Blockchain and Distributed Ledger Technology (DLT)
Distributed Ledger technology is basically a digital system for recording transactions and details in multiple places simultaneously. They differ from traditional databases because of the lack of central data store or administration.
Distributed ledgers are made up of a collection of computers connected to a network and called as nodes. These nodes process and verify every data block, and thus generate a record of it. Blockchain is a common example of Distributed ledger technology.
DLTs uses cryptography to store data in a secure manner with the use of cryptographic signatures to verify identity. They also employ keys to allow only authorised persons access to the encrypted data. Furthermore, the database is immutable hence, any piece of information stored on it once, cannot be deleted or updated.
Distributed vs Centralised Ledgers
The architecture of a Distributed ledger is such that any change in the ledger will be communicated to all the participants of the network and will have to be approved by them all. All relevant entities can view and modify the ledger as well. This transparency makes DLTs encourage a high level of trust amongst the participants and eliminates chances of fraud.
On the other hand, Centralised ledgers rely on a central authority to validate and verify any ledger modifications or additions. This process can involve personal bias and can be arbitrary as well, thereby reducing inter-participant trust.
Origin of ledgers
Ledgers basically refer to a record of transactions. They have existed for millenia now and were initially stored on paper. Digitalization of ledgers started in the late 20th century as computers became popular.
In the past, ledgers have always been validated by a central authority who ensured the authenticity of the transactions recorded in them. Central authority or third parties (like a bank) verified the transactions before processing them.
Today advanced cryptographic techniques and algorithms are employed to ensure the security of data stored in ledgers. This is vital because trade and commerce have increased manifolds, across borders and so, modern business networks involve an abundance of participants located all over the globe.
Hence, there has been an increasing demand for modifications in conventional ledgers, as they have become costly to maintain and vulnerable to hacking. Distributed Ledger Technology is the perfect use of modern technology to transform this age-old custom for modern uses and needs.
Examples of distributed ledger technology
Different kinds of DLTs are in circulation currently like:
1. Blockchain:
It is a kind of DLT where transactions are stored into blocks chained together. The blockchain is accessible to all nodes in the network and it is the best form of DLT.
2. Tangle:
This is an IOT based DLT. Tangle is a permissionless, feeless, scalable distributed ledger which is designed to support data transfer in a secure fashion.
Other popular DLTs include Corda, Ethereum, and Hyperledger Fabric.
Blockchains & distributed ledgers
Distributed ledger technologies, like blockchain, are peer-to-peer networks that enable multiple members to maintain their own identical copy of a shared ledger. Instead of requiring a central authority to update and communicate records to all participants, DLTs allow their members to securely verify, execute, and record their own transactions without relying on a middleman.
Blockchain and DLT: How they relate and differ
The terms distributed ledger technology and blockchain are often used together — and sometimes even interchangeably. They are not the same, however.
Most simply put: Blockchain is basically a type of DLT, but not all distributed ledger technology uses blockchain technology.
Both create decentralised ledgers using cryptography with immutable records that include time stamps and are considered unhackable. They can both be public (can be used by anyone) or permissioned (private). But, blockchain employs blocks of data that are chained together to create the distributed ledger, just as the name describes. But DLT also includes technologies that use other design principles to create a distributed ledger. To be considered a DLT, the technology need not structure its data in blocks.
Public vs private and permissioned vs permissionless DLT
Distributed ledgers can be categorised as “private” or “public” and “permissioned” or “permissionless” — they can be any combination of any of the two. Let us try and understand them.
Private / Permissioned: This is a network without decentralisation, some identification is needed to join the network both as an application or as a node and any party can be removed without warning.
Private / Permissionless: Requires that applications deployed in production be invited to join the network and can be removed without warning at any time. The nodes which constitute the network and run that application can freely and anonymously join and contribute, typically in exchange for a network’s native cryptocurrency.
Public / Permissioned: Allows applications to be deployed in production or removed, without having to notify anyone, reveal their identity, or meet any application criteria requirements. The nodes which constitute the network and run said applications must be invited to join the network.
Public / Permissionless: This type of network is the most decentralised. Applications can be deployed in production or removed, without having to notify anyone, reveal their identity, or meet any application criteria requirements. Additionally, the nodes which constitute the network can freely and anonymously join and contribute, typically in exchange for a network’s native cryptocurrency.
Reaching consensus
Consensus is very vital in a decentralised ledger and it can be achieved only if all the nodes are being updated simultaneously. Discrepancies make the process tedious and might lead to some major errors too. To keep the ledgers consistent, DLTs use a consensus algorithm which is a method of synchronising the data across the system.
