How Blockchain Unlocks the Fourth Wave of Financial Computing
We live and move in an ocean of old data — but that’s about to change.
One of the great illusions of the digital age is that financial transactions are able to take place and be tracked in real-time. In reality, while a million wires shoot back and forth between two banks in the course of a day, the money itself moves only in single massive net transfers. Invoices take weeks to process. Shipment and supply chain tracking is notoriously unreliable. We live and move in an ocean of old data.
That’s all about to change with the fourth wave of financial computing. It began when the first vacuum tube computers sparked to life. It accelerated with the personal computing, web, and mobile revolutions. Now with blockchain we have the power to make financial computing truly real-time. Today I’d like to share a historical paradigm for financial computing and lay out a vision for the financial singularity that lies on the horizon.
BLOCKCHAIN: A QUICK PRIMER
What is the blockchain? Put simply, it’s a new type of database in which entries corresponding to events are immutably time-stamped. Each event occurs when parties agree to mutually e-sign a transaction that conforms to the rules of an associated “smart contract.” Once this transaction is notarized into the blockchain, that commitment is binding and irrevocable.
Blockchain’s cryptographic safeguards have enabled cryptocurrencies like bitcoin to be transferred by strangers globally. These same techniques shall enable global enterprises to transact frictionlessly across firewalls and borders. Additionally, blockchain’s structure offers the potential for users to confidentially analyze their own granular historical data.
Put into finance industry terms, this “one and done” approach equates to a contract, a day journal entry for the first party, a day journal entry for the second party, an audit confirm for each of their auditors, and potential proof to any third-party authority for regulatory compliance or taxation. A perfect day journal is by no means a complete accounting system, but it’s an incredible start.
As Microsoft CEO Satya Nadella recently said:
“we’ve always looked for a distributed database with a trust harness that allows multiple organizations to collaborate, and that performs. Clearly, the blockchain, and the distributed ledger that exists underneath it, is a very novel implementation, which I believe can have massive implications.”
To understand those implications, we have to understand where we’ve been as a species.
WHAT IS FINANCIAL COMPUTING?
Financial computing is the art and science of recording events with a common unit of account (bitcoins, dollars, gold, the skulls of your enemies), a common unit of time, and more than one financial agent. In turn, these events can be integrated into “stocks” like your bank balance and differentiated into “flows” like your annual W-2 earnings.
Due to a curious property of our universe, we are unable to change the past or perceive the future. As a result, financial computing has been broken into three disciplines — accounting (past), contractual matching and binding (present), and financial modeling (future). This financial computing paradigm was perfected in 1500, scaled in 1900, and is currently (1958–2028?) being driven into a real-time mode.
Blockchain is the final chess piece required to drive real-time closed-loop financial computing. The rise of artificial intelligence (AI) and the Internet of Things (IoT) may tip this latest iteration towards financial Singularity — and realize a dream that started with the earliest settled human societies.
THE FIRST THREE WAVES OF FINANCIAL COMPUTING
The first wave of financial computing emerged 7,000 years ago with writing, numbers, and money in ancient Babylon. The earliest systems of writing in human history were overwhelmingly concerned with commodities trading and taxation.
Across cultures and millennia, the abacus, clay tablets, and tally sticks all played a role in capturing the symbolic aspects of transactional exchange (flow) and the accumulation of assets and liabilities (stocks). These tools were adequate for thousands of years in the service of agrarian communities focused on annualized gain-sharing franchises.
The masterpiece of the first wave may have been the Khipu — a clever system of colored knots used by the Incan Empire. The Incas used the Khipu to run their empire with amazing accuracy and timeliness. It was decimalized. It covered all asset and liability classes. It addressed taxation and enjoyed a persistent and mirrored memory. A specially designed messenger-based replication scheme drove the first known networked computer.
The second wave arrived with the dawn of modern accounting. Developed primarily in what is modern-day Italy, the second wave was initiated by Fibonacci’s Liber Abaci (1202) and perfected by Pacioli (1494). It was a convergence of several cutting-edge techniques — Hindu integers, greedy Egyptian fractions, Arabic symbolic algebra, watermarked paper — and the invention of double-entry bookkeeping.
As with Khipu, Pacioli’s ingenuity is not fully appreciated. His symbolic algebra was necessary to perform the sophisticated financial modeling required of a multi-currency, mixed ready-money and barter economy operating across continents. (He also enlisted a capable student, a certain Mr. da Vinci, to illustrate his books.)
Students of Pacioli had to master all three disciplines of financial computing for both voyage accounting and banking problems. This second wave was the first explicit feature-complete scheme for financial computing and could be performed by a single expert in a single day for each enterprise.
With the dawn of truly global enterprises, a third wave of accounting emerged from 1870 through 1920. Cost accounting and tabulating machines made it possible to scale from a single person making entries in a single book, to a staff of hundreds maintaining the books and records of a transcontinental railroad and General Motors.
As the corporate era continued to evolve, MBAs were the leading professionals in financial modeling, lawyers led the way in contracts, and accountants obviously held sway in accounting. But on the MIT campus, change was brewing.
THE UNFOLDING FOURTH WAVE
Few were allowed into 211 Massachusetts Avenue in 1951, but those who did got a sneak preview of the future. Its name was Whirlwind — the world’s first real-time programmable digital computer, complete with a novel magnetic memory and a CRT.
Whirlwind was originally created as a flight simulator, but America’s new Air Force had bigger plans. Could this technology be replicated across the country, networked into all the radar stations to provide real-time warning of a Soviet attack? Jay Forrester worked out the details in a few months and the SAGE air defense system was born. Real-time computer networking, operating with 99.8% uptime, with operator consoles that not only had interactive CRT displays with light pens, but also cigarette lighters and ashtrays. (It was a different time, kids!)
Jay then turned his focus towards real-time models for modern corporations, leveraging recent work in information theory and feedback loops. His famous 1958 Harvard Business Review article still sounds futuristic outside of Silicon Valley and Wall Street. A little-noticed calculation in a footnote suggests that financial modeling should be performed 20 times per week to lower the forecasting error rate. It would be decades before we reached that point.
This was the start of the fourth wave of real-time financial computing — a wave that has been building ever since. Computers took hold in the 1960s and 1970s, became personal in the 1980s, and exploded with the dawn of the web and mobile computing.
Jump ahead to 2008. Real-time modeling tools are taken for granted. But in most industries, contracts are still subject to laborious negotiation before being manually executed and manually mapped into the accounting system. Nick Szabo and his doppelgänger Satoshi Nakamoto were working to change all that with decentralized digital currency. Within that architecture lies the potential to radically transform the movement of physical and digital goods around the world — secure, unforgeable, real-time.
WHAT’S NEXT?
We founded LedgerDomain to deliver blockchain applications to real-time global enterprises and in so doing make a small contribution to the fourth wave. By partnering with leaders and visionaries around the world, we enable more reliable supply chains, real-time transactions, and frictionless accounting.
Most blockchains today only capture one side of the transaction. If you buy a pizza with Bitcoin, you can mention that slice in the notes field, but that’s not true double-entry bookkeeping. However, a flood of feature-complete applications is on the horizon. Watch for real-time communal contracting and accounting in the near future, followed by closed-loop financial computing in bleeding-edge industries.
By combining blockchain, artificial intelligence, and IoT, every transaction can be instantaneous, confidential, unforgeable, trackable, and mined for data and insights. Artificial agents will be designed to optimize the flow of contracts and resources — dumber than humans, but faster and more effective. As technology allows us to transcend our bodies and brains, this is where the seeds of the financial singularity will grow.
