Class 7: Master the Data from Emerging Technologies (Distributed Ledgers)

What do people on the island of Yap use as currency?

Giant stone discs

What is Currency defined as?

Something that is in circulation as a medium of exchange

What are some other types of currency that have been used?

• Salt

• Cheese

• Dolphin Teeth

• Cocoa Beans

• Potato mashers

• Tulips

• Knives

• Wooden notes

• Katanga Crosses

• Squirrel pelts

• Whale teeth

• Kissi pennies

• Tea bricks

What is a Ledger?

A list of events or transactions

What might we record in a ledger in the case of asset ownership?

Buyer, Seller, Amount, Timestamp

What does a ledger establish?

Consensus about facts

What kind of technology is the Blockchain?

A distributed ledger technology

What is a Non-Distributed Ledger?

One where only you keep track of it

What does Distributed mean?

Everyone gets a copy and we all keep track

Today, who are most ledgers maintained by?

Intermediaries

What ledger does currency use?

Bank ledger

What ledger do Public Securities use?

DTC, Exchanges, Brokers

What ledger does Real Estate use?

County Recorders

Who maintains Blockchain ledgers?

A software protocol running on a distributed hardware network

What are the characteristics of Double Entry Accounting?

• Credited with being a driving force behind the renaissance

• More difficult to manipulate, but also requires an external 3rd party to audit the ledgers

What are the characteristics of Triple Entry Accounting?

• Third entry is a public receipt (cryptographically sealed receipt)

  • We can implement triple entry accounting using blockchain

In the case of the blockchain, if an audit client uses it, what must the auditor understand?

How the use of the blockchain affects the client’s flow of transactions

Are events recorded in the blockchain always accurate and complete?

No

What will audits revolve around?

The processes that create the transactions

What is there a large and increasing demand for?

Audits of distributed ledgers, smart contracts, and the assets & wallets they interact with

What does the “public receipt” in Triple Entry Accounting allow for?

Perfect verifiability of every transaction instantly in real time

What does triple entry accounting get rid of?

The need to sample transactions because you have all of them instantly

What does Triple Entry Accounting make more difficult?

The ability to commit fraud because all books are linked and the transaction is public

What does Triple Entry Accounting make the transaction?

Extremely relevant AND extremely reliable

What are Hash Functions?

Mathematical functions that transform a given set of data into a string of fixed size

What are Hash Functions classified as?

Deterministic: same input will always produce the same output

What does a small change in the message of a Hash function do?

Results in a completely different hash value

What is One-Way Encoding in Hash Functions?

Can’t get original message from encoded

What is Nonce?

Number used only once, helps calculate the hash function

What is the process of Hashing?

1. Text Describing Transaction (input): could be any length or type of data

2. Hash Function

3. Hash Value (output): will be a string of hexadecimal characters of the same length regardless of length of input

What is the formula for Hash?

Nonce + a + b +c - Value of last 2 digits of previous hash

What does “a” stand for in the Hash formula?

Value of the first letter of the transaction

What does “b” stand for in the Hash formula?

Value of the first letter of the “from” party

What does “c” stand for in the Hash formula?

Value of the first letter of the “to” party

How do you find Nonce in the Hash formula?

Value between 1 and 2 that you will add to calculate a hash that can be equally divisible by 2

What is the complaint with proof of work?

Waste a lot of energy

How is the energy problem with proof of work solved?

With Proof of Stake

What are the Steps for Proof of Stake?

1. Have a bunch of people to “stake” coins

2. Pick a random staker to validate the block

3. Reward the random staker for validating it

4. Let others check the random staker’s work. if the work was wrong, then that random staker would lose the reward and their staked coins

What is the metaphor for Proof of Work?

Every race, one person wins

What is the metaphor for Proof of Stake?

One person races, everyone has a chance to be the racer

Why does payment processing in the banking system require intermediation?

Each bank maintains their own ledger

What do we need in terms of ledger maintenance?

A network of maintainers to maintain the ledger, none of which has unilateral control

What do miners do that is similar to accountants?

They are verifying authentication and authorization

What was the first crypto asset?

Bitcoin

Why is it very difficult to build smart contracts on Bitcoin?

The coding language is not turing complete

What are the other uses for crypto assets?

As smart contract platforms

What is Ethereum?

A smart contract platform that can be thought of as worldwide, decentralized, turing complete, and a computer

What is a Smart Contract?

A Self-executing agreement between two or more parties where the terms are written directly into code

What do smart contracts have dominion over?

The assets in the contract

What does a Bitcoin transaction identify?

The sender’s wallet, the recipient’s wallet, and an amountof Bitcoin being transferred.

What is a wallet?

A way to access your funds on the blockchain

How are wallets secured?

With a private key

What is the most common wallet?

MetaMask

Are wallets risky?

Yes, it’s very easy to lose your fundsif you do not keep your private key safe or if you fall for scams.

What does the blockchain and crypto mean for the accounting profession?

Frees up accountants to provide more valuable business insight and strategy