Basic Blockchain Technology and Cryptocurrency Transactions

(1) Basic Fundamental

The basic focus of blockchain technology is to provide a decentralized, immutable, and transparent digital ledger for securely recording information and transactions across a network of computers, eliminating the need for a central authority or intermediary.

(2) Blockchain Technology Layers

With this technologists begin to build Blockchain Infrastructures.  The Infrastructures consist of several layers. Typically:

Technical layers

• Hardware Infrastructure Layer: The physical devices that power the blockchain network.
• Data Layer: Responsible for storing and retrieving information on the blockchain.
• Network Layer: Facilitates communication between the nodes on the network.
• Consensus Layer: Ensures all nodes agree on the current state of the blockchain through consensus protocols.
• Application Layer: The interface that users interact with, such as decentralized applications (dApps). 

Scaling solutions

• Layer 1 (L1): The foundational, or primary, blockchain itself, like Bitcoin or Ethereum.
• Layer 2 (L2): Solutions that run on top of a Layer 1 blockchain to improve scalability and speed, such as the Lightning Network for Bitcoin.
• Layer 3 (L3): Higher-level solutions that can provide specialized functions or interoperability on top of L1 and L2 networks. 
  
  

(3)  Project Funding/Community Building/Utility Tokens

In order to fund the development of a blockchain technology the “founders”/”starters” need to raise funding.  The funding is normally raised through “collection of advance funds” and “issue of utility tokens” to funders who believe in the project and purchase such utility tokens for future use in the blockchain.

A utility token is a type of cryptocurrency that grants holders access to a specific product, service, or feature within a particular blockchain ecosystem or platform. Unlike security tokens, which may represent an ownership stake in a company or asset, utility tokens are designed purely for use within their native environment and are generally not considered investment vehicles in the traditional sense. 

Key Characteristics

• Access to Services of the blockchain/platform
• No Ownership Rights to equity of company
• In-Ecosystem Use only in that specific ecosystem
• Less-Regulated
• Value Fluctuation is tied to the demand for the underlying product or service.

Common Use Cases

• Means of Payment to pay for goods, services, or transaction (gas) fees within the platform
• Governance: grant holders the right to vote on proposals and future developments of the project
• Incentives and Rewards: tokens to reward users for specific actions
• Access Rights: to premium features, exclusive content, or participation in specific events or games. 

(4) Basic Blockchain Transactions and Recording

(a) Building the Technology is really writing an software coding largely.  Ie. Development of an Intangible Asset in accounting context.  Typically the Tech person will employ tech experts, purchase SW development tools  etc.  to “develop” into an IA/Intangible Asset (that is supposed to be capable of producing future economic benefits or cash inflows).

For non-developmental type of expenses eg. marketing and promotion, they would still remain as period expenses.

(b) SAFT: Simple Agreement on Future Token  In building the Tech, the founder typically needs to raise funding and would enter into SAFT ie. collecting advances with the contract to “issue utility tokens useable on the future platform”.

As Utility Tokens are useable for future purchases, such SAFT monies are not Capital (like that of a Shareholder) and would therefore be normally seen as Deferred Income. 

The normal accounting revenue recognition rules apply when the Deferred Revenue is to be recognized as Revenue in the future.

(c) Minting and Issuing of Utility Token

Minting is the process of “printing the currency”.  Like a central bank who ‘prints the currency notes’ (be it physical paper notes or digitally in the monetary system’.

Minting of the currency does not mean a recording of the amount of paper notes being printed.  The currency that the Central Bank minted stays in the storage as paper.  The currency becomes “effective legal tender notes” when an Exchange/Transaction occurs eg. the money is supplied through lending by the Central Bank to the institutional commercial banks with an interest rate and supply term being their conditions.   That is the time when the “Issuing” of the currency occurs and an Accounting Records begins for the currency.

Conclusion

We introduced the basic concepts of Blockchain Technology and put them into the accounting contexts.  These include the technology, infrastructures building, platform development and utility tokens etc. We analyse the basic nature of the tech as well as their purposes and functionalities. Derving from there, we understand the basic accounting transactions and their nature.  This allows for proper and correct understanding as well as the recording of the blockchain and cryptocurrency transactions.