UNIT

15 Block Chain Technology

Names of Sub-Units

Introduction to Block Chain Technology, Working of Block Chain, Crypto Currency

Overview

This unit begins with the introduction to block chain technology. Further, it discusses the working of
block chain technology and crypto currency.

Learning Objectives

In this unit, you will learn to:

 Identify the introduction to block chain technology
 Analyse the meaning of block chain technology
 Discuss the working of block chain technology
 Appraise the block chain structure
 Explain the crypto currency
JGI JAIN
DEEMED-TO-BE UNI VE RSI TY
Financial Analytics

Learning Outcomes

At the end of this unit, you would:

 Analyse the introduction to block chain technology
 Explain the meaning of block chain technology
 Appraise the working of block chain technology
 Identify the block chain structure
 Describe the crypto currency

Pre-Unit Preparatory Material

 https://ecapitaladvisors.com/blog/what-is-financial-analytics/
 https://www.gartner.com/en/finance/glossary/finance-analytics

15.1 INTRODUCTION
In January 2009, Bit coin was unveiled to the world beneath a veil of secrecy. The idea was presented in
a white paper, Bit coin: A Peer-to-Peer Electronic Cash System, released in 2008 under the pseudonym
Satoshi Nakamoto; the authorship of the article is unclear to this day. The underlying technology, block
chain, is understood to have consequences for the accounting profession. After more than a decade,
many people are still unsure what block chain means for the accounting profession.

It’s important to note that Bit coin was neither the first nor the final effort to create digital money (also
known as crypto currency) and a block chain. Several efforts were made in the early 1980s, and they are
still evolving today:

David Chaum, a computer scientist, presented the e-Cash idea in 1983.

David Chaum developed DigiCash in 1990 to try to put the e-Cash idea into practice. In 1998, the company
declared bankruptcy.

Adam Back, a computer scientist, invents Hash cash in 1997. It’s comparable to Bit coin’s underlying
technology, but it’s less secure.

Wei Dai, a computer engineer, and Nick Szabo, a computer scientist and legal researcher, produced the
B-money and Bit Gold ideas in 1998. The plans have yet to be put into action.

Over 1,600 digital currencies based on block chain are now in use. Some opponents consider virtual
currencies to be speculative assets, while others consider them to be sound investments. Regardless, the
block chain technology that underpins it is significant to both accountants and auditors.

As we all are aware that the world has become digital and coming close due to the technological changes
and innovations, the economical stage of all the countries is in a rapidly changing situation. Due to the
digitisation, and the virtual existence of the currencies and other required documents the transactions

2
UNIT 15: Block Chain Technology JGI JAIN
DEEMED-TO-BE UNI VE RSI TY

between two or more countries can be accomplished in a speedy way compared to the earlier era in
which the transactions are made in the paper money. Now in the world of paperless environment, it is
needed that the transactions are undertaken in the digital mode and also the payments as well.

The developing country like India is also converting their economy into the online transactions by
launching the digital currency in the year 2021-22. Digital currencies have no physical properties and
are only available in digital form. Computers or electronic wallets connected to the internet or specified
networks are used to conduct digital currency transactions. Physical currencies, on the other hand, such
as banknotes and minted coins, are palpable, meaning they have distinct physical qualities. Only when
their holders have physical possession of these currencies are transactions involving these currencies
possible.

This unit will focus on such a digital currency named as crypto currency. Also, it will explain what is
block chain technology, how it actually works what are the types of this block chain technology etc. Let
us now study the concept in more detailed form through the following points.

15.2 INTRODUCTION TO BLOCK CHAIN TECHNOLOGY

Stuart Haber and W. Scott Stornetta, two research scientists, first discussed block chain technology in
1991. They aimed to offer a computationally feasible approach for time-stamping digital documents in
order to prevent them from being backdated or tampered with. They created a system that stores time-
stamped documents via a cryptographically secure chain of blocks.

