Creating the companies of the future

By March 20, 2018Publisher

Q: What do Deloitte, IBM, Intel, Microsoft, Deutsche Bank, The World Bank, Toyota and JP Morgan have in common?

A: Their interest in what something called Triple Entry Accounting!

Never heard of it? Don’t worry, most people haven’t yet. Just like most people have never heard of Professor Yuji Ijiri and thus don’t know that he might be one of the most important people of the 20th century.

Triple entry accounting is the sexiest thing that has happened since – well, double entry accounting! Double entry accounting has been the norm since way back in the 1400 hundreds when Venetian monks invented it. Back then it was a big deal, since it dramatically improved on single entry accounting that had been around for over 4.000 years at that point  – since it was invented by the Sumerians.

Triple entry accounting is the third iteration of a practice that’s been around for more than 5.000 years. “So what” you ask?! Well, this gets big!

Single entry accounting basically gave us money and debt. It was the single entry in a ledger of an event like «Ali ows the King 4 acres of land in exchange for 2 gold coins.”

If you couldn’t read or the papyrus the entry was written on was lost – the recording is gone. If the King or his notarius decide to change the numbers, well too bad for Ali.

This simple system created empires for those who controlled wealth, financed wars and provided mobility control over the poor and illiterate. It enabled us to exchange money for services.

The came double entry accounting –  and double entry gave us trade. Double entry was basically the introduction of a duplicate in a ledger that meant two parties had a shared recording of the truth. Basically “The Bank lends John money” in one entry, “John owes the bank money” in a second. This simple improvement changed the world.  In combination with the printed press it paved the way for every kind of trading format we have today. From stocks to interest rates to currencies, central banks, trading houses, nation states and Free Trade agreements.

Hooray!

But – It also gave us The financial crisis, the Enron scandal, Bernie Madoff and every financial Ponzi scheme you can name. It has given us totalitarian regimes and dictators. Because the value of your documentation is only as good as the honesty of the person who issued it to you, or the good will of the ruling powers.

Along comes Professor Yuji Ijiri –  a University Professor of Accounting and Economics at Carnegie Mellon University in the US. In his widely unnoticed book “Momentum accounting and triple-entry bookkeeping” first published in 1989, Ijiri  – basically introduces the idea of a 3rd ledger. This third ledger is a recording of the event where the transaction takes place. “In regular, double-entry bookkeeping, changes in balances such as earning revenues and collecting cash are recorded. These events are recorded with two entries, usually a debit and a credit, assigned on a given date. In momentum accounting, changes in balances are the recognized events.” (from Wikipedia).

This idea of a recording of the event is the fundament in blockchain technology. It enables and absolute and immutable recording of the truth in a transaction by encrypting and sharing the recording of the transaction between two parties on a decentralized network of computers.

Triple entry accounting has so far given us bitcoin…

Here’s why that matters:

Some of today’s biggest issues in governance, finance, international trade and technology are embedded in the issue of trust and transparency. For example:

Voting:

* How many people actually voted in the last election?

* Did they already vote somewhere else?

* Was their vote recorded properly?

* Did their vote reflect their intention?

* Has the vote been tampered with or counted twice?

* Can we audit the voting later, easily and quickly?

* Can we trust that audit?

Identity:

– Are you who you say you are?

– If so, is anyone else claiming to be you?

– If your system collapses (like in Iraq, Syria or Haiti) – then are you still who you say you are?

Triple accounting is not just a copy of a transaction, it is a recorded and distributed immutable copy of that objective reality.

What does this have to do with business?

Think about this: most companies fail. They miss their market or targets and don’t make it past their first five years. Of those that do, only one-third of those make it past their 10th anniversary. In other words: most of the companies you know of today will not exist anymore by the time you retire – including where you work today.

Corporations have a weakness in them much like a plant is a fragile being. In a corporation, a crisis manifests itself and propagate quickly up and down the value chain. If the CEO or board of directors are slow seeing and adapting to the changing tides, or just make the wrong call at the wrong time – it can destroy the company completely extremely quickly.

