Digital Financial Reporting

This article published by Coinbase, What is Cryptocurrency?, is one of the best explanations of cryptocurrency and what is going on with decentralized finance.

Per this list of cryptocurrencies provided by Coinmarketcap there are 6,115 different cryptocurrencies at this moment. (I kept pressing the "Load More" button until it did not show that button any longer.) Of that total, 2,598 had some sort of market cap and a circulating supply.

Here is a video that explains wallets. Here is another video that explains wallets.

The XBRL Data Point Model Methodology has become ISO 5116. There are three parts to this ISO standard which include: 

• Part 1: European data point methodology for supervisory reporting
• Part 2: Guidelines for data point modelling
• Part 3: Mapping between DPM and MDM

So what is the XBRL Data Point Model? The Data Point Model is described by EuroFilings thus:

Data Point Modelling is a methodology which intends to create a bridge between the functional design of a reporting framework – “the reporting templates” – and the technical design of an XBRL taxonomy. Over the years, this has resulted in the so-called “Eurofiling Taxonomy architecture” which is employed in the current taxonomies from EBA and EIOPA. The essence of this methodology consists of building a dimensional data model which is the foundation to the schemas and relationships in the Taxonomy.

Currently, the Data Point Model (DPM) is used throughout the European Union, the United Kingdom, South Africa, Moldovia, Israel, amoung other jurisditctions.  The DPM enables data understanding across banking, insurance, investment firms and other verticals of our economy.

I provided a high-level overview of the DPM in a prior blog post.  EuroFiling provides this introduction to the DPM. AReport is a tool for using the DPM

The origin of the DPM is the COREP and FINREP efforts which goes back to 2005 and were driven by the Bank of Spain.  This effort also led to the creation of the XBRL Table Linkbase among other XBRL standards.

Note that the DPM Methodology is different than my method which was gleaned from reverse engineering XBRL-based financial reports that used the US GAAP and IFRS financial reporting schemes.  The DPM and my method are different tools used for different approaches to reporting.

The Object Management Group (OMG) has undertaken a project, the Standard Business Report Model (SBRM), which could potentially formalize a generalized version of my method for general business reporting.  Note that my method fouses on financial reporting.

There is a third approach to implementing XBRL which is referred to as XBRL Global Ledger (XBRL GL). XBRL GL is more transactions oriented.

NOTE: If you are interested in the Data Point Methodology, you might also be interested in the Seattle Method which is another XBRL implementation approach.

Knowledge graphs, DAGs (a.k.a. directed acyclic graphs), Merkle Trees, and Merkle Proofs will transform (are transforming) accounting, reporting, auditing, and analysis profoundly and forever.

As I have pointed out previously, an XBRL-based financial report is a knowledge graph.  Not only are such reports knowledge graphs, they are special types of knowledge graphs that don't have "loops" or cycles. Those special types of knowledge graphs are called directed acyclic graphs.

A Merkle DAG is a type of Merkle Tree. You can create a Merkle DAG from the information contained within an XBRL-based digital financial report.  When thinking about this, most software engineers think about a hash of the XBRL technical syntax that makes up the report.  But you can also think of this while considering the logic of the digital financial report.  That logic is represented by all of the rules related to the report that has been represented using the XBRL technical syntax.

A Merkle proof is an approach to verifying that information stored, transferred, handled, processed, or otherwise used by a computer has not been changed or otherwise tampered with.  You can also verify that the rules used to verify the logic of the report have not been changed.

So, for example, an auditor can verify that an XBRL-based financial report is considered complete, consistent, and properly functioning and the set of rules used to make that determination can be both defined and specified; included in the Merkle DAG and proven using the Merkle proof.

My method specifies a minimum set of information that must be used to verify an XBRL-based financial report.  Effectively, that method defines a level 5 financial report.

If you use Merkle trees and Merkle proofs to verify the report and put those hashes on a publically available digital distributed ledger then you can make known specifically what was reported, understand what information was used to verify that reported information, and be sure that the information has not been tampered with. This, I guess, is how you would create a level 6 digital financial report.

If you use a Merkle tree and Merkle proof at the transaction level you could not only verify the report but also verify the set of transactions which were used to generate that report.  This, I guess, is how you would create a level 7 digital financial report.

Wow!  This is all based on mathematics.  Heres is a prototype XBRL-based financial report plus 94% of the rules that I have come up with to make that report consistent with my method. Here is another prototype that includes the transactions and, I believe, has 100% of the core rules necessary.

Accountants, I am telling you; you might want to read the Essence of Accounting.

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What is a Merkle Tree?

Amazon QLDB

The IPFS whitepaper describes IPFS or the InterPlanitary File System thus:

The IterPlanetary File System (IPFS) is a peer-to-peer distributed file system that seeks to connect all computing devices with the same system of files.

Today, the internet uses location based addressing.  IPFS uses content based addressing. What IPFS is and how it works is explained in very simple terms in this video. This article, What is IPFS? - A Beginner's Guide, digs into the details a bit more.

Filecoin is a decentralized network for storing content that uses IPFS and blockchain technology. This video helps you understand Filecoin.

Key to understanding how IPFS works is having an understanding of Merkle DAGs.  How all this works together is explained in this article, What's really happening when you add a file to IPFS? 

So what does all this mean?

It means that things like IPFS, Filecoin, Merkle DAGs and such can be used to flexibly store information that will always be available and you can trust that the information has not been tampered with. A complete audit trail is provided in an immutable digital distributed ledger.  All of these things provide the physical "stuff" that is necessary to effectively employ the logical "stuff" like knowledge graphs that are used to represent XBRL-based digital financial reports.

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Splitting a Directed Acyclic Graph into Components

Quick Tip = What's a DAG?

What is a Merkle Tree?

Installing IPFS Command Line (This video walks you through installation)