To make a secured chain of blocks,’ Merkle Trees are used. It kept a succession of data records, each of
which was linked to the one before it. The most recent record in this chain contains the entire chain’s
history. This technique, however, went underutilised and the patent expired in 2004.

Hal Finney, a computer scientist and cryptographic activist, proposed the Reusable Proof Of Work
(RPoW) system as a prototype for digital payment in 2004. The double-spending problem was overcome
by RPoW by registering the ownership of tokens on a trusted server. This server was created so that
users all over the world may check its accuracy and integrity in real time.

Satoshi Nakamoto also theorised the principle of distributed block chains in 2008. He improves the
architecture by adding blocks to the initial chain without requiring them to be signed by trustworthy
parties in a novel method. A secure history of data transfers would be stored in the updated trees.
Block chains have progressed in a steady and promising manner. The terms block and chain were used
independently in Satoshi Nakamoto’s original paper, but by 2016, they had become synonymous as the
Block chain.

A block chain is a decentralised database that is shared across nodes in a computer network. A block
chain is a database that stores data in a digital format. The block chain’s novelty is that it ensures
the accuracy and security of a data record while also generating trust without the requirement for a
trusted third party.

The structure of the data on a block chain differs from that of a traditional database. A block chain
organises data into groupings called blocks, each of which contains a collection of data. Blocks have

3
JGI JAIN
DEEMED-TO-BE UNI VE RSI TY
Financial Analytics

specific storage capacities, and when they’re full, they’re closed and linked to the preceding block,
producing a data chain known as the block chain.

Block chain is a type of shared database that differs from traditional databases in the way it is stored:
data is stored in blocks, which are then connected together using cryptography. As new information is
received, it is entered into a new block. Once the block has been filled with data, it is chained onto the
previous block, forming a chronological chain of data.

A block chain can hold a variety of data, but the most prevalent application so far has been as a
transaction ledger. In the case of Bit coin, block chain is employed in a decentralised manner, meaning
that no single person or group has power—rather, all users have control collectively. Decentralised
block chains are immutable, meaning that the data inputted cannot be changed. This means that
transactions in Bit coin are forever recorded and accessible to everybody.

Following are the types of block chain structures:

Block Chain
Structure

Public Private Consortium Hybrid

Block Chain Block Chain Block Chain Block Chain

Governed by a Controlled by a
Completely Partially Group of Single Organisations,
Decentralised, Decentralised, Organisations, With a level of
Allows Any One Public Access is More Decentralised Over Sight
to Join Restricted Than Private Performed by
Block Chain Public Block Chain

Figure 1: Types of Block Chain Structures

15.3 WORKING OF BLOCK CHAIN

Many firms around the world have been incorporating block chain technology in recent years. But how
does block chain technology work in practise? Is this a major modification or a minor addition? Block
chain advancements are still in their infancy, but they have the potential to be transformative in the
future.

The purpose of block chain is to enable for the recording and distribution of digital data without the
ability to modify it. The basis for immutable ledgers or transaction records that can’t be modified,
deleted, or destroyed, under this technique is a block chain. Block chains are also known as distributed
ledger technology (DLT) because of this.

4
UNIT 15: Block Chain Technology JGI JAIN
DEEMED-TO-BE UNI VE RSI TY

Block chain is a hybrid of three cutting-edge technologies:

 Keys used in cryptography
 A peer-to-peer network with a distributed ledger.
 A computer system for storing network transactions and records.

