What is a Distributed Ledger Technology?
The term ‘distributed ledger’ has been thrown around too many times around blockchain conversations. Many people consider blockchain technology and distributed ledger as one and the same thing. This is technically not true although the two are related. So, what is a distributed ledger? The answer lies in this article.
I will begin our journey into distributed ledgers by looking at what a ledger is. A ledger is simply a record of related data. It has existed for as long as the societies became complex and required a bookkeeping system to keep track of important economic activities.
Ledgers existed on paper until computers became accessible in the 1980s and 1990s. There was a transition from paper ledger to digital ones. The majority of the new digital ledgers were simply digitized versions of what previously existed on paper.
Since the beginning of time, a single authority has been responsible for validating the authenticity of transactions recorded on the ledgers. However, strides in technology, particularly cryptography, better computing power, advanced algorithms, and more have made it easy for ledgers to function smoothly without relying on central authorities such as banks.
Welcome to distributed ledgers.
What is a distributed ledger?
A distributed ledger is a database kept, updated, and verified by a number of independent computers (nodes) within a large network. Distributed ledgers have distributed witnesses which makes cyberattacks very difficult.
In a centralized ledger, only one entity holds the copy of the ledger. In a distributed ledger, all the nodes of the network hold the same copy of the ledger. No single entity can make changes to the ledger without the consent of the participating nodes.
Any new changes or changes are added to all the nodes in a matter of seconds.
Explaining distributed ledgers
A distributed ledger is best described as a ledger maintained in a decentralized form across a number of geolocations and eliminates the need for third parties such as banks or clearinghouses to maintain the truthfulness of the data it holds.
All the information is securely stored using cryptography and can only be unlocked by the use of keys and cryptographic signatures.
The information entered on the ledger is immutable and cannot be tampered with. Unlike centralized ledgers that have several weak target points, distributed ledgers are harder to hack because all the nodes on the network need to be attacked at the same time. This property makes the records on the ledger resistant to change by single entities.
Why business ledgers are important
The internet has brought the world together and reduced it to a global village. Nowadays, economic activities and transactions cut through geographic boundaries. Business networks allow entities to exchange value between assets. The assets can be anything from cars to deeds, stock certificates, etc.
Some of the ledgers currently in use are problematic. They are prone to inefficiency, high-cost, tampering, and abuse. They lack transparency and can be easily corrupted which leads to disputes. Solving the disputes and reversing the transactions is a costly exercise.
Businesses have lost a significant amount of money due to bad decisions made based on faulty and incorrect data. In best case scenarios, good decisions are delayed as businesses are forced to reconcile different copies of the ledgers.
Different types of distributed ledgers
This is where the confusion lies. It is worth remembering that blockchain is a subset of distributed ledgers.
A blockchain is a distributed ledger but a distributed ledger is not always a blockchain. They are many other types of distributed ledgers and blockchain only happens to be one of them.
A blockchain is an immutable ledger that records transactions on a peer-to-peer (P2P) network. The ledger is distributed across all the network members. A blockchain does not rely on a third party but uses a consensus algorithm to validate transactions.
Hashgraph is a type of distributed ledger technology developed in 2016 by Leemon Baird, the chief technology officer and co-founder of Swirlds. It is considered by many to be superior to the blockchain. Hashgraph is built on the same concepts and refers to blocks as rounds. In all fairness, Hashgraph can be seen as a faster and more secure blockchain.
Hashgraph is regarded to be more efficient than blockchain. In a blockchain, transactions are grouped into blocks and if two miners create more than one block at the same time, one of the blocks is discarded while the other is used. This results in wasted efforts. Hashgraph betters this by making sure that “no blocks” are discarded.
Hashgraph is blockchain without limitations.
DAG stands for Directed Acyclic Graph. DAG is a term mainly used in mathematics and computer science. It is very technical but it can simply be regarded as a distributed ledger that carries all the benefits of blockchain topped off with better performance.
Holochain provides developers with a framework for building decentralized applications. It aims to be infinitely scalable, something that cannot be said about blockchains.
Blockchain use cases
Blockchain’s first and successful application is cryptocurrency. The technology is used to underpin cryptoassets such as bitcoin and Ethereum. However, blockchain has proven to be more than just that. It is slowly finding use cases in several other industries.
Here are some of the industries exploring or implementing the new technology:
- Supply chain management
- Land rights property management
Access to distributed ledgers
One question that comes to mind is who gains access to distributed ledgers. The answer depends on the nature and purpose of the distributed ledger or blockchain.
Let’s take the Bitcoin blockchain as an example. The network is open to all the members of the public and whoever wants to take part in maintaining the network. People can join and leave the protocol at will without affecting the network. There is no authority or board that sits down and decides who should or should not join the network.
There are also what are known as enterprises blockchain. These are created for a specific group of people or companies who share the same interests. For example, a permissioned banking blockchain is only open to banking and financial institutions.
Advantages and benefits of a distributed ledger
One of the major benefits of distributed ledgers is distribution and decentralization. The disadvantage of central ledgers is that they have one source of failure. If the servers are down, the whole network goes down too and brings a lot of inconvenience to users.
A distributed ledger will continue to function as normal even if one or more nodes on the network are down. Being centralized makes traditional ledgers easy targets of cybercriminals. There are several cases where hackers have targeted servers of companies and made off with user data. The recent Facebook-Cambridge Analytica scandal comes to mind.
This is different from decentralized ledgers. The hackers will need to infiltrate more than 50 percent of the network in order to steal data or tamper with it. This is almost impossible in theory.
Decentralized ledgers do not rely on third parties to authenticate transactions. This saves users time and money.
Distributed ledgers give users access and network participants access and control of their own data and transactions.
The future of distributed ledger
The future of distributed ledger will mainly hinge on its practical applications in finance and banking. The World Bank believes that distributed ledger technology has the potential to change the financial sector and make it more reliable, efficient, and resilient. The same can be said about the technology in other sectors as well.
The distributed ledger is still a nascent technology and perfect solutions are still far from being found. The technology can only grow as a result of research and conducting practical pilot projects.
Distributed ledger technology, especially blockchain, has the potential to play a significant role in uplifting emerging markets. Blockchain technology can be used to cater to the unbanked or underbanked in places like Africa.
Most importantly, institutions that have been centralized from the onset are starting to embrace distributed ledger technology. Banks and social media platforms have assembled strong teams to explore distributed ledgers.