BLOCKCHAIN FUNDAMENTALS NOTES Cryptographers developed these precursors and

many of the elements of those projects were

DAY 1
incorporated into bitcoin.
Module 1: Evolution and Technology Concepts
Examples:
Fundamentals of Money/Currency
 David Chaum’s DigiCash
A. Money has three fundamental properties:  Wei Dai’s B-money
 A store of value (people can save  Adam Back’s Hash Cash
and use the money later)
The Bitcoin* blockchain solved the third party
 A unit of account (a common base
problem by cryptographically linking blocks of
for pricing and comparison)
transactions together and creating an incentive
 A medium of exchange (a way for
mechanism that rewarded participants who supply
people to use a common currency
the computing power to link blocks in a manner
for buying and selling from one
making it unfeasible to change the ledger.
another)
*Mother of crypto
B. Money also has several important
The Bitcoin White Paper Started It All
attributes:
 Durable (ability to last a long time Blockchain technology was first implemented with
before needing to be replaced) Bitcoin, the first cryptocurrency. The creator of
 Portable (something easily carried Bitcoin and blockchain technology was an unknown
from one place to another) person who goes by the pseudonym Satoshi
 Divisible (something easily divisible Nakamoto. In a white paper, the creator of
into smaller units) Bitcoin describes the value of the blockchain as
 Fungible (one unit is follows:
interchangeable with or the same as
any other unit) “Using digital signatures, hashing, and proof of
work to avoid double spending and fraud, the
A Brief Currency Timeline Bitcoin blockchain enables its participants to
confidently transfer value using Math for validation
Barter  Commodities (precious metals, salt, etc.)
and verification instead of trusted third party.”
 Coins (the original fiat currency)  Paper
(another fiat currency)  Plastic (credit and debit Blockchain, Cryptocurrency, and Bitcoin
cards)  Cryptocurrency (i.e. Bitcoin:
cryptographically secured) The implementation of blockchain was invented in
conjunction with Bitcoin in 2009. Bitcoin is a
Note: Most forms of money still exist today. cryptocurrency, a type of digital currency that is
secured against fraud and theft by means of
Pre-cryptocurrency History
mathematical encryption algorithms.
 There were many attempts dating back to
 Cryptocurrency derives its name from the
the 1980s to create some form of digital
use of cryptography to secure blockchains
cash but none of them eliminated third
without a third party and without having to
party financial institutions.
trust the participants.
 The projects failed for various reasons but
 Cryptocurrency is a new type of money that
mainly because of their reliance on third
anyone in the world can receive, send, and
parties.
earn by voluntarily participating in the
 The lack of trust in third parties is what
respective network.
motivated the cypherpunk movement and
these innovations.

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  Bitcoin is the first cryptocurrency and the
first use case of blockchain technology used
as a medium of exchange to store the
transfer value.
Cryptocurrency and blockchain development has
geometrically evolved because of its open source
nature. For example, open source code is freely
available code on Github that can be reused for
other projects without permission.
Not all blockchains are the same. A common
error is to equate all blockchain technologies to the
Bitcoin blockchain. Newer, next-generation
blockchains not associated with Bitcoin do not
necessarily share all the attributes of the Bitcoin
blockchain.
However, there would be no blockchain
technology of any sort without Bitcoin. The
better you understand Bitcoin, the better you will
understand how other cryptocurrencies and
blockchains work.
Birth of Bitcoin and the Blockchain
October 31, 2008: Bitcoin design whitepaper
titled “Bitcoin: A Peer-to-Peer Electronic Cash
System” is published through a cryptography
mailing list by Satoshi Nakamoto.
January 3, 2009: Genesis block is mined (this is
block number 1 of the blockchain).
January 9, 2009: Version 0.1 is released.
January 12, 2009: First Bitcoin transaction sent
from Satoshi Nakamoto to Hal Finney.
Bitcoin and Blockchain Characteristics
 Symbol is BTC.
 Each coin has 100,000,000 units, or 8
decimal places.
 Example of a bitcoin amount is 1.89543145
BTC.
 Cryptographic, predictable, fixed monetary
supply of 21,000,000 BTC.
 Approximately, 17,000,000 BTC are in
circulation as of April 2018.
 No one owns Bitcoin, the public blockchain.
Anyone can own Bitcoin, the
cryptocurrency.
Bitcoin, Gold, and the Fundamentals of
Money
 Bitcoin is an excellent medium of exchange
and store of value – Bitcoin has been called
digital gold (it far surpassed the value of an
ounce gold in 2017).
