Blockchain is first an accounting revolution-from double-entry bookkeeping to multi-party bookkeeping
As a combination of multiple technologies, aside from its other technical characteristics, blockchain is first of all a huge innovation in accounting, and this innovation will give birth to a new financial paradigm and new financial infrastructure. We look back at the history of the development of accounting. Double-entry bookkeeping originated in Genoa, Italy in the 14th century. After Luca’s book was published, double-entry bookkeeping became wildly popular around the world and has been recognized by the industry and is still in use today. In fact, the reason why double-entry bookkeeping can withstand the test of time is that it records both the “credit” and “debit” at the same time, which captures the essence of the transaction. The double-entry bookkeeping method was successful in the early stage of its implementation, defining the basic accounting framework, and this set of standards has been used in modern business society to this day.
After a thousand years of development, accounting has ushered in a turning point: three-entry bookkeeping. The blockchain technology is a system that realizes this type of accounting method. Furthermore, this system creates three sets of entries: two sets of entries are standard for double-entry accounting, and the other set of entries is provided by the issuer of the receipt (node in the blockchain system). The entry provided by the issuer is presented in the form of a digital receipt of the transaction, with the issuer’s signature on it, which creates a dominant record for the transaction and is stored by the entire transaction network. Simply put, the three-party (multi-party) bookkeeping of the blockchain retains the transaction borrowing and lending information of both parties to the transaction and the third party (the third party is the entire network). In the original single-party ledger, both parties to the transaction each keep their own ledger and the entire business. There are countless ledgers on the network. When reconciliation and review are required, third parties (auditing companies), supervision, and inter-industry clearing associations are required. The overall cost is very high, and the security is low, and risks are prone to occur. The core of the blockchain solves several core problems of double-entry bookkeeping:
1. The reconciliation between single ledgers becomes a consensus of the whole network
The reconciliation of different ledgers has become a consensus algorithm mechanism, which greatly reduces the huge cost of security and interoperability of double-entry ledgers. The blockchain network is also scalable, although the expansion of the participants of the single blockchain network will Reduce performance, but the current alliance chain can basically achieve little performance loss under 100 level nodes, and at the same time, it can also achieve greater account expansion through trusted cross-chain. Especially for the financial industry, the current technology can already support More multi-agent collaboration.
2. The first transaction and then settlement process becomes a transaction that is settlement
The settlement between traditional double-entry ledgers, especially the settlement in financial scenarios, is basically unable to achieve instant settlement. Usually, business transactions are performed for a period of time and then settled at a concentrated time. The settlement pressure is relatively high. In the blockchain, transactions can be settled (currently the fastest consensus mechanism can produce blocks in one second). In the blockchain system, point-to-point transfers can be made directly between different addresses in the blockchain. , The income of address A is the loss of address B. Different account systems require a third party to change the accounts of both parties to the transaction. In the blockchain, transaction confirmation and distributed ledger update are completed at the same time, and the settlement efficiency is high. Distributed ledgers and confirmed transactions are open to the entire network and cannot be tampered with (under normal consensus). Whether in UTXO mode or ACCOUNT mode, transactions are naturally integrated with settlement, and the entire ledgers are fully automated. With consensus technology The development of blockchain transactions confirms that this relatively large bottleneck has been improved. Compared with the traditional centralized settlement method, the efficiency of the blockchain is improved by more than ten times.
3. From data ledger to programmable system
Before the emergence of Turing’s complete smart contracts, Bitcoin, as the earliest realization and prototype of the blockchain, can be regarded as a simple transaction and settlement network. Both the Bitcoin network and the banking network can be regarded as the difference between a simple multi-party bookkeeping model and a double-entry ledger model. With the development and in-depth application of smart contract technology, the blockchain, the ledger, has developed a powerful programmability and broadened With the original simple transaction function, more complex functions such as complicated conditional payment, business logic, automatic execution of scripts, and multi-party agreements that conform to legal relationships have begun to be realized. The ledger was originally only responsible for recording transaction data, and now the ledger itself can complete complex atomic transactions. Take a simple example: In the case of complex transactions, the business system is required to complete the transaction, and then record the transaction result in the ledger system. The ledger only records the transaction result, not the process. This intermediate link will become the system that cannot be ignored. Disadvantages. In the blockchain, the complex transaction process takes place in the ledger. The ledger carries out consensus and witness for each transaction and event to ensure the correctness of the transaction, and finally records the transaction process. This can eliminate risks between systems very well.
