From double-entry bookkeeping to blockchain's "triple-entry bookkeeping," why must banks go on the blockchain?

Banks rely on ledgers, and blockchain technology is also fundamentally based on ledgers. However, these ledgers are fundamentally different from each other. Today's banks face a choice similar to that of newspapers and magazines in the past: either embrace the internet and become a new online media, or cling to print media until few people subscribe. The advent of stablecoins has further reinforced this trend.

On the surface, we can see that many banks are starting to adopt encryption technology. But if we look at the most fundamental logic, why will encrypted ledgers eventually replace bank ledgers? This involves accounting methods.

Traditional banks primarily use double-entry bookkeeping, while blockchain introduces triple-entry bookkeeping. Double-entry bookkeeping originated in Italy during the Middle Ages and is the universal accounting foundation for most countries worldwide. It requires that every transaction, such as deposits, loans, and transfers, must be recorded simultaneously in at least two related accounts with equal amounts, ensuring two-way verification of each transaction. For example, a "debit" account will always have a corresponding "credit" account. This ensures that assets = liabilities + equity, achieving balance and facilitating auditing.

When you deposit 1000 yuan into a bank, the bank records: Debit: Cash 1000 yuan; Credit: Customer Deposit 1000 yuan (liability subclass). However, traditional double-entry bookkeeping relies on independent bookkeeping by each party, which is susceptible to tampering and inaccurate reconciliation. For example, the money someone deposits in a bank is essentially a number on the bank's ledger. Theoretically, the bank can modify this number. People can only trust the bank's brand, third-party audits, and oversight; that is, they need to trust that the bank will not act maliciously and that third parties can audit and supervise. For instance, the Enron scandal in 2001 exploited loopholes in double-entry bookkeeping to falsify accounts, leading to bankruptcy.

If we're talking about double-entry bookkeeping, is there also single-entry bookkeeping? Yes, there is. Single-entry bookkeeping is simply recording a single transaction. In comparison, double-entry bookkeeping is more rigorous.

So, what's the difference between triple-entry bookkeeping and blockchain? Triple-entry bookkeeping adds a "third entry" to double-entry bookkeeping: a shared, immutable record. This record can currently be implemented using a blockchain that eliminates the need for trust and intermediaries. This is the advantage of distributed ledgers.

This third entry is often a cryptographically signed receipt or a timestamped block. To prevent tampering, it requires network consensus for verification, such as Bitcoin's Proof-of-Work (PoW) mechanism and Ethereum's Proof-of-Stake (PoS) mechanism. This method solves the trust problem of double-entry bookkeeping; it is tamper-proof and eliminates the issue of inaccurate reconciliation. The so-called "three-way" approach means that the blockchain acts as a "third-party" arbitrator, ensuring the transaction is trustworthy and auditable.

For example, Ethereum is essentially a distributed ledger where every transaction is recorded in the accounts of the sender and receiver (similar to debit/credit in double-entry bookkeeping). It also has a network consensus mechanism (PoS mechanism) to generate an immutable "third entry": a timestamped block with a cryptographic signature.

The three-entry bookkeeping system essentially creates an immutable record within the blockchain. Its existence is more efficient than double-entry bookkeeping, eliminating the need for intermediaries for overall management and reducing auditing work. In layman's terms, double-entry bookkeeping involves each party keeping their own copy; the three-entry system, plus a "smart lockbox," automatically stamps the record and provides nationwide witnessing. It is tamper-proof, and auditing is instantaneous.

Ultimately, from a fundamental perspective, the move of banks onto the blockchain means changing their double-entry bookkeeping system to a three-entry bookkeeping system. Once privacy issues (ZK proof) and compliance issues (KYC) are resolved, the blockchain can greatly improve the efficiency of banking operations. Banks will no longer need to maintain a large and outdated financial system, but can instead switch to a brand-new, non-downtime encrypted on-chain system.

Embrace it or be marginalized – this is one of the most important challenges facing banks and other financial institutions over the next two decades.