SOME KEY CONCEPTS AND HOW THEY RELATE TO BLOCKCHAIN

Ownership, Possession and Triple-Entry Accounting

Ownership and Possession

Ownership and Possession are legal concepts that appear to mean the same on the surface but they
have distinct meanings. We will briefly explain what they both are and why they matter to our
understanding of the blockchain.

Ownership

This simply refers to an exclusive right to something. That is, an owner is someone who can claim only by
law and not by anything else, that something belongs to them. In other words, ownership is the legal
right to have possession of something. One can own a thing and not be in possession of it and vice versa.

Possession

This refers to having physical control over something with continued use of it. It is possible to have an
individual who is physically in possession of a thing yet not have a legitimate right over that thing.
Meaning it is only a consumption right. An example may be when a person drives a stolen car with a fake
licence.

There are also cases of legal possession such as when a tenant is given the right to rent an apartment by
the landlord. In such situations, the landlord has ownership while the tenant has possession.

Ownership, Possession and Blockchain

One benefit of blockchain in this regard is that it acts as a reliable technology for decentralizing
ownership of assets. The goal of decentralization (add a link to the last newsletter) remains to eliminate
the need for trust among several transacting parties while ensuring that the chances of default from any
one party are almost non-existent.

This has huge socio-economic advantages among which are robust security of assets (as a result of not
having a single point of failure) and the reduction in the cost of transactions from less dependence on
intermediaries like banks, compliance officers, lawyers, etc. whose primary service is to ensure trust in
the transaction process.

Another benefit is easy access to liquidity. Through the tokenization of assets, the blockchain has opened
up opportunities for many to invest and co-own properties and other assets that they normally would
not have been able to access. These tokens can then be easily and securely traded boosting liquidity in
the process – all without a central authority like a broker or clearing house.

Having intermediaries that help to broker trust for transaction parties may be laudable, but history has
shown that it can have negative societal implications when such privilege is abused as was the case in
the 2008 financial crisis. The advent of blockchain is enabling open and secure transactions which makes
it a better solution for fostering trust in the transaction process.
Lastly, blockchain not only decentralize asset ownership, it also helps to authenticate them. This is
behind the momentum and spread of non-fungible tokens (NFTs). Because every data recorded on the
blockchain is immutable, i.e., cannot be changed, problems relating to piracy or forgery can now be
easily managed. For example, issuing educational certificates as an NFT can put an end to certificate
forgery.

Links

chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://bse.eu/sites/default/files/
working_paper_pdfs/1155.pdf

https://amanahadvisors.com/understanding-ownership-and-possession-in-nfts-from-a-shariah-
perspective/

https://exonum.com/use-case-counterfeit-prevention

Double and Tripple Entry Accounting System

Double Entry Accounting

The general accounting system commonly used today started as far back as the 13 th century but took
structure in the 15th century when Luca Pacioli developed a scientific method to record transactions. It
was based on a duality principle where every transaction gets recorded on two different accounts at the
same time with one account receiving the credit and the other receiving the debit.

This is the idea behind double-entry accounting which is the most commonly used system of accounting
today. It provided an efficient way for transactions to be tracked and reduces the risk of fraud as
unintended errors can be easily identified and corrected.

Triple Entry Accounting

The triple-entry accounting system is a new accounting method that seeks to provide congruency among
several books of account through the addition of an extra layer to the double-entry accounting system. It
began with the advent of cryptocurrencies and was popularized by Ian Riggs.

Cryptocurrency or digital assets are recorded on the blockchain because the technology allows peer-to-
peer transfer of these assets across several unknown parties without the need for an intermediary. This
is not the case with a double-entry system of accounting which mostly depends on an intermediary to
verify transactions.

However, following the success of this ledger innovation for recording digital assets, many of its
proponents believed it could also revolutionize the current system of accounting which is the double-
entry accounting system.
For example, let’s consider two businesses Inc A and Inc B. When Inc A buys goods from Inc B, the
accountants in each of these companies recorded the transactions in their individual ledgers. Usually, at
the end of specific periods, the accounts of both companies are required to be submitted for auditing to
ensure correctness in their business activities that period.

The auditing process may require that the auditor for Inc A ledgers will have to call Inc B accountants to
verify the legitimacy of a particular transaction. The reverse can also be the case when auditing Inc B
accounts.

In the scenario described above, what a triple-entry accounting system does is act as a finality for the
ledgers of Inc A and Inc B. That is, the accountants in both companies will take records of the transaction
as written in their individual accounts and place them on a ledger shared by both businesses. When
verified by both parties as valid, the record is cryptographically signed and attached to the blockchain
where it cannot be tampered with.

It is clear from the above explanation that triple-entry accounting is not just the creation of a third entry
for transactions. Rather, it introduces a new layer of transparency and trust to the current accounting
system by keeping a separate immutable receipt of transactions contained in double-entry accounts on
the blockchain.

That said, it stands to reason that the triple-entry accounting system can revolutionize the general
accounting process owing to its degree of transparency which will also impact the auditing process.

https://www.capactix.com/understanding-double-entry-and-triple-entry-accounting/

https://medium.com/dataseries/triple-entry-accounting-system-a-revolution-with-blockchain-
768f4d8cabd8

https://www.linkedin.com/pulse/what-triple-entry-accounting-anthony-leducq/

https://coingeek.com/double-entry-vs-triple-entry-accounting/

https://www.investopedia.com/terms/b/blockchain.asp

https://www.simplilearn.com/tutorials/blockchain-tutorial/blockchain-technology

https://www.ibm.com/topics/what-is-blockchain

https://builtin.com/blockchain

https://www.nerdwallet.com/article/investing/blockchain

Basic Features of the Blockchain

Blockchain Definition
In simple terms, a blockchain is a ledger for recording transactions. The whole technicalities and
processes that works to place this record on the blockchain is what is referred to as blockchain
technology.