 Bitcoin is a poor unit of account because of
price volatility. – It would not work as a
reportable currency and it would skew
financial statement comparisons.
 Gold is an excellent store of value, a
moderate unit of account, and a poor
medium of exchange.
Bitcoin, Gold, and the Attributes of Money
 Bitcoin is highly durable, portable, divisible,
and fungible. – One Bitcoin is 100,000,000
units and millions in value can be
transported with one piece of data, the
private key.
 Gold is highly durable and fungible. Gold is
not easily portable or divisible.
 Gold has a 5,000 plus year history and
Bitcoin is less than 10 years old. – Bitcoin
durability is being proven everyday while
gold is a rare metal that doesn’t oxidize.
Bitcoin and Blockchain: Additional
Characteristics
 Peer-to-peer transactions
 No intermediaries or trusted third parties
 Public ledger transparency (transactions
and ownership can be independently
verified)
 Sets the new standard for immutability
(best example in history)
 Eliminates some types of fraud
 No more PCI compliance (as required for
credit cards)
 Send a transaction 24/7 without permission
to anyone in the world
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DAY 2
Blockchain: Core Components of the
Technology
Note: The core components are described in the
context of Bitcoin.
A. The Ledger
 A blockchain itself is the record of all
transactions
 A blockchain is a ledger of transactions,
each of which records a change in
ownership of the native currency of a
particular blockchain. Bitcoin is the native
currency of the Bitcoin blockchain.
 Transactions are grouped into a block,
added to the blockchain and linked to all the
previous blocks with cryptography. Every
block references the previous block with a
hash.
 Cryptography is the math used to prove no
data has been changed. This is the basis for
an immutable blockchain.
 The Bitcoin blockchain, for example,
becomes one version of the truth.
B. Peer-to-Peer Network
 A large number of nodes (computers)
connected over the internet in a
decentralized fashion.
 A large number of nodes that updates and
stores the complete synchronized version of
the blockchain.
 Every node agrees on one state of the
blockchain at any point in time. This allows
anyone to independently verify a
transaction.
 The network distributes security among
thousands of computers making it
infeasible for malicious actors to
compromise the network.
 Nodes can go offline without affecting the
network. One party is never relied upon for
any of the benefits of the network which is
the value proposition of decentralization.
C. Consensus Mechanism
 A process using protocols and algorithms so
nodes can agree on the same version
(state) of the blockchain without having to
know or trust one another.
 The combination of a blockchain and a
peer-to-peer network is not inherently
immutable, secure, or reliable. The
consensus mechanism makes those
attributes possible.
 The consensus mechanism is composed of
the consensus protocol and the consensus
algorithms.
 This is where the phrase “blockchains are
trustless” comes from. “Without knowing or
trusting” is the magic sauce. With Bitcoin,
trust is not totally eliminated but is the new
standard for trustlessness.
Consensus Protocol and Consensus Algorithm
 The consensus protocol is a set of
rules governing how the entire
network operates and all the core
components. Bitcoin has a protocol.
 For example, the specification for
valid digital signatures.
 The consensus algorithm defines
the steps to achieve consensus
using the set of rules, the protocol
 For example, verify the digital
signatures of transactions. The
protocol is the rules and the
algorithm is the instructions to
enforce the rules.
D. Incentive Mechanism
 The native currency (bitcoin, for example)
that incentivizes participation to secure the
decentralized network. The issuance of
Bitcoin is part of the consensus mechanism.
 The Bitcoin blockchain is a permissionless
blockchain because anyone can participate
as a node, a developer, or an end user
without asking anyone for permission.
 Remember: No one owns Bitcoin, the public
blockchain, but anyone can own bitcoin, the
cryptocurrency.
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  Because Bitcoin is not a company, there is  A hashing algorithm takes an input of any
no CEO, no employees, no bank account, length information and reduces it to a string
no revenue, no hiring process, and no of characters to a uniform length.
contracts.  Bitcoin uses a hash protocol called SHA-
 Miners versus nodes: A full node downloads 256, which reduces any string of input
and maintains a full coy of the blockchain, information into a 256-character string,
validates blocks, and can relay transactions. known as a hash ID.
