BC-1.1.2 Why are ledgers important?
This article is part of a blockchain program at The Hague University. The program is created in collaboration with field specialists and in an open-source fashion💓. It is freely available on the Koios platform, which is run by a community (DAO).
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Intro & recap
So you now know that a ledger is a tool to record transactions. And that transactions = transfer of value. And that the ledgers mimics the transfer of value between entities as best as possible. An entity is nothing more than a fancy word for somebody, or something, with a separately identifiable existence. This used to be a person in the good old days of history. It can nowadays also be a legal entity like a corporation. Or even a machine! So more entities and different sorts enter the ledgers. On the internet, nobody knows you’re a dog. But on the blockchain, nobody knows you’re a fridge.
Thanks to new technologies like the internet and blockchain technology, these entities are better connected. As a result, we record transactions more and more efficiently.
💡 Ergo, we keep getting better in recording transactions which enable us to create and enter new types of value in the ledger (like a forest!).
💡 Reducing something called the “transaction cost efficiency” is a very important reasons for ledgers to exist. It means that using the ledger will create less friction between transactions. Frictions, like less monetary costs, faster transaction time or broader (global) reach. Keep this point stored in the back of your mind: ledger improvements lead to better tx-cost efficiency. This is one of the core use-cases of blockchains.
❓ Friction in a transaction can be caused by many things. It used to be limited space on a clay tablet, but could also be things like costs or delay. The more inefficiencies, the less the transaction (tx) cost efficiency. What kinds of friction in a transactions can you think of?
A long story short
The example: employee card & #1 ownership
In the video accompanying this chapter, I brought my employee card from The Hague University. I use this card and the ledger behind it as an example to explain why ledgers can play essential roles.
First of all, ledgers confirm ownership (1). In the case of my employee pass, there is a unique identity number. In our example, the card starts with 54 and ends with an 8. So if I enter this number in the employee card ledger of THUAS, my name will pop up. So if I’ve lost my card, the people with access to the ledger will know that Jordi Jansen is the owner of this card. Ledgers, therefore, confirm ownership of assets (1). Same goes for your bank account and your unique bank account number.
So imagine our previous example of the room with your 10 friends. What if one of your friends starts robbing other friends. This could be beneficial for your aggressive friend. But most likely, your other 9 friends wouldn’t deem this very fair. But they would need to prove that he stole the money. They would need something or somebody that they can trust. To fall back upon. An entity of which everybody agrees, “hey, we can trust that entity “. As you have learned, an entity can be a person. But it can also be a legal entity. And in the case of blockchains: a mathematical protocol. But let’s keep it simple for now. In this case, in the 10 friends example, that person would be you. You are the so-called “trusted third party (TTP)”.
💡A TTP provides trust and uses a ledger to do so.
❓ How many TTPs can you pinpoint in your own life?
So friend A, for example, hits friend F in the back of the head, steals the money, and now suddenly has $20 in his hand. Physically. Not according to your ledger! According to your register, friend A still has $10, and friend F still has $10. So now, friend F and the others can fall back on you and your ledger. If friend A does not agree to that, he can decide to keep the money. So with physical assets, like cash, you would need to enforce the return of funds. As history has shown us, this often went hand in hand with legislation (by law) or violence. The ledger itself can’t enforce things, it was either the community or the TTP by force of law or armies.
💡 The checks when there is a conflict, a.k.a. the compliance a.k.a. does every abide by the rules, are by design afterwards.
As mentioned, sometimes the TTP holds the power. This power increases if the ledger is digital, you don’t need to visit your friend and ask him the money back. Just rewind the transaction! You, as a controlling party, would hold that power. You decide who owns what (based on the power the community, your 10 friends, gave you). You could create a new state of who owns what. In this case, when there would be no cash but only digital money, you could reverse the transaction. According to the ledger, the state remains the same (your friend did not steal). It never happened because it was not a valid transaction according to your rules.
💡 A transaction not recorded in the ledgers hasn’t officially happened. It tells you “who” owns “what” asset.
💡 Just as in regular stories, you can read back in the ledger’s time and see who owned what in the past. So recording transactions is like telling a story and writing history (of exchanging values). Possibly a bit dull and single-minded, but incredibly important for the community as a whole!
