them tries to add an entry to the ledger
without this consensus, or to change an
entry retroactively, the rest of the network
automatically rejects the entry as invalid.
Typically, transactions are bundled
together into blocks of a certain size that
are chained together (hence “blockchain”)
by cryptographic locks, themselves a product of the consensus algorithm. This produces an immutable, shared record of the
“truth,” one that—if things have been set
up right—cannot be tampered with.
Within this general framework are
many variations. There are different kinds
of consensus protocols, for example, and
often disagreements over which kind is
most secure. There are public, “permis-
sionless” blockchain ledgers, to which in
principle anyone can hitch a computer and
become part of the network; these are what
Bitcoin and most other cryptocurrencies
belong to. There are also private, “permis-
sioned” ledger systems that incorporate no
digital currency. These might be used by a
group of organizations that need a com-
mon record-keeping system but are inde-
pendent of one another and perhaps don’t
entirely trust one another—a manufacturer
and its suppliers, for example.
The common thread between all of
them is that mathematical rules and
impregnable cryptography, rather than
trust in fallible humans or institutions, are
what guarantee the integrity of the ledger.
It’s a version of what the cryptographer Ian
Grigg described as “triple-entry bookkeeping”: one entry on the debit side, another
for the credit, and a third into an immutable, undisputed, shared ledger.
The benefits of this decentralized
model emerge when weighed against the
current economic system’s cost of trust.
Consider this: In 2007, Lehman Brothers reported record profits and revenue,
all endorsed by its auditor, Ernst & Young.
Nine months later, a nosedive in those
same assets rendered the 158-year-old
business bankrupt, triggering the biggest
financial crisis in 80 years. Clearly, the
valuations cited in the preceding years’
books were way off. And we later learned
that Lehman’s ledger wasn’t the only one
with dubious data. Banks in the US and
Europe paid out hundreds of billions of
dollars in fines and settlements to cover
losses caused by inflated balance sheets. It
was a powerful reminder of the high price
we often pay for trusting centralized enti-
ties’ internally devised numbers.
The crisis was an extreme example of
the cost of trust. But we also find that cost
ingrained in most other areas of the economy. Think of all the accountants whose
cubicles fill the skyscrapers of the world.
Their jobs, reconciling their company’s
ledgers with those of its business counterparts, exist because neither party trusts
the other’s record. It is a time-consuming,
expensive, yet necessary process.
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