 Nodes must also use mining hardware and
Proof-of-Capacity (PoC)
mining software to become a miner. All
miners are nodes but not all nodes are  Another consensus algorithm used in
miners. blockhains that allows mining devices in the
 Miners provide security in the form of network to decide mining rights and
computer equipment that runs a mining validate transactions with the help of their
software with the expectation of reward. available drive space
 The larger the hard drive, the more solution
Consensus Algorithms: Proof of Work VS.
values one can store on the hard drive, the
Proof of Stake
better chances a miner has to meet the
Proof of Work Proof of Stake required hash value from his list, resulting
Miners provide Forgers or validators in a higher possibility of acquiring and
computational power (coin holders) stake gaining the mining prize.
to solve a coins to secure the  It has appeared as an alternative to the
mathematical puzzle. network. They act problems of high energy consumption in
honestly because they PoW consensus and coin hoarding in PoS.
risk losing their stake if
they act dishonestly
and do not follow the Proof-of-Activity (PoA)
rules.  A consensus algorithm used in Blockchain
Resource intensive Uses significantly less
technology that ensures that all
method to secure the resources to secure the
transactions occurring on the network of
network. A block network. Forgers get a
blockchains are genuine and authentic.
reward (bitcoin) is reward for staking the
given to the first miner coins they own.  PoA consensus, which is a combination of
who solves the PoW and PoS, ensures that all miners arrive
challenge of the proof at a consensus.
of work problem.  An attempt to consolidate the best features
Miners also earn of PoW and PoS systems.
transaction fees.  Conditions for a PoA consensus:
Block rewards over Staking rewards over a. Validators have to confirm their real
time can be estimated time can be estimated identities.
on the computing based on the coins b. A candidate must be ready to invest and
power supplied by a staked by one owner to put his reputation at stake. A rigorous
miner to total power of total coins staked by
selection process decreases the danger
all miners. everyone.
of choosing shady validators and
encourages long-term commitment to
The Power of Hashing Algorithms the Blockchain,
c. A method for electing validators must
 Hashing is a process used to encrypt data, be equal to all competitors.
prevent tampering, and verify data has not
been changed.

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 d. The identity of validators must be Directed Acrylic Graph (DAG)
verified to maintain the integrity of the
 A Digital Ledger Technology (DLT) variation
Blockchain.
that has been presented as a Blockchain
 An example of PoA is Decred
alternative.
Proof-of-Weight (PoWeight)  Due totheir arrangement in a directed
graph, the cooperating nodes of a DAG are
 A consensus algorithm based around the
capable of cross verification.
Algorand consensus model.
 The use of DAG improves the network’s
 In other words, we can say that this is a
scalability and lowers transaction fees by
notable upgrade of the PoS system in
allowing fee-free nano-transactions
which the more tokens one owns, the
 Does not require miners or the underlying
better their chances are to discover more
energy-intensive infrastructure since it
but this whole idea makes the system
achieves consensus without implementing
somewhat biased.
the classic hash-protected PoW.
 Tries to solve such a biased nature of the
 Significant features of DAG:
PoS.
a. Scalability: DAG is well-known for its
 Instead of using your portion of tokens
limitless scalability. In contrast to
owned in the network to reflect your
previously distributed ledgers, DAG
chance of “discovering: the next block,
improves scalability as network grows.
some other weighted value is employed.
b. Compatibility: By implementing
Advantages Disadvantages transaction fee-free strategies, DAG, as
PoWeight is known It has proven a decentralized channel, allows
for its super challenging to get participants to make fast micro or even
scalability and high consumers enthused nano-transactions.
customization. The about the concept c. Resilient: Using the Winternitz one-
fundamental due to a lack of time signature mechanism, DAG makes
algorithm can be incentivization, as the the underlying distributed ledger less
adopted by the protocol does not pay susceptible to quantum computers with
developers to allow users for maintaining
higher level computing characteristics.
for the formation of anode and validating
d. Validation: DAG’s quantum resistance
committees. transactions.
allows for masked authenticated
messaging and parallelly lined
Leased PoS (LPOS) transactions, which is a great way to
transform data using encryption and
 Allows users to lease out their interests to
authentication techniques.
miners. Mining nodes, in return, share some
part of their earnings with the leaser. DAY 3
 A novel way to benefit from mining without
Crypto Terms
really needing to mine.
