used as tools to mirror and match the state of the physical world – something that happens outside of the computer - like in keeping track of our physical beetroot stock and cash holdings.
But as more and more of our actions and experiences become mediated by digital systems, there are an increasing number of use cases where there is no physical quantity or state to track!
The ledger is just used to track and control quantities that stay inside that very same digital system. And those digital values then regulate and control how we interact with that system.
Consider a video game that uses a fictional currency to control what your character can buy within that interactive experience.
This currency, however, does not map to anything out there in our physical world in a clear way...
It doesn't need to.
All we want from this experience is an interaction with a closed digital system
The game experience is created and controlled by referencing quantities and values that are purely digital.
In these cases you don't need to have two separate things to solve the engineering problem. You don't need to have the ledger, and then the coins, as it were. All you need is one single ledger.
This is still the case if we're talking about a massive multiplayer online game, where thousands of players take part and they're all each on their own independent gameplay journey. Their cash holdings and their gameplay possibilities can all be stored and controlled with one large ledger.
This is a subtle and seemingly minor detail, but it gives you the foundation to understand that when we're talking about Bitcoin or other tokens, we're not talking about any kind of separate stuff. All we are talking about is just the state of a common shared ledger, that tracks how many tokens every user has.
The ledger is a singular and complete document for determining who has what, and how they can use it.
Why are digital ledgers important to businesses?
So, summarising up on why and how digital ledgers add value to our businesses by allowing us to:
- Analyze historical data
- Plan for the future
- Keep track of our obligations
- Program and automate complex business logic
- All ledgers allow us to record business activities and to control them
- Compared to their old-fashioned ancestors, digital ledgers can EXPAND capabilities for recording and control
- Digital ledgers also offer an expanded potential for automation and error reduction
- As purely digital values become more relevant in modern economies, digital ledgers give you the opportunity to represent and control them using a single, digital tool – and nothing else
Here’s why Blockchain Technology and Bitcoin use it
Roderick brings over 10 years of quantitative modelling, financial analysis, and transaction experience that includes work on private equity infrastructure deals; financial management and planning for CFOs; and equity fundraising for start-ups.
He offers quantitative and qualitative problem solving that navigates interrelating issues around product vision; user experience; economic outcomes; fundraising; and marketing. His creative and original thinking is resourced from strong academics which include post-graduate studies in economics and earning the CFA Charter.