Redefining assets: from asset digitization to full information digital assets
The most important job in the financial industry is to deal with various asset issuance and asset exchange. The current technical means can only be called asset digitization, and the blockchain realizes “digital assets based on full data”. How to understand the difference between the two? Asset digitization: Simply put, asset digitization is to use digitized information to record the asset information originally recorded on paper files into the software system, and finally save it in the database together with other data (the system security level is different, but the essence is the same ), asset digitization has improved the efficiency of asset transfer and exchange, but at the same time it brings the risks of easy tampering and fraud. These risks are very likely to become large-scale financial events. This has been the case in the digitalization process in recent decades. It’s not uncommon. Digital assets with full information: First of all, digital assets on the blockchain are also data recorded in the ledger, but through cryptography and consensus mechanisms, they better solve the problems of easy tampering and fraud caused by simple digitization. The most important feature is that digital assets on the blockchain can be highly coupled with their subsidiary information, that is, digital assets can carry a large amount of information throughout their life cycle, and include the status change information of their own assets, including transaction records, issuance records, Split records. The key to an asset or digital asset is the trade background information. When the digital asset on the blockchain carries the authenticity of its own trade background information, the value of the digital asset can be easily recognized, which is more conducive to a series of other activities. Financial activities.
for example:
Electronic bills can be regarded as the digitization of assets. Electronic bills are a digital expression of traditional paper bills. The bill itself records only part of the information used as a circulation tool, and does not show the trade contract behind the bill. , Logistics, invoices, factoring contracts, legal relationship agreements and other background information, but accounts receivable vouchers issued on the blockchain can well contain these trade background information (still relying on off-chain information at this stage). With more and more native information on the chain, digital assets on the blockchain can better and more comprehensively restore the entire life cycle of the asset, and all of this can be followed and cannot be tampered with. (——This example comes from the book “Digital Assets and Digital Finance” by Yao Qian)
Blockchain provides the financial industry with a full-cycle asset management infrastructure that is different from traditional digitalization, and it also redefines the concept of assets. At present, there are still huge real assets that have not yet been online. We believe that blockchain Would be an important solution to this problem.
From centralized accounts to users’ autonomous decentralized digital identities
Almost all services of modern finance are based on the bank account system, and this account system is completely in the hands of financial institutions, including user data generated by users. All assets and important information of users are in the hands of the account custodian to achieve business operations. , This form has caused the security of user information and assets. It also caused the emergence of financial hegemony. The blockchain initially realizes the user’s autonomous decentralized digital assets through the cryptographic public and private key system, and the signature of the private key guarantees the user’s voluntary will in financial activities.
Operate sovereignty with users, and ensure that assets are truly handed over to users through cryptographic algorithms, instead of being kept by centralized institutions. At the same time, the development of other cryptographic algorithms such as zero-knowledge technology can further protect the privacy of user data. From another perspective of cost: the bank account system presents a state of account islands. Different banks and financial institutions have different account systems. The intercommunication between accounts is very difficult. The most typical scenario is transnational For transfers, because people from different national borders exist in different account systems, at least one intermediate account is needed for interaction between accounts. According to a 2016 study by McKinsey & Company (McKinsey & Company, 2016), the average cost of a US bank to make a cross-border payment through a correspondent bank is between US$25 and US$35, which is more than 10 times the average cost of a domestic payment. 34% of the cost comes from the liquidity locked in the correspondent bank account (because the funds could have been used for higher returns), 27% comes from treasury operations, 15% comes from foreign exchange operations, and 13% comes from Compliance costs. For blockchain, the multi-party ledger + public and private key account system naturally opens up different accounts and ledger, which greatly reduces costs. What I want to say here is that for KYC and AML, the blockchain can be elegantly implemented in other ways (such as permissioned blockchain, introducing authenticators, etc., which will not be repeated here).
