It was then that Italian merchants and bankers began to record accounting using the double-entry system. This method was made possible by the adoption of Arabic numerals. Thanks to him, merchants acquired a secure tool for keeping their records and allowed bankers to take on a powerful new role as intermediaries in the international payments system. However, it was not only the tool that gave way to modern finance, but it was the way it was inserted into the culture of the time.
In 1494, the Franciscan friar and mathematician Luca Pacioli compiled his way of working in a manual on mathematics and accounting. In this manual, he presented double-entry accounting as a way to track accounts and as a moral obligation. For Pacioli, since bankers and merchants made profits, they had an obligation to give something in return. Thus arose the use of compensatory entries to record the balance of values separately: a debit is combined with a credit, an asset with a liability.
Pacioli’s morally correct accounting made these professions that tended to be looked down upon receiving a kind of religious blessing. During the following centuries, trustworthy and truthful ledgers came to be regarded as a symbol of honesty and purity, allowing bankers to become payment intermediaries and accelerate money circulation. This is how the Renaissance was financed, and the way was paved for the explosion of capitalism that would change the world.
But the system was not incorruptible. Bankers and other financial players are often in breach of their moral obligation to keep their books honest. They still do; ask Bernie Madoff customers or Enron shareholders. Also, even when they are honest, their honesty comes at a price. We have enabled trusted centralized administrators, such as banks, stock exchanges, and other financial intermediaries to become indispensable. They have ceased to be intermediaries to become guardians; they charge fees, restrict access, create friction, reduce innovation, and strengthen their dominance in the marketplace.
So the true promise of blockchain technology is not that it can turn you into a billionaire overnight or offer you a way to protect your financial activities from the governments that are always watching. The true potential of the blockchain is in its ability to dramatically reduce the cost of trust through a radical and decentralized accounting approach. This, in turn, would create a new structure for economic organizations.
Designing a new form of accounting may seem like a somewhat boring development. Yet, for thousands of years, since ancient Babylon, ledgers have been the foundation of civilization. The exchanges of values on which society is built require that we trust what others say we possess, what is owed to us, and what we owe. To achieve that trust, we need a common system to keep track of our transactions, which defines and orders society itself (see Faith in Bitcoin and its ability to work ‘miracles’ for all of society). How else would we know that Jeff Bezos is the richest human being global, that Argentina’s GDP is around 500,000 million euros, that 71% of the world’s population lives on less than eight euros a day?
What are cryptocurrencies?
In a virtual digital currency that uses cryptography to provide greater security, this secure encryption technique regulates the generation of monetary units and verifies the transfer of funds, and it does not require the intervention of a central bank or other institution that controls or regulate your operations.
Cryptocurrencies are not tangible; they do not exist in physical form, but they are used and function as currency for exchange, allowing instant transactions through the Internet of Things (IoT) and regardless of borders.
Characteristics of a cryptocurrency
The main qualities or attributes that these virtual currencies have are the following:
Cryptography: they use encryption to collect and pay securely.
Decentralization: they do not need to be controlled by any institution.
There is no possibility of forgery or duplication: cryptographic systems protect users.
There are no intermediaries: the relationship is direct from person to person.
Irreversible transactions: once the payment or collection has been made, there is no possibility of cancelling it.
Interchangeable for other currencies: allows a wide range of operations
Privacy: does not require or require disclosure of the identity
of the person doing the business.
Applications or technologies that use the blockchain
Currently, the use of blockchains is expanding rapidly due to how secure and shielded the data is and its easy access from several computers. These unique and exclusive attributes have contributed to its penetration into global markets and financial operations.
The issuance and negotiation of securities, traceability in logistics chains, contracts, real-time accounting, insurance operations, electoral processes are some examples of blockchain applications.
In the last decade, the blockchain has aroused great interest from many people acting in different fields of knowledge: finance, health, property, the public sector, among others. This is due to the multiple advantages that technology generates, including eliminating intermediaries, an innovation that makes it possible to operate in a decentralized manner and without the need for a central authority.
It is very common for blockchain to be applied incorrectly to things, not a chain of blocks. By the classic definition, a blockchain is an electronic ledger – a list of transactions. Those transactions can, in principle, represent almost anything. They could be real money exchanges like those allowed by blockchains associated with cryptocurrencies such as Bitcoin. But they can also be applied to the exchange of other types of assets, such as digital certificates of shares, and to the instructions for ordering the purchase and sale of shares. They can also be applied to so-called smart contracts, computerized instructions to do something when a specific situation occurs—for example, buying a share when its price is below 10 euros.
This makes a blockchain a special type of accounting ledger. It is stored in multiple copies on multiple independent computers within a decentralized network rather than being managed by a single centralized institution, such as a bank or government agency. There is no single entity that controls it. Any of the computers on the network can modify the chain, but to do so, it must follow the rules of the “consensus protocol,” a mathematical algorithm that requires most other computers on the network to agree to the change.
Once a consensus has been reached, all computers on the network update their copies of the ledger simultaneously. If any of them try to add a ledger entry without this consensus or change an entry later, the rest of the network automatically rejects the entry as invalid.