💡 Centralized ledgers sounds like a good solution to resolve conflict, but the power is held by the centralized party. Keep in mind for later: there are multiple risks in this sort of ledger. For example, you could make a mistake, or you have the power to manipulate the ledger. Nor is everybody allowed to read the story, so checking your behavior is hard.
❓ What ledger would you like to be the boss (TTP) of?
The example: employee card & #2 Identity
Ledgers also confirm identity (2), often recognizable by a unique ID with a unique number. An example is the employee pass, which starts with 54 and ends with an 8. But in the other instance of your own ledger containing the friends, you had your friends identified by their names. If two friends had the exact same name, you most likely would have given them the letter of their last name or something like that. You would have to create a system for this. Unique IDs and numbers are an excellent start.
How do you recognize when you are in a ledger? Simple! Just check for your unique identifier. You most often have a unique ID, like a number. For example, you are registered with your unique phone number in the phone companies record or with your personal bank account number in the bank ledger. So not only do ledgers confirm ownership. They also verify identity. For example, this is important if you want to tie an asset to a name, like who owns what car. Another example is your unique social security number, which forms an essential part of your system identity.
💡 You can check if you are active in a ledger by use of a unique identifier.
❓ In what ledgers have you been active since this morning?
The example: employee card & #3 Status
Another reason why ledgers are essential. They confirm status (3).
Let’s get back to the case of my employee card. When I want a cup of coffee, I need to check in the THUAS buildings first. My status will go from offline to online in our systems, which are connected with the ledger. THUAS uses a digital ledger, so everybody with access to the administration can now see, “hey, Jordi is in the building”. The ledger forms the backbone for other systems, like an online/offline status. The same goes for your public transport card, when you check in. Or your passport: you are in the country, you are out of the country. But also other statuses like “you are married / you’re not married”.
💡 As an individual entity, you have a certain level according to the ledger that you are registered in. Different ledgers will lead to different statuses. In other words, and you will hear this more often (!!!)
DIFFERENT LEDGERS = DIFFERENT USE CASES
The example: employee card & #4 Authority
The fourth component, also crucial, is that ledgers allow giving a specific authority to an entity.
This could be in a company where your employee ID will connect you with particular properties. As an employee, you can visit some areas in the building or some places in the digital database. For example, you can enter the financial administration, but not the salary administration (ergo digital access). Or you are physically qualified to visit level 1–15 in the building, but not level 16 or 17 (the elevator doesn’t allow it). Or you can pay an invoice of up to $10,000. This authority can all be tied to the ledger. So, according to the THUAS ledger, I can drink 15 cups of coffee a day. I’m also allowed to open specific classrooms, but according to the ledger and surrounding systems build on that ledger, I’m not allowed to open the video department.
💡 You can build authorization systems on ledgers.
Conclusion
A ledger is crucial because it:
- (1) proves ownership of assets (= who owns what in time)
- (2) confirms identity (= you need to have an identity in the ledger to transact)
- (3) records and maintains statuses (= status is tied to your identity, like ‘married’)
- (4) enables levels of authority (= authority is tied to your status, like specific access
Ledgers in their core still record transactions and transfer value, only the extent increases in time. Different ledgers play different roles. Additional roles are created when ledgers can do more. But that is better shown when you examine ledgers of the past. Let’s explore this in the next session. On to the history of ledgers!
😋🍽️ Food for thought (= answers ❓)
Post your answers in the class Twitter Thread. Can be done from anonymous accounts as well! You can pretend to help us improve the quality of conversation and help your fellow peers learn. But in the mean time take a sneak peek at the answers…😉
How would you explain the importance of a ledger to somebody who is five years old?
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📖🖋 Homework assignment 📖🖋
Take two of the transfers of value you identified in your own life from the previous question. Then, for each transfer of value, determine how the four properties that make ledgers necessary are applicable. If you’re unsure whether they are actually good answers, contact your Koios community members in Discord.
📓🤓 Further readings (sources or support) 📓🤓
- What is an entity? https://www.techopedia.com/definition/14360/entity-computing
- https://gendal.me/2013/10/23/on-the-blockchain-nobody-knows-youre-a-fridge/
- Ledgers (paper from Chris Berg) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3157421
- Exciting reads for further investigation: http://chrisberg.org/category/working-paper/page/2/
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