A Brief History of Ledgers
Before starting my investigation into distributed ledgers I did some research on the history of ledgers. What I found really put blockchain in perspective for me.
You’d be forgiven for thinking that “blockchain” and “bitcoin” are just tech memes like “deep learning”, “smart cities” and “the cloud”. The speculative mania in cryptocurrencies might even make them seem like products of human greed rather than ingenuity. In the context of history, blockchain is simply a new way to create ledgers. This is why I think it will have a lasting impact. In this article, I present three examples where new ledger technologies drastically changed society and try to show why blockchain might do the same.
Pictographic Tablets (3,200 BC)
Over 5,000 years ago, the ancient Mesopotamians started to record quantities on clay tablets. They partitioned the tablet into rows and columns. Within each cell, they drew a picture of the type of item and made holes indicating the quantity of it. Each type of item had its own standard pictographic representation, making this ledger language the earliest form of human writing we’ve discovered¹. It’s called “Proto-cuneiform” because it later evolved into a complete written language called “Cuneiform”. In other words, the ancients invented Excel before Word!
The earliest Proto-cuneiform tablets came from Uruk around 3200–3000 BC. At the same time, Uruk became the world’s first city — the first time tens of thousands of people settled in the same area. The specific meaning of many of the pictographs remains a mystery. The best we can do is study them and make a reasonable guess about their function and importance.
The Cuneiform Digital Library Initiative (CDLI) has a searchable database of these fascinating tablets. Here’s some I found that I thought were particularly remarkable:
- W 05233,b: Distribution of different types of grain products to celebrate the festival of the evening star of the goddess Inanna. IMAGE, DESCRIPTION
- MSVO 3, 11: Calculation of how much barley meal and malt were needed to fill an order for several types of beer. Shows on the reverse side the calculations to reach the total requirement of meal and malt from the different quantities of each beer. IMAGE, DESCRIPTION
- MSVO 3, 82: Pictured above. Describes two allotments of barley. The holes each represents 10 gur. A gur was roughly the same as 300 litres¹, so in total each allotment was roughly 6,000 litres. Its front and back have the imprint of a cylinder seal to prove authenticity. IMAGE, LINE ART
- MSVO 3, 29: Describes 135,000 litres of barley (produced, lent, borrowed?) over a period of 37 months IMAGE, DESCRIPTION
And here’s a rough list of features I derived from them:
- A pictographic description of the purpose of each transaction/allotment and other metadata.
- Incremental calculations into sub-totals and then totals so the calculations could be verified.
- The signature of an official to specify who authorised the transaction.
- Means of authentication with a cylinder seal.
- A dating system which can specify a date or duration.
Quite an amazing achievement, but what did they really mean for the development of civilisation? As society becomes more populous and complex, so do the records of events. Being able to record data outside of one’s memory is obviously going to make things more efficient and less prone to error.
I think the tablets also helped facilitate the division of labour. In order to abandon an agrarian life and embrace an urban profession you had to be able to trust the system to feed you. Developing trust can be difficult in a large communities. In small farming communities you can get by with your extended family as your social network, but in a city you need a wider degree of cooperation. Proto-cuneiform allowed contracts to be written down so they couldn’t be disputed later. Cylinder seals provided a technical trust mechanism that made them irrefutable. Having administrative records in general probably made the system seem trustworthy, systematic and fair. Once trust and stability were established people could settle into a specialisation without concern for their survival.
Of course, we can only speculate on how essential these tablets were to the population explosion in Uruk. What we can say is that the invention of ledgers coincided with the dawn of civilisation.
The double-entry system (1340 AD)
Around 700 years ago a new method of accounting emerged amongst the merchants and money lenders of northern Italy. This new ledger technology gave its entries a logical relationship. Every item must be entered twice, once as a credit and once as a debit. According to some scholars, its spread led to what we now call “capitalism”. The Marxist economist, Werner Sombart was one of the first to make the connection⁴:
The very concept of capital is derived from this way of looking at things; one can say that capital, as a category, did not exist before double-entry bookkeeping.
It’s easy to see why he thought this — double-entry is essentially an algorithm that organises the transactions of a business according to the following equation:
Assets = Liabilities + Capital
Where “capital” measures the equity of the business owners. Rearranging the equation we get:
Capital = Assets − Liabilities
It should be obvious what we must do as business owners: Get more assets without adding to liabilities i.e. maximise capital. Hence, Sombart considered double-entry a necessary condition for the transition to a society based on private companies maximising capital i.e. capitalism.