 Considered to be a more powerful branch Address a unique identifier used to
of PoS as it extends the capabilities of PoS send and receive
and facilitates additional features such as cryptocurrency
balance leasing, passive income Airdrop distributing cryptocurrency
generation, and secure transactions for free as a market strategy
 The Waves platform currently supports Altcoin alternative cryptocurrencies
LPoS to Bitcoin

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All time high the highest or lowest price a
(ATH)/All Time cryptocurrency has reached
Low (ATL)
Arbitrage buying and selling the same
asset on two exchanges to
profit from small price
differences
Bagholder Someone who missed and
opportunity to sell at a high
price and now owns low
value cryptocurrency
Bear Someone who is pessimistic
about the market or coin
value
Bitcoin (BTC) A digital currency launched
in 2009 that boomed the
cryptocurrency market
Block A group of transactions
made in a blockchain
Blockchain A globally distributed digital
record of transactions;
permanent and secure
Bull Someone who is optimistic
about the market or asset
value
Buy the Dip Buying cryptocurrency
(BTD) when the price has fallen
Cold Wallet A digital wallet that is not
connected to the internet
Cryptocurrency A digital currency that uses
cryptography to secure
wallets; often decentralized,
though not always
Cryptography The method of using code
to convert information and
communications into an
unreadable format
Decentralized No entity holds one control
over the network; anyone
can join (see ‘node’) and
blockchain records are
stored in many locations
Ethereum A cryptocurrency and
decentralized computing
platform launched in 2015
Exchange A platform to buy, sell, and
invest in cryptocurrency.
Exchanges can be
centralized (coinbase) or
decentralized (unstoppable)
Fear of Missing When someone is
Out (FOMO) concerned that they might
miss a good buying or
selling opportunity
Fear, Negative sentiment about
Uncertainty, the market, usually spread
and Doubt in the media
(FUD)
Fiat Currency that is
government issued legal
tender, unlike
cryptocurrency
Fork A change in how the
blockchain operates that
can be backwards
compatible (soft fork) or not
(hard fork)
Hardware A physical device used for
Wallet storing cryptocurrency keys
(usually USB connected)
Hashing Transforming chunks of
data into unique test strings
that are nearly impossible to
decipher
Hodl Slang term for ‘hold’, to
keep cryptocurrency instead
of selling it
Hot Wallet A digital wallet that is
connected to the internet
Initial Coin A method of raising funds
Offering (ICO) for a new project in
exchange for a token
Market The total number of coins
Capitalization in circulation multiplied by
individual coin price
Memory Pool Unconfirmed transactions
(Mempool) held until they are picked up
by a node on the network
Mining Using computer hardware
to process and validate
cryptocurrency transactions
Mining Pool Miners combining their
mining rig power to increase
the chances of closing the
block and receiving the
reward for it
Mining Rig A computer built specifically
for mining cryptocurrency,
usually containing high
specification components
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Mooning When a cryptocurrency’s its own blockchain and
value is rapidly rising in a represents an asset or utility
short period of time Transaction Movement of
Node A computer that connects to (TX) cryptocurrency from one
the cryptocurrency network address to another
and becomes one of the Whale Someone who owns lots of
network participants cryptocurrency
Peer-to-Peer When two entities/devices Whitepaper An authoritative document
(P2P) communicate directly to explain a new
without a third party cryptocurrency
Private Key Secret identifier that proves
ownership of a wallet
Proof of Stake Method used to process Cryptocurrency Wallets
(POS) transactions with miners  A wallet is software that stores private key
having more control based
and their associated public keys and allows
on how much
users to send transactions to the peer-to-
cryptocurrency they hold
peer network and receive cryptocurrency
Proof of Work Method used to process
(POW) transactions, requiring from others.
completion of complex  Cryptocurrency is not actually “stored” in a
mathematical equations by wallet although it is often referred to this
computers way. Wallets may contain more than one
Public Key Generated by the private cryptocurrency depending on the wallet.
key and turned into an Cryptocurrency actually “resides” on a
address generally used to respective blockchain and private keys are
receive cryptocurrency used to change the ownership. The record
Pump and Fraudsters spreading false and the cryptocurrency become one
Dump info to increase a and the same.
cryptocurrency’s value  The Law of private keys: If you control
(pump), then cashing out
your private keys, you own your
(dump)
cryptocurrency and if you do not control
Satoshi The pseudonym given to
your private keys, you do not own your
Nakamoto the person or persons who
created bitcoin (their cryptocurrency.
identity is unknown)  Example: Smartphone apps (Mycelium,
Satoshis The smallest unit of Bitcoin; Edge), online web wallets (blockchain.info),
one Bitcoin equals hardware wallets (Ledger, Trezor)
‘100,000,000 satoshis’
Shilling Spreading false information
to increase the price of a The Push VS. Pull Paradigm Shift
cryptocurrency
Software Wallet A method of storing  In the traditional financial model, the buyer
cryptocurrency keys within gives authority to the sellers to pull money
software files on your from the buyer’s account.
computer or mobile device  Buyers hand over their credit card
Ticker An abbreviation to identify a information for a credit card transaction or
cryptocurrency (for hand over their bank account and routing
example, “BTC” for Bitcoin) numbers for an ACH or wire transaction to
Token Used interchangeably with the seller. This is where PCI compliance
“coin”. Technically, a subset comes in because companies attempt to
of cryptocurrency that has
securely store credit card information for

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 millions of customers in the case of big box
stores.
