Since the financial crisis of 2008, confidence in the banking system shifted to new horizons, which opened the door for Bitcoin and other cryptocurrencies (digital currencies that are not controlled by a central bank). The technology at the heart of this cryptocurrency boom is known as blockchain, but it should not be confused with Bitcoin. It is much more than Bitcoin and has started to revolutionize money, business, and the world.
So, What is Blockchain?
Blockchain is a digital ledger of financial transactions that is entirely public and constantly updated by a myriad of users. It can record transactions between two parties efficiently and in a verifiable and permanent manner. Imagine a global network of tens of thousands of computers auditing encrypted records instead of just one third party (i.e., PayPal and other financial institutions). Although encrypted, this transparent exchange platform allows multiple parties to collaborate with one another. This level of openness helps secure the system in an era of cybercrime.
A blockchain database contains two types of records: transactions and blocks. Blocks hold batches of transactions. The blocks are time-stamped and link to a preceding block. The blocks cannot be corrupted because the transactions cannot be retroactively changed. Every transaction is given a secret key and a public key. The secret key should never be shared and is similar to your digital signature, but significantly more secure since a message associated with the secret key must be verified with the public key. Unlike a signature, no one can just copy or forge your secret key as it is a unique and complex computer code. This creates an order or “blockchain” that authenticates the previous transactions and must compute correctly with the new transactions.
Why Should You Care?
Blockchain is more than just a byproduct of cryptocurrency. Blockchain provides a home for documents of all sorts (property deeds, birth records, etc.). It could reshape the business of record keeping and how business transactions are processed in general. Because blockchain allows for the transacting and securing of digital data, it can potentially impact a wide range of areas, from compliance to data management. Blockchain technology incorporates smart contracts (computer programs) for seamless execution, which can improve billing quality and data storage, while helping to minimize business disruptions. Less time spent on data mismatches reduces revenue leakage and enhances cash flow performance.
It is difficult to predict just how soon small and mid-sized businesses will begin adopting blockchain technology. Although cloud-based business solutions have rapidly started to take over, many business are resistant to change and shy away from electronically archiving records. However, business owners shouldn’t ignore the potential impact of blockchain.
Since the last major update to the current financial accounting system was during the Renaissance, it is clear that this tool has enormous potential from an accounting standpoint. Labor-intensive tasks of double-entry bookkeeping, document storage and outside audits can be costly and time-consuming for a business. Simply put, the automation of blockchain simplifies everyday operations by eliminating huge amounts of records and replacing them with interlocking time-stamped audit trails. All roads leading to accelerating profit and growth.
Stay tuned… there are very few fundamental shifts that happen in our lifetime and blockchain is one of them.