The working of block chain technology can be explained with the help of the following pictorial
representation:

1. A New Transaction is 6. The Transaction is

Entered Complete

2. It is Transmitted to a 5. Block are Chained

Network of Peer to Together Creating a
Peer Computers Long History of
Scattered Across the Permanent
World Transactions

4. On Confirmation to
3. The Network Solves
be Legitimate
Equations to Confirm
Transactions, They are
The Validity of the
Clustered Together
Transaction
Into Blocks

Figure 2: Working of Block Chain Technology

There are three important concepts in block chain technology:

 Blocks: There are multiple blocks in every chain. A nonce generates the cryptographic hash when the
first block of a chain is formed. The data in the block is considered signed and irreversibly connected
to the nonce and hash unless it is mined.
 Miners: Mining is the process by which miners add new blocks to the chain. Every block in a block
chain has its own unique nonce and hash, but it also refers to the hash of the preceding block in the
chain, making mining a block difficult, particularly on big chains.
 Nodes: Decentralisation is one of the most essential concepts in block chain technology. The chain
cannot be owned by a single computer or entity. Instead, the nodes connecting to the chain form a
distributed ledger. Any type of electronic equipment that saves copies of the block chain and keeps
the network running is referred to as a node.

5
JGI JAIN
DEEMED-TO-BE UNI VE RSI TY
Financial Analytics

15.4 CRYPTO CURRENCY

A crypto currency is a currency which proves itself useful for the verification of transfer of assets, for
controlling the addition of new units as well as securing the financial transaction making the use of
cryptography. It can be said that the most well-known use of block chain is in the crypto currencies.
The crypto currencies are the digital currencies which can be used for buying goods or services. The
examples of the same include – Bit coin, Ethereum or Litecoin.

The crypto currency, which is similar to the digital form of cash, can be utilised to purchase almost
everything including your lunch to your next home. However, the crypto makes a use of block chain in
order to play both the roles – a public ledger and an enhanced cryptographic security system. Therefore,
there is always a surety for the online transactions as well as there is a track of all those transactions as
it records each and every transaction.

In today’s date, there can be seen approximately 6700 crypto currencies all over the world and which,
in total, carries a market capitalisation almost around $1.6 trillion, into which there is a major holding
of the value by Bit coin. One can notice the incredible popularity of these tokens over the last few years,
which shows – 1 Bit coin = $60000.

The working of crypto currency can be explained as below:

1. The crypto currency can be used as a digital form of cash.
2. The currency can be purchased making a use of one digital wallet or trading platforms out of the
several wallets and platforms available.
3. These wallets are then transferred digitally after purchasing of an item to the new owner with the
block chain that has recording of the transactions.

In a nutshell, the crypto currencies can appeal that it records everything in a public ledger and the same
is secured with the use of cryptography which makes a record of every payment that is time stamped,
secure and irrefutable.

The crypto currency is seeking the attention of everyone due to the following major reasons:
1. The crypto currency carries its own identifiable number which is attached to the owner, because of
which the theft becomes much harder in the security of block chain.
2. There is a reduction in the need for individualised currencies and central banks because of crypto
currency. The block chain technology makes it possible to send the crypto currency anywhere and
anyone in the world. It does not require any currency exchange or any interference from the central
bank.
3. It can be said / noticed that the crypto currency is proving useful to some people to become rich.
The price of the crypto, especially bit coin is being driven up by some speculators and some early
adopters are able to become billionaires.
4. Day-by-day, number of corporations are bringing themselves to the idea of a digital currency for
payments which are based on the block chain technology.

6
UNIT 15: Block Chain Technology JGI JAIN
DEEMED-TO-BE UNI VE RSI TY

Finally, it can be noted that, the crypto currency has an important advantage over normal currency
that crypto does not have control of any central authority.

This helps to avoid the funds to be hacked or stolen as it does not have any central point of failure or a
‘vault’. The crypto currency has a shared and distributed nature which always keeps everyone on the
same page.

The crypto currency, which is based on the block chain technology having a transparent and distributed
nature, becomes more secure to utilise and deal in any transaction and making the payments.