 This exposes the buyer to significant risk of
fraud and unauthorized transactions. The
Target, Home Depot, TJ Maxx and other
credit card hacks demonstrate that storing
PII information on behalf of buyers
(customers) is an exercise in futility.
 Funds cannot be stolen from a bitcoin public
address but funds can be easily stolen from
credit cards and bank accounts.
 A cryptocurrency public address does not
 Custody, responsibility, and control can also
need to be secured. A public address with
fall somewhere in the middle of the
$1,000,000 in bitcoin could be posted on a
continuum:
billboard and no one can steal the funds.
a. Centralized crypto exchanges where
 This is one of the most important concepts
trading takes place are akin to financial
in understanding the transformative power
intermediaries.
of blockchain technology and
b. Blockchains that are not fully
cryptocurrencies.
decentralized (permissioned
 Fraud risk in the pull model is eliminated
blockchains) fall in the middle. For
by the paradigm shift to the pull model.
example, a Fortune 500 that deploys its
own blockchain or joins an industry
consortium blockchain like R3. There
The Custody, Responsibility, and Control are no intermediaries but the
Continuum for Assets blockchains are more centralized.
 Traditional financial institutions maintain  True custody, on the left most side of the
custody of their customers’ assets. Custody continuum, only happens when the owner
means they have responsibility and control holds the private key of a fully decentralized
of those assets on behalf of their cryptocurrency like bitcoin.
customers. This is the right side of the DAY 4
continuum.
 Customers (individuals or businesses) Blockchain Process and Technical Controls:
relinquish control to financial institutions Overview
who have custody of their assets. Custody,
 The potential for blockchain to radically
responsibility, and control reverts back to
transform auditing and assurance will be a
the individual or business entity when third
challenge in the process of realizing all the
parties are eliminated by a peer to peer
benefits.
decentralized network like bitcoin.
 The profession will undoubtedly evolved.
 Owning cryptocurrency is synonymous with
This evolution will affect the role of CPA
having custody and therefore 100%
auditors as well as the skill sets necessary
responsibility and control. This is the left
for auditors to remain relevant and
side of the continuum. Someone can have
competitive while continuing to provide
control of an asset and be irresponsible
value.
which is why both of these concepts are
 Assurance has historically been delivered
important.
one-to-one between the auditor and the
audit client. Blockchains may not be
controlled by the audit client yet require

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 assurance as a substantial tool used for
producing financial statements.
 Professional judgment is a major part of the
CPA value proposition in delivering services
based on the evaluation of management’s
estimates. Which are significant basis for
financial statements. Blockchains will not
eliminate this professional judgment.
 Errors and fraud will still exist regardless of
blockchain and sufficient audit evidence still
has to be obtained. The risk of off-balance
transactions in the form of off-chain
transactions will still occur and have to be
assessed.
 CPA auditors provide reasonable assurance
that financial statements are fairly stated.
When blockchain fulfills the promise of real-
time auditing and eliminates non-value
activities, test of controls will still be needed
to provide that reasonable assurance.
 Understanding and testing controls is going
to require more technical skills and
knowledge, which is both a challenge and
an opportunity. Professional skepticism will
be even more important with blockchain
technology and CPAs are best poised to
provide blockchain assurance.
System and Organization Controls
 Many companies have outsourced their
managerial services for economic or other
reasons. The companies are called user
entities and the outsource entities are
called service organizations in the context
of SOC.
 The AICPA issued SOC guidance for user
entities to assess how internal controls of
service organizations affect their financial
reporting and security and privacy of
information.
 Service organizations such as Amazon AWS,
Google Cloud Platform, and Microsoft Azure
are single clearly identifiable and auditable
entities.
 These same cloud based service providers
now have blockchain-as-a-service (BaaS)
offerings. A production ready end-to-end
service, and will need updated SOC reports.
 Auditors will have unique challenges for
user entities who use blockchains because
they are not single entity service
organizations in the traditional sense of a
company like Microsoft.
