Blockchain is a bit simpler than you may think. It is what it sounds like: a chain of data made up of component blocks that exist in the cloud.
Don’t get intimidated by the word “cloud;” you’re already in it. For example, if you use Google Drive or Microsoft’s OneDrive, you’re using cloud computing for data storage. You can access that data everywhere because it is in the cloud, not living on the hard drive of your computer or in the storage of your mobile devices.
A bit of trivia: more than 70% of all internet traffic passes through Loudoun County in Virginia.
Blockchain operates on a similar principle: it’s out in the internet and can be accessed by the right person at any time.
When you use Blockchain, your computer breaks down the information that you want to store, send, or exchange, into encrypted parts: blocks. These blocks reside in the cloud, waiting to be assembled into the right sequence so you can use the information again.
Blocks are pretty incredible. Each one contains an immense amount of data and some important features.
For simplicity, blocks have attributes like these:
- All the information about where the data it contains came from and what generated it;
- Data (in the case of Bitcoin exchanges, a transaction history)
- A unique digital signature;
- The “address” of the next block;
- A pointer to lead it to the next block;
- Data about the block that comes before it in the chain; and
- Built-in verification protocols (this is very cool).
The verification protocol is often a mathematical cypher or complex code. This is very important because hackers can try to copy a block in order to hack the entire chain, but If a hacked version of a block tries to link to the chain and it can’t do the math, it’s discarded.
Think of it like this…
Charlie Block is waiting around for Daniel Block. A block that LOOKS like Daniel comes along, so Charlie attempts the club’s secret handshake. This Daniel Block doesn’t know what it is, so Charlie says “Nope!” and keeps waiting for the real Daniel.
A little later, Real Daniel comes along, passes the handshake test, and holds hands with Charlie as they wait for Eduardo Block to arrive.
By the time the end of the chain is reached, the encryption and handshakes are very strong and can’t be changed, which means the data in the chain it can’t be changed either. These chains can be very, very long, and the longer they get, the harder they are to hack, making blockchain very secure. That kind of security is ideal for many kinds of data exchanges, including money changing hands.
“The technology will be applied to any transaction that has multiple touch points to ensure there can be no changes to the transaction itself. Financial are the obvious use case but think about the process to purchase a house and the many hands involved and all the changes throughout the process. When there is any argument regarding if a certain change was made, it will be a moot point because blockchain will have an indisputable record of what actually occurred.”
-Wade Yeaman, Fluid IT Services
That is why accountants and tax preparers need to be aware of the world of blockchain: it is part and parcel to cryptocurrencies. Cryptocurrency is taxable, just like other property and monetary transactions, and it must be reported to the IRS. With the rise in Bitcoin mining and the use of cryptocurrencies as a form of payment, it is increasingly likely that a “main street practitioner” will have a client who needs to report income to the IRS.
Delve a little deeper and check out this list of possible blockchain use cases that Disney Dragonchain references.
Blockchain and the incredible blocks are here to stay, and you may encounter them more often in the near future, so be prepared.
About the Author
James Crawford is the Communications Manager and Editor of the National Society of Accountants.