The system works by taking the list of transactions from the merchant’s journal (a single entry ledger) and transferring them to the double entry ledger. Each item goes into the double-entry system by adding a credit in one account and a matching debit in another. To me, it’s a very unintuitive, so here’s an example: you sold a shirt for five dollars that you originally bought for three⁵. In the double-entry system you would:
- Credit your inventory account (an asset account) $3. Credit, because inventory is an asset account which is decreased by crediting. This credit removes the shirt from your inventory.
- Debit your “cost of goods sold” account (a capital account) $3. Debit, because you’ve lost a shirt and debits are decreases in capital accounts.
- Debit your cash account (an asset account) $5. Debit because cash is an asset account which is increased by debiting.
- Credit your “sales revenue” account (a capital account) $5. Credit because sales revenue is a capital account which is increased by crediting.
There are four entries because two things happen in this transaction. You lose shirt and you gain $5. Summing the entries on our capital accounts (cost of goods sold and salves revenue), we have a $5 credit and a $3 debit giving a total credit (increase of capital) of $2.
In a complex business money and assets can be going in and out of different places for different reasons. Entering things twice provides two views of the same event in different locations. You can look at your capital accounts and see what is causing debits (loss of capital). Likewise, you can look at your cash account to see how your cashflow is fairing. Something that is sucking away your cash might be affecting your capital, or it might not, for example if you are paying down debt (recorded in a liability account). The double-entry ledger makes it easy to reason about these things.
As double-entry became ubiquitous it gave businesses, investors and lenders a common language. Financial statements derived from double-entry system, like the balance sheet, became a standard way for businesses to demonstrate their creditworthiness or potential for investment. This paved the way for an investor class, an essential feature of capitalism, which specialised in their analysis.
Once again, we can’t definitively say that double-entry caused capitalism. But to me, it does seem that as the double-entry system spread out of northern Italy, the western world economically re-orientated itself towards the rational and systematic pursuit of profit.
Central banking and fiat — Ledgers entries as money (1931 AD)
Prior to the invention of fiat money, ledger entries always measured a quantity of something tangible owned or owed. A liability on the ledger was someone else’s asset because it represented a quantity of something that the debtor had to transfer to the creditor in the future. So how could you make a ledger asset valuable unless it’s redeemable for something valuable?
The answer lies in the fundamental idea of economic value. Things can be valuable for two reasons:
- They are, or are a means to obtaining, an economic good (something desirable to an individual).
- They are a means to avoiding an economic bad (something undesirable to an individual)
Redeeming ledger entries in gold gives them value because of the former reason. The following quote from Adam Smith illustrates how you can use the latter reason to give paper money value through the tax system:
A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a certain value to this paper money; even though the term of its final discharge and redemption should depend altogether on the will of the prince
— Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations
In other words, Being in jail is an economic bad. Governments have jails. Governments put people in jail for not paying their taxes. So the way to give ledger entries exchange value is obvious: Make people pay taxes by transferring their ledger credits to you. This scheme was realised by central banking system and implemented roughly as follows:
- A bank is given special legal authority. It’s called the central bank. The government of the country has accounts at this bank.
- The central bank issues bank notes which are redeemable in credit at the central bank for the face value.
- The central bank does not redeem its liabilities for anything.
- The government only accepts payment of taxes by crediting its account at the central bank (usually through a commercial bank), or by paying them with bank notes.
With these four points a new ledger technology is achieved. The numbers on the central bank’s ledgers magically have value even though you can’t redeem them for anything!
The history of The Bank of England (BoE) demonstrates the above quite nicely (I’ve labeled the satisfaction of the criteria above):
The Bank Charter Act of 1844 gave the BoE an effective monopoly on issuing bank notes (1). A £1 bank note was redeemable by the BoE for one Sovereign (a gold coin) or could be converted into a £1 deposit (bank credit) (2). In 1931, the BoE stopped redeeming their notes and deposits in gold (3). Now, the bank notes could only be exchanged for credit and vice versa. Gold coins were and are still legal tender, but they trade at a premium to the bank notes so you would be foolish to pay taxes with them. BoE bank credit and by proxy bank notes, are now effectively the only things you can pay taxes with (4).
