What Is a Ledger? Definition and Its Importance to Blockchain
From mining and staking to holding and trading, even long-time cryptocurrency enthusiasts and stakeholders are constantly expanding their vocab to keep up with the evolving crypto industry.
But sometimes, we end up chasing trends (like using crypto to purchase equities) without understanding the core principles that makeup cryptocurrency and blockchain technology. It never hurts to go back to basics for a refresher on these fundamentals.
That’s why today, we’re examining the subject of ledgers, a well-established method of bookkeeping that now plays a key role in blockchain technology and crypto.
Let’s figure out exactly what it means to keep a ledger, why it’s important to the blockchain, and how ledgers fit into the ever-changing puzzle that is the cryptocurrency space.
Basics of the General Ledger
We’ll save you the accounting lesson and jump right into the basics of a general ledger before we move on to more exciting topics like distributed ledgers, blockchain technology, and more.
Definition and Background
A general ledger is simply a record-keeping system for financial data, whether it belongs to a company, an organization, a family, or an individual. It's also known as a principal book of accounts and is composed of multiple general ledger accounts. Information used to create a ledger includes financial statements. Transactions are recorded as credit or debit.
Ledgers are used most commonly in business (like a sales ledger, debtor ledger, or creditors ledger), but more broadly, the concept can apply to anything. Just look across all your bank accounts, credit cards, assets, and liabilities – all of this can be compiled into a general ledger, a one-stop point of access for everything. A ledger is not a balance sheet or a way to track expenses.
Think of a ledger to store and analyze the money that comes into and goes out of an organization so that nothing is lost. A ledger can record information about financial transactions so that it's easily readable and searchable. Typically, financial journals are used to create ledgers. This helps accountants and business owners achieve goals like:
- Ongoing understanding of business trends
- Track records with suppliers, customers, partners, contractors
- Determining when or how to develop new business plans or products
- Ensure the proper payment of taxes and avoid issues with auditing
- Key data to make informed decisions about spending and cash flow
As you can see, the general ledger is the heart and soul of a company’s financial operations. While everyone approaches it slightly differently, there are best practices taught and followed by the world’s top accountants past and present.
Advancements in Ledger Technology
We don’t need to travel very far back when ledgers were entirely paper-based and manually written by hand – hard to believe!
Just as you’d expect, ledgers of yesteryear had many faults and vulnerabilities, the most obvious being the fact that only one ledger existed and could therefore be lost, stolen, destroyed, or manipulated in some way. There was also the issue of double-entry transactions, resulting in inaccurate data.
On top of those shortcomings, a general ledger is also prone to fraud or simply human error. We’ve all done it – writing a wrong number or inputting information into the wrong part of a spreadsheet.
Acknowledging these issues sets the stage for advancements in ledger technology throughout the 20th century and advancing exponentially in the age of the internet. Accounting software is more advanced than ever.
Physical ledgers and financial reports hardly exist in today’s world, and companies use elaborate ERP (enterprise resource planning) solutions to manage everything from ledgers and inventory to orders, payroll, and even customer relations.
The margin for error still exists with 21st-century tools, of course, but things move far quicker and more precisely than anyone from the pre-computer era could imagine.
What Is a Distributed Ledger?
You may hear the term “distributed ledger” on your cryptocurrency research journey. This is where we bridge the gap from the old school to the new school – and into the future.
The key concept to understand here is decentralization, which differs from the ledgers of old, which were entirely centralized and controlled by an administrator. There isn't one person in charge of accounts receivable and other accounting records.
With distributed ledgers, everything relies on consensus, replication, and data synchronization across the entire digital database. That’s the only way to ensure the accuracy of transaction data throughout the whole system.
In other words, a change to the database by a user in Hungary will have to be synced across every node from Houston to Honolulu at a high-speed rate.
You can see how the concept of a distributed ledger builds on the foundations of a general ledger and the many subcategories in accounting, and that’s exactly where we come to the intersection of blockchain, crypto, and all the fascinating developments in tech and finance happening now.
Blockchain Ledgers
Distributed ledgers have been around for a while, with the first sketches drawn up in the early 1990s.
Here’s how distributed ledgers fit into the blockchain equation and how this impacts the functionality and value of cryptocurrencies.
How Blockchain Ledgers Are Different
While all blockchains are distributed ledgers, not all distributed ledgers are technically blockchains.
The difference is how transactions are recorded and stored in blockchain systems, granting more security to those who use the infrastructure for commerce.
This is because every transaction is permanently etched into the blockchain network via building blocks, whereas basic distributed ledgers can still be altered and manipulated.
Understanding this distinction is a key part of any cryptocurrency education, and you can see a whole world of possibilities open up once you grasp the implications of blockchain technology.
The Role of Mining and Blocks
Ledgers, blockchains, cryptos – how does Bitcoin mining factor into all this?
The simple answer is this: mining is the process through which new Bitcoins (or other proof-of-work coins) are generated by solving complex equations.
These equations serve to process and secure transactions on the network as they happen, and when the final answer is solved, a block is created, and a coin is rewarded to the winner.
Discover more about crypto mining here and see why it’s such a crucial part of the process for blockchain, decentralized finance, and more.
What’s Next in Ledgers and Crypto?
The stage is set for decentralized ledgers and blockchain to make a huge impact in tech, and cryptocurrency is just the beginning. Here are some trends to expect in the industry and beyond moving forward.
Mining Expands and Accelerates
Widespread adoption of Bitcoin, investor interest, and even support from governments in certain parts of the world all point to crypto mining as a fast-moving and profitable industry.
Some innovators are even positioning themselves for renewable energy Bitcoin mining, granting a huge cost advantage while setting an example for green energy adoption in other industries.
More Apps, Assets, and Opportunities
Remember, the saga of cryptocurrency and blockchain technology has only just begun – where will we go next from here?
These technologies are already being applied in cybersecurity, digital identity management, health records, legal affairs, and even DeFi apps that allow for lending, interest accumulation, and more.
Learn More About Ledgers, Blockchain, and Crypto
Whether you’re seeking out the next exciting altcoin, researching a new DeFi app, or trying to make a cryptocurrency of your own, don’t forget the distributed ledger makes it all possible.
Never stop learning about distributed ledger technology, stay tuned to blockchain tech, and of course, don’t miss out on the latest crypto news as the story continues each day.
Sources:
General Ledger Definition | Investopedia