 Existing standards cannot be applied to
blockchains so process and technical
control testing becomes more important
until blockchain standards begin to emerge.
Process Controls and Technical Controls
Process controls are application controls and
manual controls over transaction processing.
 Organizations have more direct control over
implementation of these controls related to
blockchains and cryptocurrencies.
Technical controls are based on logical
programming, which is also part of the IT general
controls of the IT environment.
 A public blockchain is not going to have an
audit, SOC, or lend itself to technical control
testing so reliance has to be obtained
directly.
 There will likely need to be another solution
layer to aid auditors with technical controls.
For example, mechanized proofs are
protocols that mathematically prove a
smart contract will execute as designed.
Process Controls
Process controls can help mitigate the limitations of
verification.
 Maintaining the trail of information is as
important as securing assets.
Process controls are needed to increase the
security of using and storing cryptographic assets.
 Custody, responsibility, and control of
assets shifts to the end user.
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  If private keys, the digital pen for signing
transactions, are lost, stolen, or deleted,
assets will be gone forever.
Questions that auditors, accountants, and clients
should ask in developing and assessing process
controls:
 Who should have access to
cryptocurrencies?
 Who should be responsible for recording
and capturing the transactions?
 How should cryptocurrency be secured but
on our use case?
 What kind of physical security should be
used to backup private keys?
 What exchanges should be used to buy and
sell cryptocurrency?
 Who is responsible for deciding when to buy
and sell?
 Who has and should have read and write
permission for permissioned blockchains?
These are only a few of the controls relating to the
security that an entity would need to address.
Comprehensive process controls should include the
following:
 Private key storage and backup
management
 Physical and environmental security: safes,
door access controls
 Cryptographic asset controls: who has
access and from where
 Implementation of multi-sig wallets: N-of-M
signers to send funds
 Password managers to delegate access to
wallets and exchanges
 Access to read and write to ledgers which
may or may not be the same as sending
cryptocurrencies
Technical Controls
 The existence of blockchain technology in
an organization does not remove the need
for knowledge of the technical controls
within it.
 Auditors and accountants have to
understand these controls in order to gain
reasonable assurance that blockchains are
working as intended.
 Understanding technical controls will also
require working with technical experts like
developers who design and implement
these controls.
Blockchain technical controls that need to be
understood and assessed include these:
 Consensus mechanism: Proof of Work
or proof of Stake
 Block size and transactions throughput:
How many megabytes
 Cryptographic algorithms used: ECDSA,
SHA256
 Transaction validation parameters:
Valid signatures
 Mining difficulty: Hashing or computing
needed to solve blocks
 Standard infrastructure controls such as
virus checking schedules, 0-day exploit
remediation, maintenance schedules,
capacity and backup management still have
to be managed.
 A distributed ledger node within a private
blockchain is still a combination of data and
software running on one or more servers,
often within a virtual private network (VPN).
 IT general controls will continue to apply to
the operational environment.
Responsibility Controls
 Who is responsible for controls with so
many different blcockchain solutions
available?
 A public permissionless blockchain is
not a company; there is no CEO and no
employees. It is a decentralized
platform; therefore, responsibility for
controls is spread among the
participants, such as the nodes, miners,
and developers.
 A consortium permissioned blockchain
is more formal in nature and made up
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 of members who are granted
permission; however, the responsibility
for controls is still shared and spread
among the members.
Accounting Aspect
 Holdings of a cryptocurrency meet the
definition of an intangible asset. If
cryptocurrencies are held for sale in the
ordinary course of business, then the entity
applies the inventories standard.
Initial Recognition and Measurement
 An intangible asset is recognized when:
- it is probable that future economic
benefits that are attributable to the
asset will flow to the entity; and
- the cost of the asset can be measures
reliably
 If an intangible asset is acquired in a
business combination, then these criteria
are assumed to be met. If an intangible
asset is acquired in a separate acquisition,
then the probability criterion is assumed to
be met and the reliable measurement
criterion is usually met.
Blockchain Benefits, Values, and
Opportunities
 New applications of blockchain allow one
party to prove information without
revealing it. Organizations reduce risk by
not having to store information and
accountants get the value of verifying all
kinds of information in the same way.
 Blockchain eliminates reconciliation
because transaction settlement time
approaches zero and entities will have one
version of the truth with shared ledgers.
 All aspects of supply chain form source to
final product will be linked and therefore
verifiable.
 Accountants and auditors will have better
tools and provide greater value added
services.