Companies are fragile because of many factors. They are hierarchically structured (one boss, many employees), subject to external forces like changes in technology, stock markets, economy and consumer patterns.

In comparison to this – Cities are extremely resilient. Some Cities are literally thousands of years old. Varanasi in India has been continuously inhabited since 1.000 BC, Jerusalem sine 2.800 BC!! Cities can make it through wars, new rule, kings and queens, famine etc. Cities continue to grow almost nonstop, while the companies that exist within those cities tend to go belly up. Why is this?

Evolution!

A city is a continuously adapting complex network. Networks are extremely resilient to fault. A City is a decentralized, living organism where each person is free to individually change their role, activity, occupation and domestic state as he wishes. Consider an ant hill: You cannot understand the mechanics or purpose of an anthill by studying a single ant all day, min the same way that understanding a city is impossible by studying one of its inhabitants.

A City has no single, controlling management function, no purpose, and aside from some civic leaders, no real ‘chain of command’. Yet cities continue to grow. «The citizens of the city tend to have a very high stake in the success of the city, either because they own a house, their largest asset, in that city, or because it is part of their self-esteem, culture and persona.» (Eran Shir, Medium)

Decentralized businesses are the future:

At the moment, bitcoin is the first iteration of a decentralized business network with a proven ability to scale and provide trust between parties where there was none. Bitcoin has been criticized for being the payment method of choice between drug dealers and drug users, but if you have an open mind about those early days, it’s hard to argue that there are two entities in commerce that have less trust between them than drug dealers and their customers. One is a criminal and the other is a junkie. Not exactly a loving relationship.

Despite this, Bitcoin and the Bitcoin blockchain has grown past this point and into being the world’s largest and most well-established cryptocurrency. Growth has been at first steady, and then in periods extremely hectic. It’s been live for more than 8 years (!), never once breaking down, going bankrupt or losing sight of its core principles as outlined in the original White Paper by the person or group called Satoshi Nakamoto. The Bitcoin blockchain is, in fact, proving to be antifragile! As the scope, volume and value of Bitcoin grow, the more attractive it is becoming for hackers, skeptics and regulators. And in the face of this, bitcoin has thrived and proven its ability to keep mining new coins, hashing its transaction blocks – and awarding its miners, the computers that keep the blockchain alive and working.

The land Fantasia from Michael Ende’s book  “The Neverending Story” will survive as long as there is at least one human who still believes in it. As long as there is a group of people in the world that will believe in Bitcoin enough to operate a miner and a wallet, Bitcoin will continue to exist.

With the exception of religion and armies, corporations have until now been the most effective large scale way to organize human energy and convert it to value. The reason is the concept of management, culture and organization. Companies rely on double entry bookkeeping of their actions to ensure they have financial control and growth. The same is true for banking, governance and trade.

With blockchain and triple entry accounting, it is possible to organize and manage innovation, trade and transactions around decentralized and synthetic economies, enabling them to exist in a decentralized manner. Like cities, the individual parts and inhabitants have an incentive structure, a defined common principle managed in a smart contract and white paper that attract people to invest their time and energy in it.

These principles can be applied to larger challenges like identity and data management, societal governance and building economies.

We can shift the organization of creation, innovation, management and growth from weak structures with low resilience to change – to decentralized, self sustaining entities that will continue to grow and thrive.

I’ve seen 239 articles in the last 6 months with variations of the title “Bitcoin is dead”. Who knows – maybe one of them will be right one day. But for now, the Bitcoin Blockchain is ticking like a clock, creating a new, encrypted and shared recording of the truth every ten minutes.

«Cities, Companies, Currencies — these are the foundations on top of which we build the human society. Making these basic building blocks resilient and ultimately antifragile is a worthy cause, which could fundamentally evolve the human condition for the better»

This blog post is heavily influenced by  – and borrows a lot from Eran Shirs great article “Bitcoin as the first anti-fragile economic entity”  and Daniel Jeffries equally great article “Why Everyone Missed the Most Important Invention in the Last 500 Years” in Hackernoon

Rickard Lawson, Head of Publishers at Strossle, and country manager for Norway.