Blockchain adopts the mechanism of a distributed ledger. Meaning, the right to write, update and
maintain transactions records is achieved in a distributed manner and in real-time by several participants
represented as a node or computing device spread across several geographies.

Blockchain technology was created by an anonymous person or group of persons that goes by the
pseudonym Satoshi Nakamoto to record Bitcoin transactions which was the first peer-to-peer digital
currency or cryptocurrency.

Understanding Blocks

(Image of a block)

Blockchain records data or transactions in a block. The block parameters also include a timestamp
(showing that the transaction data existed when the block was created), a cryptographic hash of a
previous block and a nonce.

Each record in a block is immutable, meaning it cannot be changed. Changing a record might have been
possible if blocks were not chained to each other by design. So, rather than changing a record, the
correct data is re-written to the block where it then exists as its own distinct record on the blockchain.

This makes the blockchain a revolutionary tool for business auditing because every history of changes
made to data can easily be traced.

How Blocks are Chained

Each block has a header which is a unique identifier for that block and it is linked to the header of the
previous block via a cryptographic hash. This design of linking or chaining blocks together is how the
term blockchain was derived.

A cryptographic hash is a special function that takes all the input of a block i.e., block parameters, and
creates a distinct output for that block. A single character difference in the input of a block when hashed
will return a completely different output as result.

(Include an image of a cryptographic hash).

The output or hash of a block, say A, is placed on the next block which we will call B, and that of block B
is placed on the header of the next block which we can call C and so on.

Thus, the blocks are chained together and connected to each other giving rise to a ledger or database
whose records are immutable.

Understanding Group Consensus

In a central system, a database or ledger holding key data is usually managed by a database
administrator who is saddled with the sole responsibility and authority to add, retrieve, update and
delete information on the database.
For a blockchain, which is also a ledger, but operated in a decentralized fashion, it is important for every
commitment made to the database to first be verified by every other administrator of the same
database with each having individual rights to manage the database. This is where the concept of
blockchain consensus applies.

As a distributed ledger that runs on a peer-to-peer design, the blockchain uses a consensus mechanism
to determine the genuineness of transactions or data made by each node or computing device on the
network. After the block (which contains transactions) has been validated, it is added to the blockchain.

So, let’s say, for example, there are ten nodes or participants (which we can denote as A to J) in a
blockchain who manage the state of transaction records on that blockchain. If a transaction occurs and
node E happens to be the first to validate that transaction, it will be able to add it to the blockchain.

Before adding that record to the blockchain where it becomes immutable data, it is first run across all
the other nine nodes and depending on the type of consensus mechanism of the blockchain, an
agreement is reached that certifies the record of node E before it adds it to the blockchain after which
the record becomes reflected in every node.

Some common types of consensus mechanisms include proof of work (pow), proof of stake (pos), proof
of capacity (poc), proof of activity (poa), proof of burn (pob), proof of history (poh) and proof of elapsed
time (poet). The functionality of each type of mechanism and why one may be preferred when
compared to another will be further explained later in the course.

https://www.investopedia.com/terms/c/consensus-mechanism-cryptocurrency.asp#:~:text=What%20Is
%20a%20Consensus%20Mechanism,systems%2C%20such%20as%20with%20cryptocurrencies.

https://crypto.com/university/consensus-mechanisms-in-blockchain

https://ethereum.org/en/developers/docs/consensus-mechanisms/

https://www.coindesk.com/learn/what-is-a-consensus-mechanism/

https://www.futurelearn.com/info/courses/blockchain-cryptocurrencies/0/steps/76497

https://academy.binance.com/en/articles/what-is-a-blockchain-consensus-algorithm

Types of Blockchain

Blockchain is a distributed ledger technology where the right write to the ledger is shared and is not in
the control of any one entity typically.

The blockchain began as Public blockchains where any participant can choose to record information as
well have the transactions made available to the public. As the technology evolved, centralized
organizations saw its value but out of reasonable concern for privacy of users data, certain modifications
and designs of the blockchain were developed to address these needs. This led to how private
blockchains came about allowing specific persons right to the database while retaining its ability to
maintain immutable records.
Another type of blockchain combined the features of a private and a public blockchain and is generally
referred to as a consortium or hybrid blockchain. This type of blockchain may be suitable for
transactions involving both private businesses and social organizations such as NGOs to help ensure
transparent activities. The design for this type of blockchain will typically have variations in the degree of
centralization and decentralization features used.

The last type of blockchain is referred to as sidechains. The name is generic of its special design features
that enables it to run side by side with another primary blockchain. Records can be exchanged between
the primary blockchain and the sidechain by a two-way bridge. Often times, the features of sidechains
are designed to complement the weakness in another blockchain thereby enhancing the efficiency of the
sidechain.

It’s also important to note that while a sidechain is designed to connect with another blockchain, it can
still be very much distinct and independent in its features such as in its consensus mechanism and block
parameters.

Conclusion

In the next chapter, we shall be considering how the blockchain really works by taking a deep dive into
how cryptography is used in blockchain as well as how the various consensus mechanisms work.

Happy reading!