Distributed ledger technology(DLT) has been the talk of the town lately. And for good reason. It is, after all, a technology that promises a new way of recording transactions and storing information. It is a networked database that is spread across multiple nodes.
Unlike centralized databases, distributed ledgers do not have a central controlling entity which removes the possibility of a central system-wide failure. The concept of DLT is not exactly new, it has gained visibility due to the rising popularity of blockchain and cryptocurrency.
DLT enhances transparency by allowing every user to easily view the recorded information and the changes made to it. It also ensures that the data is reliable, accessible and securely stored.
This article will help you learn more about distributed ledger technology meaning, its properties, advantages and the difference between distributed ledger technology and blockchain.
A Brief History
Distributed networks are not a new thing. They have been around since the 1990s when computers in different locations started being used to solve problems. These users sitting in different locations would record data and then send it to the central location.
In the 21st century, digital ledgers have become much more advanced. With improved internet access and speeds and intranet protocols, it is possible for huge amounts of data to be collected, sorted, analyzed and stored. But with the distribution of access also comes the need to verify the changes in the data.
Soon, programs were developed to reduce the need for data audits. Instead, consensus mechanisms are used to validate transactions and the data is secured with cryptography. This is a major factor that makes distributed ledger technology crucial to the development of cryptocurrency. Ethereum is a good example of a decentralized programmable platform based on distributed ledger technology.
How Does Distributed Ledger Technology Work?
In a DLT system, there are a number of devices on a network called nodes. Each node stores a copy of the ledger and the record of every change is sent to them. As it works on a peer-to-peer data sharing basis, a consensus needs to be established to validate transactions. Proof-of-Work and Proof-of-Stake are the most widely used consensus mechanisms though there are other options too.
Once the transaction has been validated, it is recorded in the ledger and each node publishes its version of the ledger with the latest transactions. These transactions are then used as a basis for following transactions leading to the development of a blockchain.
The data in the ledger is secured with cryptography and can be accessed only with “keys” or cryptographic signatures. Further, the information stored in the ledger is a permanent and immutable record.
Who Uses Distributed Ledger Technology?
Distributed Ledger Technology has use cases in various industries. It is used in various sectors such as finance, healthcare, security and logistics to better manage things.
Banking
Transferring money via traditional banking channels, especially across borders, can often be expensive and time-consuming. Here, DLT can help in reducing the time, effort and cost needed to transfer money from one place to another. The decentralized network provided by this technology can help in eliminating middlemen making the process simpler.
Supply Chain Management
In a traditional supply chain setup, it can be difficult to trace where a fault happened. However once distributed ledger technology comes into the picture, the process becomes much more transparent. The data once entered in the distributed ledger is unalterable.
You can, thus, easily check out the steps in the chain from the beginning to the end to discover where the mistake happened. The increased transparency will help in making the supply chain more efficient.
Healthcare
DLT can be used to securely store sensitive medical data of patients. Data stored in the distributed ledger is pretty much tamper-proof and even if someone tries to change the data, it will be immediately visible to everyone. Therefore, DLT has great potential in the healthcare sector to ensure secure storage of and quick access to medical records.
Cyber Security
Cyber security is a big concern for nearly everyone these days. DLT comes in handy here to protect data from unauthorized access. It uses cryptographic algorithms to encrypt all information and creates an environment where the data cannot be tampered with easily.
Governance
Distributed Ledger Technology can be useful for governments to make the voting system more transparent and ensure the integrity of the voting process. As the transactions are recorded in an open ledger and are immutable, DLT can help prevent voter fraud and enhance the quality of the governance.
Real Estate
DLT can be used to create a tamper-proof record of property ownership. These records are transparent and openly available to anyone which will help in establishing a definite proof of ownership in the case of real estate.
Distributed Ledger Technology Advantages
Security
DLT is a secure system of storing information. Once data is added to the ledger, the record becomes permanent and no one can update or change it. Manipulating the system would be extremely difficult since the data is kept in each network node. This makes DLT a secure system of keeping records.
Decentralization
The decentralized nature of distributed ledger technology ensures that there is no single point of failure. There is no central point of control and, hence, it is less prone to attacks and system-wide failures. The risk is spread across the nodes in a distributed ledger making it a resilient system.
Efficiency
DLT uses self-executing smart contracts to automate transactions. This helps streamline the process and improve efficiency as smart contracts are automatically executed once certain conditions are met. This can also help in reducing the cost of executing transactions and maintaining records.