A variety of consensus algorithms are available in the market but the most basic and intuitive one involves a simple voting system. Each node calculates how they think they should update the ledger based on the data available to them. The nodes then calculate the vote and upgrade their ledgers based on the consensus. But, as blockchain systems have scaled with advancement, this voting system seems to be incompetent as it requires a lrage bandwith and processing power. So new consensus algorithms are developed that are easy but also efficient.
Cryptocurrency and compensating network participants
DLTs require a lot of processing power per transaction to carry out their consensus algorithms.DLTs divide the computational burden, just as each participant is responsible for maintaining the ledger.For the consensus algorithm and to process transactions, every node must contribute computing power.However, computing power is not free.
So digital ledger technologies typically reward active members with cryptocurrency as a means of compensating them for their work and encouraging further participation. Cryptocurrency is a virtual, encrypted token that can be exchanged across a decentralized network. Participating in the network allows you to earn or exchange these coins.
While cryptocurrencies have no inherent value (much like fiat currency), they may be valuable to participants in a network because they are necessary for performing actions quickly, securely, and cost effectively across the decentralised network. Not only is their work rewarded in cryptocurrency, the value of that currency may rise as the network grows and more build useful applications on the distributed ledger platform.
Why are distributed ledger technologies useful?
Distributed ledger technologies allow businesses and individuals alike to quickly carry out secure transactions without needing to rely on a middleman. By avoiding intermediaries, distributing control of the ledger, and providing a tamper-apparent network, DLTs present a more cost-efficient, accessible, and reliable transaction platform than centralised ledger systems.
Remove the middleman
The robust security system for blockchain ensures transactions without needing any intermediaries which makes it secure and confidential. The decentralised nature prevents data access to other third parties thereby reducing cost and making the process more secure and cost efficient.
Accessibility
While centralised systems monopolise control and limit access to their ledger, DLTs provide a much more accessible service. DLTs allow businesses and individuals to carry out transactions freely, without relying or trusting any other individual.
Tamper-Resistance
The extensive hashing algorithm and subsequent cryptographic techniques used on a blockchain increase its security and make it almost impossible to be altered or tampered.
Immutability and controlled mutability
Some distributed ledgers take security very seriously by establishing immutability, preventing any and all participants from changing established records for any reason. Members of these immutable DLTs can only view the ledger and carry out new transactions. Even if all participants in the network wished to change the ledger, there would be no pathway within the system’s architecture for that change to occur.
Therefore, participants of an immutable distributed ledger can be certain that their ledger is not only tamper-apparent, but tamper-proof. A distributed ledger technology is immutable if it does not provide any participant or group of participants the ability to alter or delete established records.
Controlled mutability is probably a better option: no malicious participant or group of participants can alter the records without everyone knowing (tamper-apparent), but the DLT can adapt to bugs and changing regulations. The council will have the ability, through unanimous vote, to remove illegal or malicious content to abide by local and global regulations. Because the council will be completely transparent and bound by term limits, participants will observe and hold the council accountable for any changes that they may make to the ledger.
Importance of DLT
1. Decentralisation makes it more trustworthy and efficient as compared to conventional ledgers
2. It is immutable and resistant to hacking or frauds.
3. All participating nodes have access to the data which makes the process reliable
4. Allows real-time data sharing which also ensures that the ledger is always updated.
5. DLTs offer an extra layer of security because of the peer-to-peer network. As it lacks a single point of failure that hackers often target.
6. Quick and efficient transactions can take place and be recorded at the same time.
7. The lack of any middlemen or central authority also reduces the cost of transaction.
Benefits of DLTs
1. Lower operational costs due to elimination of central authority
2. Increased data transparency
3. Enhanced transaction speeds
4. Low risk of frauds, tampering or data manipulation’
5. Increased reliability and resiliency as there is no single point of failure
6. Higher level of security
Future Scope of Distributed Ledger Technology
Experts believe that DLT could prove to be revolutionary technology. It could drastically improve the existing processes for storing transactions and also produce new innovative applications in the future.
The fact that DLTs allow transactions to occur in real time across global networks makes it more useful and indispensable. However, the adoption of this technology will undoubtedly be slow at first and will gradually gain traction. It has to be noted that organisations will face some issues in implementing and scaling DLT.
Conclusion
In this article, we learnt about Distributed ledger technology, what it is, how it became popular, how it differs from the existing centralised ledgers. We also learnt the origin of ledgers and discussed some primary examples. We then learn the importance and benefits of DLTs and discussed its future scope.