Blockchain Benefits and Value
 Increased transactional trust
 Reduced fraud, increased security
 Frictionless, low cost transactions, and
faster processing times
 Independent verification
 Owner-controlled assets
The Four Characteristics of the Bitcoin
Blockchain (and many other public
blockchains)
The benefits, value, and opportunity of blockchain
technology also come from these characteristics.
1. Censorship Resistance
 Censorship is the suppressor of
speech and information.
 Public blockchains like Bitcoin are
censorship resistant.
 There is no third party or centralized
control which can “censor” the
network.
 Any parties with the ability to censor
can and will use it for their own
benefit. The power and control to
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 censor usually resides with a few
people or organizations.
2. Borderless
 Borders are geographical
boundaries for sovereign states and
legal jurisdictions.
 Public blockchains, like Bitcoin, have
no borders political, geographical,
or otherwise.
 It is the first global financial
network, operated the same for
everyone everywhere.
3. Neutral
 Neutral is impartiality and the
absence of bias.
 Public blockchains like Bitcoin are
neutral, operate on predefined
protocols and algorithms.
 Central bank policy is influenced by
a few decision makers with geo-
political motives.
4. Open
 Open is freely accessible and
without restrictions.
 Public blockchains like Bitcoin are
based on the open source
innovation model.
 Innovation happens rapidly,
developers can access code without
permission.
Zero-Knowledge Proof
 ZKP
 One of the most important concepts in non-
financial use cases with blockchain.
 Process in which one party (prover) proves
information to another party (verifier)
without revealing the information.
 If the prover does not know the
information, it must be guessed.
 The chance of repeatedly guessing correctly
approaches zero so the proof is probabilistic
not absolute.
 Based on the algorithm that returns either
a true or false output, there are three parts
to ZKP:
a. If the prover’s statement is true, the
verifier will know if it is true.
b. If the prover’s statement is false, the
verifier cannot be fooled.
c. The verifier does not learn the
information and privacy is maintained.
 Example: Zcash was the first
cryptocurrency to implement zk-SNARKs,
an adaptation of the ZKP.
 A Zcash transaction can be validates but will
not reveal the sender, recipient, or the
amount being transferred.
 Private blockchains (permissioned) offer
privacy and confidentiality but ZKPs provide
an additional security layer.
 Catalyst for Wall Street adoption.
 Benefits are both financial and non-
financial.
 Privacy (individual and institutional).
 Verification of identity KYC and anti-money-
laundering (AML) rules.
Domain-specific Applications
 Blockchain is transforming the following
domains into the best use cases of
technology:
a. Supply Chain
 One of the most complex and
inefficient markets with many
intermediaries
 The most important challenges in
supply chains include these:
 Payments
 Legal/contracts
 Customs
 Provenance
 Dispute resolution
 International trade complicates
issues even more.
 Supply chain could be the best
blockchain use case.
 Cost reduction, social and
environment effects, and more.
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  Provenance is the chain and record
of ownership.
 It is the most important concept for
supply chain transformation.
 The manufacturing process from
source to final destination can be an
immutable record.
 Consumers are demanding to know
the source materials, processes,
environmental impact, ethics, and
more.
 This demand will force
transparency.
 Blockchain will add value by proving
who, what, when, where, and why
at every step.
 This will reduce direct costs and
significant time.
 Push supply chains where
companies forecast, produce goods
and wait for sales, will shift to pull
demand chains where goods are
produced when sold.
 The shift to a pull demand chain is
the next evolution in just-in0time
(JIT) manufacturing.
 Manufacturing supply will move in
tandem with market demand.
 Blockchain will give people control
of their own identities.
 The identity holder chooses what
data to share with whom. A
company would request certain data
and the identity owner grants
permission to access only the
requested data via a wallet or an
app.
 An otherwise expensive KYC AML
process for banks can be monetized
when they sell verifications of
identities of mutual customers.
c. Distributed Cloud Storage and
Retrieval
Characteristics:
 Transaction ledger with
public/private key encryption, and
cryptographic hash functions for
security.
 Encrypted data that only the owner
has access to.
 Chunked and distributed data.
 High availability of data/files even if
a significant part of the network is
down.

b. Digital Identity and KYC

d. Prediction Markets
 ZKPs and the concept of verifying
 Are currently betting markets that
information without revealing it will
incentivize specific behavior.
radically change identity
 Improve decision-making.
management.
 Use cases include sporting events and
 Financial institutions have to verify
contract settlement.
personally identifiable information
 The “wisdom of the crowd” gives value
(PII) for KYC regulations.
to prediction markets.