Transparency
The distributed ledger technology allows for greater transparency in data and transactions. All users of a DLT can easily view the data and gain insight into the operations of the system. This helps in increasing accountability and reducing theft and fraud.
Inclusivity
Distributed ledger technology can be a great tool to ensure better financial inclusion. It can be helpful for people who cannot access traditional banking channels. DLT can be used to provide them better access to a wider range of financial services.
Distributed Ledger Technology Challenges
Complex Technology
DLT is still a new and emerging technology that can be difficult to implement for many people. It is perceived as a complex technology that requires specialized knowledge to be implemented on a large scale. This is a cost that companies and individuals may not be willing to bear.
Scalability Issues
Distributed ledger technology suffers from scalability issues. As the number of participants increases, the processing capabilities of the DLT system may slow down. This leads to increased costs and with the massive amounts of energy required by certain networks like Bitcoin, can also have a negative environmental impact.
Lack of Regulation
As distributed ledger technology is still in its infancy, the industry does not yet have proper regulation or standardization. The lack of a legal and regulatory framework for this technology can become a major security risk. This further deters industries and organizations from adopting DLT.
Interoperability Issues
For seamless data exchange and collaboration, interoperability between different ledger systems is crucial. But due to the lack of standardization in the DLT industry, this remains a difficult task. There is a need to bridge the gap between different distributed ledger systems and establish interoperability for the technology’s wider adoption.
Immutability as a Downside
While immutability is one of the most important features of DLT, it can often turn into a weakness too. The fact that a transaction is unalterable once recorded in the system can make it nearly impossible to reverse the transaction in the case of an error or fraudulent activity.
What is Distributed Ledger Technology vs. Blockchain?
While blockchain and distributed ledger technology are often considered to be synonymous, this is not actually true. They are interrelated but different things. Blockchain is a subset of distributed ledger technology. Simply put, DLTs can be of several types and blockchain technology is a specific type of DLT.
On a fundamental level, data in a DLT can be chained but it does not necessarily use blocks like blockchain. Whereas in blockchain technology, data is stored in a particular linear system of chained blocks.
Due to their decentralized nature, both DLT and blockchain need to establish consensus to record transactions. For blockchain, the most widely used consensus mechanisms are Proof-of-Work and Proof-of-Stake. DLT has slightly more options available in this field such as Delegated Proof-of-Stake and Byzantine Fault Tolerance.
Further, while blockchain may have multiple use cases, it is primarily associated with the financial sector where it is used for maintaining an immutable record of transactions. DLT, on the other hand, has much wider uses across sectors like healthcare, governance and security.
Importance of Distributed Ledger Technology
The importance of distributed ledger technology arises from its potential to change the way information is recorded, stored and transmitted. It can be a secure method of storing sensitive information and increasing the accessibility of said information.
Let us try to understand this better by focusing on the three main pillars of distributed ledger technology:
Security
Ledger technologies traditionally used in sectors such as banking tend to be centralized ledgers. There is a single point of control with a single entity that is in charge of the ledger. A failure or cyber attack at this central point can bring the whole system to a standstill.
Distributed ledger technology is built on the basis of consensus mechanisms which makes it less vulnerable to central failures or system-wide attacks. It secures data with cryptography and makes it nearly impossible to tamper with the records.
Transparency
In a centralized ledger system, information access is restricted to a select few individuals. While this may be important for sensitive information, in other cases it can lead to unaccountability and increase the possibility of fraud.
When the data is broadly and transparently distributed, as is the case with distributed ledger technology, it builds trust and increases accountability in the long-term. A system where the data can be verified by anyone also discourages bad actors from indulging in dishonest practices.
Accessibility
Distributed ledger technology has the potential to increase access to social benefits and financial services in underdeveloped areas to historically underserved populations.
With this technology, transactions can be recorded and stored using just a network connection as compared to a specific connection like a bank account at a particular branch. Additionally, a shared network can also mean less red tape for the general public while accessing various services.
Conclusion
Distributed ledger technology presents a new way of storing information in a manner that is more secure and equitable. It uses a network of separate but connected devices to keep data records that are permanent and immutable. DLT has many use cases and can be used to keep an accurate record of financial transactions, increase efficiency in supply chains and improve governance.
However, it is still a developing technology and faces many challenges such as scalability issues. These problems need to be addressed to promote wider adoption of distributed ledger technology.