It’s easy to see how this technology is desirable to governments. Indeed, every government on earth participates in a central banking system of some sort. The supply of central bank credit is firmly in the control of a small number of humans appointed by the government. Gold, on the other hand, is an element on the periodic table that is found all over the world. Its supply is completely outside the political domain. After freeing paper money from gold, the central bank could use its gold like any other asset. More importantly, the central bank can purchase new assets ad infinitum by trading them for credit it created with an irredeemable ledger entry. Usually, this power is used to buy or sell government debt to expand or contract the money supply in accordance with economic data and the economic theories the central bankers hold.
The central banking systems made ledger numbers, not commodities, the money of humanity. Most people spend most of their lives working at jobs to get paid. Now, this concretely means getting an increase in numbers in your bank account or getting central bank notes. Central banking caused a subtle but fundamental change in the human condition. Humanity’s primal motivation to gather wealth was redirected away from real goods to ledger numbers on paper and electronic databases.
Distributed Ledgers (2009 AD)
Just under 10 years ago, an anonymous person called “Satoshi Nakamoto” released a paper called “Bitcoin: A Peer-to-Peer Electronic Cash System”. At its core was a new ledger technology called a “blockchain”. The blockchain runs over a decentralised peer-to-peer network where all participants come to a consensus on the state of the ledger. It was the first ledger that wasn’t the tool of any particular person, group or government. Bitcoin was a decentralised public ledger for the whole world.
But a public ledger of what? Well, just like in the central banking system, the ledger entry numbers (bitcoin), are the money themselves. Like central bank credit, bitcoin isn’t redeemable for anything, but unlike central bank credit you can’t pay taxes with it. The blockchain is just a public ledger for the sake of having a public ledger. Weirdly enough, people decided that owning entries on this ledger was worth paying for.
A full theory as to why people are willing to give up their hard earned bank numbers for bitcoin numbers is outside the scope of this article. I’m going to try and explain that another time. As a starting point, here a few properties distributed public ledgers have that central banking ledgers don’t:
- Permissionless: Unlike central bank or commercial bank ledgers you don’t need anyone’s permission to own an entry. This is especially relevant to the billions of people who don’t have access to reliable electronic financial systems. IOHK, the company behind Ouroboros, is setting up offices in Ghana, Ethiopia and Kenya in 2018 for this reason⁶.
- No central authority: The operation of the protocol is the only thing determines the next state of the system. If you trust the protocol then you can trust the system. This also means there is no way to create new money on the ledger unless the protocol defines a way to do that.
- Contract execution: The blockchain can be extended with a programming language. Complex contracts can be written in the language and publicly executed on the blockchain.
- Public: You can prove you own something or have done something publicly using cryptography as long as it can be represented on the blockchain.
- Optional Anonymity: You can own an entry without ever revealing your personal identity.
These properties don’t by themselves mean that bitcoin or other cryptocurrencies should have exchange value. But if we can somehow assume they can one day have a dependable stable value, it’s easy to see the potential for these ledgers to transform civilisation.
Future
Each of the above ledger technologies probably seemed benign at the time of their invention and early development. It’s only in retrospect, after their logic has had many years to permeate through society, that we can see their significance.
Distributed ledger technology is still in its nascent stage. It has already earned its place in the history of ledgers. Like the other ledger inventions, it might play a major role in the evolution of our future society. So far, it’s most notable effects are the emergence online illicit drug markets, a speculative mania and some cat breeding game. Only time will tell if that’s all it will do!
Notes:
- There are other older instances of humans scratching symbols into things but no earlier use of an actually useful written language has been confirmed.
- http://cdli.ox.ac.uk/wiki/doku.php?id=old_babylonian_scribal_schools, “Bridge between volume and capacity units: 1 sar-volume is equivalent to 60 gur (ca. 18 m3 or 18 000 liters)”.
- http://ianmorris.org/docs/social-development.pdf, see [9.2] Estimates of Western City Sizes
- https://web.archive.org/web/20110722064638/http://www.dse.unive.it/summerschool/course2007/accounting%20and%20rationality.pdf, Sombart’s is quoted on page 33.
- I took this example from this video: https://youtu.be/VxPVM8CRtEM
- Mentioned in this video https://youtu.be/D_QLfnucgh0?t=52m15s