Conclusion 15.5 CONCLUSION

 Stuart Haber and W. Scott Stornetta, two research scientists, first discussed block chain technology
in 1991.
 They created a system that stores time-stamped documents via a cryptographically secure chain of
blocks.
 To make a secured chain of blocks,’ Merkle Trees are used. It kept a succession of data records, each
of which was linked to the one before it.
 In 2004, Hal Finney, a computer scientist and cryptography campaigner, suggested the Reusable
Proof Of Work (RPoW) system as a digital payment prototype. The double-spending problem was
overcome by RPoW by registering the ownership of tokens on a trusted server.
 Satoshi Nakamoto also theorised the principle of distributed block chains in 2008. He improves the
architecture by adding blocks to the initial chain without requiring them to be signed by trustworthy
parties in a novel method.
 A block chain is a distributed database shared by nodes in a computer network. A block chain is a
database that stores data in a digital format.
 A block chain organises data into groupings called blocks, each of which contains a collection of
data. Blocks have specific storage capacities, and when they’re full, they’re closed and linked to the
preceding block, producing a data chain known as the block chain.
 Decentralised block chains are immutable, meaning that the data inputted cannot be changed.
 The purpose of block chain is to enable for the recording and distribution of digital data without the
ability to modify it.
 Block chains are also known as distributed ledger technology (DLT).
 Block chain is a hybrid of three cutting-edge technologies:
 Keys used in cryptography
 A peer-to-peer network with a distributed ledger
 A computer system for storing network transactions and records

7
JGI JAINDEEMED-TO-BE UNI VE RSI TY
Financial Analytics

 There are three important concepts in block chain technology:

 Blocks
 Miners
 Nodes
 A crypto currency is a currency which proves itself useful for the verification of transfer of assets,
for controlling the addition of new units as well as securing the financial transaction making the
use of cryptography.
 The crypto currency, which is similar to the digital form of cash, can be utilised to purchase almost
everything including your lunch to your next home.
 The crypto currency has an important advantage over normal currency that crypto does not have
a control of any central authority. This helps to avoid the funds to be hacked or stolen as it does not
have any central point of failure or a ‘vault’.
 The crypto currency, which is based on the block chain technology having a transparent and
distributed nature, becomes more secure to utilise and deal in any transaction and making the
payments.

15.6 gLOSSaRy

 Block chain: A block chain organises data into groupings called blocks, each of which contains a
collection of data
 Blocks: There are multiple blocks in every chain. A nonce generates the cryptographic hash when
the first block of a chain is formed
 Miners: Mining is the process by which miners add new blocks to the chain
 Crypto currency: A crypto currency is a currency which proves itself useful for the verification
of transfer of assets, for controlling the addition of new units as well as securing the financial
transaction making the use of cryptography

15.7 CASE STUDY: CRYPTO CURRENCY BRINGING IN USE

Case Objective
This case study highlights whether the crypto currency be embraced or not.

Thorsten Konig, The CEO of Ivory Tower, which is a leading online education platform in the world,
wanted to implement the use of crypto currency for paying and receiving the amounts in regard to
his venture. Thorsten had been talking about incorporating crypto currencies into the company for
months. He was a big supporter of Bit coin and had invested roughly 5% of his own money in it.

The CEO had ordered Ankit, who is a CFO of Ivory Towers, to look into collecting tuition payments and
holding some of Ivory Tower’s cash reserves in crypto currency a few weeks ago. Thorsten had also
started mentioning “our crypto future” in media interviews, causing suspicion that he will develop or

8
UNIT 15: Block Chain Technology JGI JAIN
DEEMED-TO-BE UNI VE RSI TY

buy a crypto trading platform. Ankit, on the other hand, knew Thorsten was committed to Ivory Tower
for at least the next three years; all he wanted to do was integrate it with his new hobby. To Thorsten,
receiving Bit coin fees and investing in the currency was as simple as doing business in euros and
dollars, which Ivory Tower already did. Bit coin acceptance might help the corporation, which is based
in the United States, hedge against dollar inflation even more.