From highly dependent on financial intermediaries to self-financing
The concept of self-finance can be understood as: non-financial enterprises relying on information technology to serve their main business and related industries, to their own or business-related enterprises and individuals, such as upstream and downstream enterprises, subsidiaries and branches of the supply chain Institutions, end consumers and their own employees provide comprehensive financial information services such as investment, financing, payment settlement and value-added services. ——Transform the information generated by itself into financial services for its own ecology. In the self-financing concept, assets are natively generated by users (the full information digital assets mentioned above), users can master their own identities and assets, and users can perform financial activities without relying on financial intermediaries. From the previous analysis, we can clearly see that the blockchain can be used as a perfect self-financing infrastructure, and this is the most profound change of the blockchain to the financial industry.
The prototype and characteristics of blockchain self-financing
1. Generate digital assets based on the full amount through its own activities: the most typical ones include the digital assets of accounts receivable in supply chain finance, digital assets of orders, and user autonomous data in data banks. 2. Financial activities that do not rely on financial intermediaries: Referring to the current hottest Defi project, we can see that in the Crypto world, users have achieved peer-to-peer transactions (most digital currencies), a decentralized exchange Uniswap based on the consensus of the entire network and everyone can make a market. Contract-controlled on-chain mortgage stablecoin system MakerDao, on-chain uncentralized guarantee lending AAVE, etc. And these solutions are constantly being implemented in different ways in the real industry.
From external supervision to penetrating supervision
In a broad sense, financial infrastructure also includes the legal environment, corporate governance, accounting standards, credit environment, anti-money laundering, and financial supervision. The most important of these are laws and regulations and corresponding supervision.
From the perspective of technical characteristics, blockchain technology presents a brand-new regulatory-friendly structure. Traditional technical supervision and supervision are essentially dual and independent. The supervisor externally supervises the business of the supervised party. It is difficult to achieve good results in terms of efficiency and depth, and the cost will be high.
Blockchain technology allows the regulator and the regulated party to be in the same business state and environment, and its supervision methods, corresponding laws and regulations, and effects are completely different from the original regulatory framework. The role of blockchain technology in supervision and risk management mainly relies on the following characteristics:
1) The full amount of business data is available: First of all, for risk control and supervision, the ledger information can be synchronized at any time to monitor the ongoing business on the chain. At the same time, the data cannot be tampered with, which is very conducive to source determination and criminal responsibility.
2) The programmability of smart contracts: By writing risk management methods and business logic into smart contracts at the same time, through the automatic execution of smart contracts, risk management and control methods and supervision methods become procedures that cannot be skipped, and they are automated. Risk management and supervision
In our previous projects, we communicated with regulatory agencies and carried out corresponding designs to satisfy regulatory agencies for better supervision in the blockchain architecture. One of the designs is called: the in-event supervision system based on smart contracts. The in-event supervision system is a related service component established by the blockchain middleware layer and the smart contract layer. First, the business contract embeds the supervision rules into it. When the business layer wants to call the business contract, the in-event supervision system can monitor the smart contract in real time Data generated during the execution process and analyzed. If there is any abnormal data, it can be reported to the supervisory system, and supervisory instructions can be issued to intervene in the execution of the business, such as suspension, operation, blacklisting, etc., to realize real-time supervision of the business . The whole process of supervision can be automated online, which is impossible in terms of efficiency and depth by traditional means.
This article only discusses the impact of blockchain on the financial industry from the aspects of accounting, assets, and financial models. Of course, the scope of impact of blockchain is far more than that, and more include: laws and regulations, currency Programmability, transaction friction, large-scale inclusive finance, borderless finance, undifferentiated income, etc. all affect ancient industries that have been developed for thousands of years.
Article source: Heyue Technology
