This summer, we covered Bitcoin and its relationship to recent ransomware attacks, but today we want to briefly examine the protocol undergirding Bitcoin—the blockchain—to see why it may be more important to the financial industry than the famous digital currency.
How does the blockchain work?
Everyone using Bitcoin has a copy of the community ledger, and when a transaction takes place, it’s recorded alongside all other transactions that occurred within a roughly ten-minute timeframe as a “block.” Before a block is added to the ledger, it must be verified.
To verify a block, people known as “bitcoin miners” dedicate their computers’ computational power to solving a complex mathematical problem. The first miner to solve the problem validates and timestamps the block, adding it to the previous block—a process that, over time, creates a “chain” of verified, globally recorded transactions. (As an added incentive to dedicate their resources to validating transactions, miners are rewarded bitcoins for solving the problem.)
If a ne’er-do-well wanted to “hack” the blockchain for financial gain—like getting back bitcoins after receiving a good or service—that person would have to alter not just the block containing their transaction, but all preceding blocks on the ledger.
In short, the blockchain creates a secure, accurate record of bitcoin transactions documenting the number of bitcoins in circulation and how they were spent.
Why is the blockchain important?
As a secure, reliable, real-time record of transactions, the blockchain is obviously of interest to financial industries. Just like the spreadsheet, the blockchain is poised to revolutionize the way people envision public markets: automated, peer-to-peer contracts, money transfers, and audits are just a few of the predicted changes.
It goes without saying that some in the accounting profession, from CPAs to software developers, are wary of how this technology will impact their industry. After all, Bitcoin and the blockchain were created to cut centralized intermediaries like banks out of financial transactions. But others seem to be embracing the blockchain, investing in the technology in an attempt to stay at the forefront of whatever form the industry takes.