Ankit was well aware that the situation was far more convoluted. Even established crypto currencies
like Bit coin, which were acquiring widespread appeal, were highly volatile, with value fluctuations that
made them look more like speculative stocks. Sure, the company could accept Bit coin payments and
then convert them to dollars, but it had to decide if it was better to establish the necessary internal
competence or employ a third-party provider to handle transactions. And investing earnings in crypto
currency was a very other story.

Just thinking about the financial-reporting difficulties made Ankit’s head hurt. Then there was his
fiduciary role as CFO: Did shareholders really want Ivory Tower to bet on bit coin if doing so would
jeopardise the company’s ability to produce better technologies and courses and expand its reach in the
future?

He arranged a meeting of all the officials of the company in order to get the opinions of all of them.
Some were of the opinion that the company can accept the fees in Bit coin, crypto currency. “It fits with
our mentality,” Shira Peretz, Ankit’s deputy, said. “Embracing the future, championing new technology,
shaking up the stodgy educational world”. However, other officials were of the opinion that the Bit coin
is not at all reliable; it does not have GAAP guidance on how to make an accounting of the same.

After considering all the point of views of all the officials, Ankit got a bit confused about the issue. If
monetary exchange is going to trend toward crypto, Ivory Tower must remain ahead of the curve.

Experts’ opinion on the above issue

1. Ankit should back the movement to accept Bit coin as a mode of payment as well as a balance-
sheet investment. With a principled, decentralised, transparent, and consensus-based development
methodology, it is the most secure and resilient.
2. The case against Ivory Tower accepting and holding Bit coin is significantly more compelling than
the one for it. The initiative should be opposed by Ankit. It is correct that crypto currency is far too
volatile to be considered bankable. If Ivory Tower wishes to protect itself from inflation, gold and
real estate are two options.

Questions
1. What are the plus points of Bit coin those are mentioned in the above case?
(Hint: Bit coin acceptance might help the corporation, which is based in the United States, hedge
against dollar inflation even more)
2. Which are all the risks and ill effects of the Bit coin?
(Hint: Bit coin is not at all reliable, it does not have GAAP guidance on how to make an accounting
of the same)

9
JGI JAINDEEMED-TO-BE UNI VE RSI TY
Financial Analytics

15.8 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. Explain the development process of block chain technology.

2. What do you mean by block chain technology? Explain in short.
3. What are the types of block chain?
4. Explain briefly the working of block chain technology.
5. What is crypto currency? How does it work?

15.9 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

1. Stuart Haber and W. Scott Stornetta, two research scientists, first discussed block chain technology in
1991. They aimed to offer a computationally feasible approach for time-stamping digital documents
in order to prevent them from being backdated or tampered with. Refer to Section Introduction to
Block Chain Technology
2. A block chain is a decentralised database that is shared among computer network nodes. A block
chain acts as a database, storing information in a digital format. Refer to Section Introduction to
Block Chain Technology
3. Following are the types of block chain structure:
a. Public block chain
b. Private block chain
c. Consortium block chain
d. Hybrid block chain
Refer to Section of Introduction to Block Chain Technology

4. The purpose of block chain is to enable for the recording and distribution of digital data without the
ability to modify it. The basis for immutable ledgers or transaction records that can’t be modified,
deleted, or destroyed, under this technique is a block chain. Refer to Section Working of Block Chain

5. A crypto currency is a currency which proves itself useful for the verification of transfer of assets,
for controlling the addition of new units as well as securing the financial transaction making the
use of cryptography. It can be said that the most well-known use of block chain is in the crypto
currencies. Refer to Section Crypto Currency

@ 15.10 POST-UNIT READING MATERIAL

10
UNIT 15: Block Chain Technology JGI JAIN
DEEMED-TO-BE UNI VE RSI TY

 https://www.techtarget.com/searcherp/definition/financial-analytics
 https://www.careerizma.com/careers/financial-analyst/

15.11 TOPICS FOR DISCUSSION FORUMS

 Make a group of three/four friends to discuss about the concept of block chain technology.

11