Accounting Information Systems

Fifteenth Edition, Global Edition

Blockchain Technology

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Blockchain
• Blockchain technology was originally developed to support the
crypto-currency Bitcoin to prevent “double-spending” the same
coin, but it has since been adopted for use in a variety of
industries to create reliable audit trails for any business process.

• A blockchain is a distributed ledger of hashed documents with

copies stored on multiple computers.

• An important characteristic of a blockchain is that it cannot be

unilaterally altered by any one entity. (However, a majority of
participants, or a centralized authority running a non-public
blockchain, can agree to alter the blockchain. For example, after
a theft of a large amount of the crypto-currency Ethereum,
participants agreed to alter the blockchain to prevent the stolen
“coins” from being used.)

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Blockchain
• Blockchain got its name from its structure, which is individual digital
records, called blocks, linked together using cryptography in a single
list, called a chain.
• The blockchain isn’t stored in a single location—it is a distributed
ledger that functions as a decentralized database.
• Each computer in the distributed peer-to-peer network maintains a
copy of the ledger to prevent a single point of failure.
• Since the blockchain is managed by a network that follows protocols
for inter-node communication and validating new blocks, there is no
need for a central authority that controls everything.
• The information recorded in the blockchain is made public, so
everyone on the blockchain’s peer-to-peer network has a copy of the
blockchain and all transactions are accessible to everyone.

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Blockchain
• Hashing is a process that takes plaintext of any length and
creates a short code called a message digest, popularly
referred to as a hash. For example, the SHA-256 algorithm
creates a 256-bit hash, regardless of the size of the original
plaintext.

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Blockchain

• Copyright © 2021 Pearson Education Ltd.

Blockchain
• Figure 12-6 shows the role of hashing in the three-step process that
creates a blockchain. In this example, a blockchain is created to serve
as an audit trail for a business process.

• Step 1 begins by collecting a batch of documents and calculating hash

values for each document. Pairs of those hashes are then
concatenated together, and that result is in turn hashed. This is
repeated until just one root hash for the entire block has been created.

• Step 2 then validates the new block by a process called mining, which
uses three inputs (a random number, called a nonce; the root hash just
calculated in step 1; and the root hash of the most recently validated
block in the chain) to generate a header hash value that begins with a
prescribed number of leading zeroes. The number of leading zeroes is
arbitrary and agreed on by all participants in a specific blockchain
network.

• Step 3: Append the New Block to Existing Chain

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Figure 12.6 How Hashing Updates a
Blockchain (1 of 3)

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Figure 12.6 How Hashing Updates a
Blockchain (2 of 3)

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Figure 12.6 How Hashing Updates a
Blockchain (3 of 3)

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Blockchain
• Let’s examine why this three-step blockchain procedure
creates a reliable audit trail. Recall that hashing produces
a unique value for the data being hashed. Therefore, any
change in the underlying data results in a different hash
value.
• Consequently, if someone edits one of the underlying
documents, such as changing the terms in a particular
sales invoice, the altered document would have a different
hash value than the original. Now refer back to step 1 in
Figure 12-6. If the hash of one of the documents in a block
changes, so too would all subsequent hashes generated
from pairs of documents. Ultimately, the root hash for the
entire batch would be different than what it was originally.

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Blockchain
• Consequently, step 2 in the process would not work
because the combination of the new root hash, the root
hash of the previously validated block, and the nonce
would no longer generate a header hash with the required
number of leading zeroes. Now, it is theoretically possible
for the person who altered the original document to simply
redo the mining process in step 2 to find a new nonce that
generates a header hash with the requisite number of
leading zeroes for the altered batch of transactions. The
person could then repeat that process for each subsequent
block in the chain and eventually create a new blockchain.

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Blockchain
• However, all that effort would only change the copy of the
blockchain stored on that one computer. But the altered
blockchain would not match the copies distributed on the
computers of all the other participants in the blockchain
network. Thus, the distributed nature of the blockchain
provides a means to identify any attempts to unilaterally
alter any of the original documents, which is why the
blockchain process creates a reliable audit trail.
• Nevertheless, a blockchain will only produce a reliable
audit trail if it has been properly implemented. Just as
errors in implementing encryption can introduce
vulnerabilities that negate the value of encryption, errors in
implementing blockchain can result in unreliable records.
Thus, auditors will need to be able to examine a
blockchain to verify that it is working correctly.
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AIS & BLOCKCHAIN

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Blockchain
• Here is a brief, high-level view of how the blockchain works; that is,
how a transaction is added to a block and how a block is added to a
chain.
• 1. Initiate transaction. Two parties, such as a buyer and a seller,
decide to exchange something of value and request that a transaction
be initiated. Instead of using actual buyer or seller names, a unique
digital signature or identifier is used. This is analogous to using a part
number for a product or a username for a person.