 All other vendors for consumers and
 Widespread use of this application will
businesses alike manage some level
strengthen efficiencies, decrease costs,
of PII.
and provide a high degree of security to
 The same PII gets saved over and
the market.
over again in centralized databases
that are giant attack silos.
 Identity theft for both consumers
and businesses costs billions Industry-specific Applications
annually. a. Healthcare c. Accounting
 Identity is controlled by institutions b. Tax d. Legal
and not by the identity holder.

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Industry-specific Applications: Healthcare
Efficient and accurate compliance with the Drug
Supply Chain Security Act is a current, real-world
example of blockchain disruption of this industry.
 Electronic health records (EHR)
 New interfaces that enable patient data
sharing
 High availability of accurate information
Industry-specific Applications: Accounting
 The ownership and the transactional history
becomes one and the same.
 Bank reconciliations become obsolete,
transaction clearing is essentially reduced
to time zero.
 In the traditional model, entities keep their
own version of events in their own
accounting system. In the blockchain
model, entities will have a shared version of
the truth.
 For example, a vendor customer
relationship will share one version of
transactions and potentially eliminate
reconciliation.
 Accountants have a greater opportunity for
value added services as non-value added
tasks are automated or eliminated.
 Currently, the Bitcoin blockchain is an
immutable ledger but it is not inherently a
double entry accounting system.
 A blockchain is more like a single entry
system recording only the “cash” side of the
journal entry between two parties.
 “Triple entry accounting” is a term to
describe double entry accounting plus
blockchain, with blockchain as the third
entry.
Industry-specific Applications: Accounting
Journal Entry
 Blockchains are inherently a single entry
system. The following is a bitcoin
transaction sent from Company A to
Company B for a $1,000 computer. This is
the entry on the blockchain:
 This is the journal entry Company A and
Company B have to make in their respective
accounting systems:
Industry-specific Applications: Tax
 There are two sides of taxation:
a. Taxpayer compliance
b. Revenue collection (tax authorities)
 Some state-level tax authorities in the US
are accepting bitcoin and likely other
cryptocurrencies.
 Taxpayer compliance and tax authority
collections will eventually merge.
 Cryptocurrency sales tax and use case:
- Sales tax is remitted in real time.
- Sales tax is remitted on per sale basis.
- Taxpayer compliance is automatic.
 Arizona, Georgia, and Illinois have bills in
various stages for accepting Bitcoin and
other cryptocurrencies for tax payments.
Industry-specific Applications: Legal
Blockchain-enabled Ricardian contracts is a hybrid
method for both computer execution and human
interpretation of contracts.
 Smart contracts have the potential to
revolutionize the practice of law:
a. Powered by Ethereum (blockchain 2.0)
b. Eliminate the need for human-based
contract execution
c. User defined programs that run on the
blockchain
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  Provability of service process – GPS-linked Summary of Benefits, Values, and
process servers can now prove that service Opportunities
was performed and record interactions
 Blockchain will fundamentally replace
 Payment for the use of intellectual property
existing domains, industries, and business
– Proof of Play (PoP) can now be irrevocably
models.
recorded on the blockchain and musicians
 Supply chain is complex and will likely take
will be better paid
decades to transform, whereas a
 Land registry and deed management –
decentralized marketplace is ready to use
Titles recorded on a blockchain cannot be
but needs adoption.
changed without use of the owners private
 Accounting needs more development to
key
realize the full potential of blockchain
 Chain of evidence custody – Transport and
relating to double entry accounting.
storage of evidence can now be fully
 The number of cases is infinite and the best
documented
use cases probably have not been
developed yet.
Business Use Case: Decentralized
Marketplaces

 Marketplaces and bidding sites like eBay are

centralized.
 These platforms have the following issues:
- Charge significant transaction fees
- Charge listing fees
- Transactions conducted by the third
party (eBay)
- No reward for user loyalty
 A decentralized escrow-based marketplace
can solve all of these issues.
 A decentralized peer-to-peer marketplace
- Charges low or no transaction or listing
fees
- Is P2P, no third party
- May reward users with platform profits
- Facilitates buyer sending
cryptocurrency to an escrow (smart
contract) and seller releasing funds
after receiving goods or services
 Examples: Open Bazaar and Syscoin
 Agreements recorded as clockchain based
Ricardian contracts
 Payment made in Bitcoin, Bitcoin Cash, or
Zcash
 Escrow-based
 Moderators for problem resolution

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