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Published May 10th, edit replace rm! Balance sheets are useful terms from accounting showing a snapshot of the financial state of a company. Balance sheets consists generally of 3 columns:. These map directly to the Rights and Obligations I rambled on about a couple of weeks ago. An Asset is a Right and a Liability is an Obligation, just with numbers assigned to it. The Equity I will get to shortly. Essentially it is a simple way of getting an overview of the current value of a business.
Equity is the current value of the business as owned by the shareholders. Essentially ledgers are long lists of transactions between accounts. The transactions are added up to create balances. Traditional currency accounting has a central issuer that issues currency.
Traditionally gold now often USD. This is based on the fact that Bitcoin itself does not have any assets. This would mean that any bitcoin owned by anyone would just be an asset:. What about the Equity? Well a Bitcoin address is not an identity it is just an account. An account has an owner. That owner may or may not be known. But the Equity is the owners share of the account. Which in Bitcoin is always the same as the Balance.
Ethereum Smart Contracts introduce the concept of obligations into the blockchain world. Therefore we must also talk about liabilities now. In my previous Escrow Smart Contract example the Smart Contract controls funds sent to it by a buyer to send on to a seller.
Basic Token Contracts with a central issuer are in some respect just centralized currencies. The issuer holds the funds but the token holders are owed some sort of value. For the token holders each token issued is essentially an asset, which is why us old timers in the Crypto space used to call these Asset contracts instead of tokens. In the following example I am drastically over simplifying this by having an ETH denominated Token Contract to show the basic accounting. Where things start getting complicated is if you decide to issue USD denominated tokens instead of ETH denominated tokens.
But what happens if the price dropped instead? Now your token holders want to get their money out and you now need to find ETH 10, This is where we need some level of off-blockchain integration. But of-course this is not visible on Ether.
Camp , so you will need some kind of legal contract promising off blockchain enforcement of your promises. All the talk at the moment is about the poorly named The DAO which at the time of writing has issued There are many discussions of what a DAO is, but for the sake of accounting purposes I will define a DAO an organization whose ownership is defined by tokens.
This is very similar to a traditional Corporation and the accounting is also very similar. The SmartContract allows any token holder to take out their share of current equity at any point. The balance sheet gets more complex when Proposals starts being approved. I am currently researching this and will write a more in-depth article about it later. But to give an example, The DAO could invest a lump sum into a business in exchange for future rewards.
This would lower the liquid ETH assets by the lump sum amount and replace it on the balance sheet with a longer term asset, called Reward Tokens. But the valuation of them will be important in the future. We need Smart Contracts to manage Liabilities. Unlike Bitcoin Addresses they can contain many types of assets. Mind you the valuation of DAO token will change in the future. Valuation of assets is a complex issue.
There is a fundamental price which is the Stock Holders Equity and there is a market price. Future Market price will take into account future revenue, management, risk and sentimental thoughts into account. The Balance Sheet is only one of the 3 traditional corner stone reports in accounting. Balance Sheets can also seem the most abstract and the hardest to understand.
Yet it proves a really useful tool for us, in particular in understanding and analyzing Smart Contracts. Receive all my latest articles on Bitcoin, Ethereum and building businesses using Blockchain technologies.
My name is Pelle Braendgaard. I live in wonderful Managua, Nicaragua. I work with Clojure , Bitcoin and Ethereum. Stake Ventures Wherein our protagonist chronicles his thoughts and experiences in startups, banking, code and the world. Balance Sheets and Blockchains Published May 10th, edit replace rm! Balance sheets consists generally of 3 columns: Creating a balance sheet is thus pretty simple. Adding up any debts and any assets.
So what would be a helpful way of creating a balance sheet for Bitcoin? Using the traditional currency balance sheet: Assets Liabilities Equity 0 Maybe if we look at it as a DAO it makes more sense: Assets Liabilities Equity This would mean that any bitcoin owned by anyone would just be an asset: Ethereum Smart Contracts Ethereum Smart Contracts introduce the concept of obligations into the blockchain world.
Token Contracts Basic Token Contracts with a central issuer are in some respect just centralized currencies. Floating exchanges rates means risk Where things start getting complicated is if you decide to issue USD denominated tokens instead of ETH denominated tokens. This address would currently have a balance sheet looking like this: A useful tool The Balance Sheet is only one of the 3 traditional corner stone reports in accounting.
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