A cloud of FOMO is accumulating over the business world, precipitating the global adoption of Distributed Ledger Technology (DLT). Many of the world's largest enterprises are backing blockchain projects, but what does this mean for SMEs? We receive many enquiries from businesses seeking to understand DLT, its underlying principles and what it can do for them. In this post I’d like to sketch the differences between public and private distributed ledgers (blockchains), introduce the concept of triple entry accounting and touch on platforms.
Public and private blockchains are quite different in their approach to security. Public networks are mostly secured by financially incentivised consensus (mining) and allow for splits to occur in case of conflict (forks). This pattern requires long times between blocks (which are normally small) to achieve stable public consensus. This trade-off between security and efficiency is fit for purpose but enterprise solutions have different requirements.
For businesses, transactions should be instant. Party and counter-party should be able to transact without revealing contents to anyone but each other and a regulator. Participants must be able to identify those with whom they interact. The system should be accountable and governable with legal recourse. Private blockchains for business discard mining and achieve consensus through trusted nodes secured by more traditional firewalls and permissions.
Triple Entry Accounting
Using a blockchain in the context of a consortium of businesses can provide reliable accounting between firms. If a number of organisations need to access, share and update accounts in the context of a business relationship, they can benefit from using a distributed ledger. As a result, business can advance beyond traditional Double Entry book-keeping and use Triple Entry Accounting.
Years before Bitcoin and blockchain existed, Ian Grigg proposed a mechanism for Triple Entry Accounting (not to be confused with a system of the same name by Yuji Ijiri). The Triple Entry system does not simply add a third column to the traditional Double Entry approach, it consists of a shared ledger where receipts, cryptographically signed by three entities, form the basis of accounting.
In a traditional offline transaction between a customer and supplier, we have a model where party, counterparty and notary are the primary actors. Documents are passed between party (customer) and counterparty (supplier) and settled through the notary (banking system). With a triple entry system we can disintermediate the bank and replace the invoices with smart contracts. Instead of transacting in fiat, the systems unit of account becomes money (in a tokenized form). The receipt becomes the transaction itself and exchanges of value are fully attested by cryptographic signing.
Ethereum is a public blockchain where receipts can be used as described. It’s core engine, the Ethereum Virtual Machine (EVM) is a pluggable component for smart contract execution that is used on several different projects and platforms. On platforms like Microsoft’s Bletchley and the Linux Foundation’s Hyperledger, the EVM can be used like a piece of lego to build a custom blockchain solution. Consensus mechanisms, middleware and authentication protocols can be weaved together in a fabric that integrates businesses and existing infrastructure.
The potential unlocked by customizable blockchain platforms that support businesses “being on the same page” are just beginning to emerge. The dominant trends are toward increasing the velocity of money, disintermediating 3rd parties and tracking provenance & supply chains.