• 2. Validate transaction. The transaction is sent to the peer-to-peer

network nodes who use algorithms to simultaneously validate
transaction details, including its time, dollar amount, and participants.
To achieve a consensus, a simple majority of 51% of the nodes must
validate the block. The number of computers in the peer-to-peer
networks can be as large as desired; the Bitcoin blockchain has
millions, each with a copy of its blockchain ledger. In a private,
permissioned chain, participation in the consensus process is
restricted to approved nodes.
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Blockchain
• 3. Create a block. Since each block in a chain can store up to 1 MB
of data, the verified transactions are combined with hundreds or
thousands of similar transactions to create a new block for the ledger.
The transaction’s dollar amount and the digital signatures of both
parties are stored in the block.

• 4. Calculate and insert a hash. Each block is given two unique

codes, or pieces, of identifying information called a hash, which
distinguishes it from other blocks. Hash codes use a mathematical
algorithm to turn digital information into a string of numbers and letters.
One hash is that of the current block and the second is the hash of the
block that precedes it in the chain. When a new block is added to the
chain, it is linked to the previous block by storing a cryptographic hash
generated from the contents of the previous block. The second hash
ensures that the chain is never broken and that each block is recorded
in a permanent and unalterable way.

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Blockchain
• 5. Complete transaction. The block is added to the
blockchain, and all the other computers storing the
blockchain are updated automatically. This completes the
transaction recording process, and the right of ownership
of the item of value is passed from the seller to the buyer.

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Blockchain
Blockchain has several significant advantages, including the following:
• Accuracy. Transactions are verified by many thousands of networked
computers instead of error-prone humans. Even if a computer makes a
computational mistake, the error would not spread to the rest of the
blockchain unless at least 51% of the network’s computers validated
the mistake.

• Transparency. Blockchain data are transparent. That is, all

transaction details, including participant user names, transaction
amount, transaction date and time, and who entered the transaction,
are open for everyone on the blockchain to see. This includes
authorized regulators, auditors, etc.

• Data consistency. In older legacy systems, data are often located in

multiple databases and finding data can be complex. The data can
also be inconsistent among databases, with some of them updated
and others not. With blockchain, data are stored in one location only.
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Blockchain
• Trust. To ensure that blockchain networks can be trusted, computers
that want to join the blockchain are tested. That is, new users are
required to prove themselves before they can be a part of a blockchain
network. For example, in Bitcoin’s proof of work test, a system must
expend significant computer power and energy to solve a complex
math problem before they can add a block to the blockchain.

• Single set of books. As both sides of a transaction are stored in a

single source, that eliminates some of the need for a set of books for
the buyer and for the seller. One set of books provides a trust level not
present in current legacy systems.

• Cost. Blockchain eliminates the costs of human third-party verification

and many transaction processing costs.

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Blockchain
• Decentralization. By storing the blockchain on all network computers,
the risks of data held centrally is eliminated. For example, if a copy of
the blockchain is hacked or compromised, only that copy is affected.
This reduces or eliminates the traditional requirement for file and
database backups.

• Efficiency. Blockchain works all day, every day—and transactions can

be finalized within minutes and considered secure in no more than a
few hours. Contrast that with limited business hours and waiting days
for transactions to clear and for money to be available.

• Privacy. Although many blockchains are public databases, where

users can view transaction information, users are unable to access
confidential data that identify those engaging in the transactions.

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Blockchain
• Security. A blockchain is difficult to corrupt. There is no single point of
failure; if one node goes down, there is a copy of the ledger on all the
other nodes. Information is shared and continually reconciled by
thousands of computers. New blocks are always added chronologically
to the end of the blockchain. It is very difficult to go back and change a
block’s contents because each block contains its own hash and the
hash of the previous block. If information is changed, the hashes for
the previous and subsequent blocks also change and this disrupts the
ledger’s shared state.

• Provenance. Provenance is the history of ownership of something of

value. The data collected by Blockchain shows who did what, when
they did it, and the history of the item since it was entered in the
blockchain. That history is transparent, verified by all network
participants, and frequently reconciled.

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