And so, what is distributed ledger technology or “distributed ledger” (DLT)?
According to the description of the technology, on Coinmarketrate.com, so-called “blockchains” are formed within the DLT. It is a decentralized database that contains chronological sequences of data blocks. These data blocks, in turn, contain one or more transactions that are linked or combined using cryptographic methods.
In this sense, DLT can be understood as a kind of organizational concept in which there is an electronic data structure for registering relevant data, as well as a protocol or registry that determines how this data is exchanged and compared.
But, this is too superficial an explanation. Let’s dive into the technology itself.
What is the difference between DLT and blockchain?
Blockchain is a subset of DLT. While blockchain describes a data structure that stores a permanent chronicle of transactions, DLT refers to a data structure spanning multiple computers and locations.
Therefore, the term “blockchain” refers to a subset of the comprehensive DLT. Here, a data structure with an immutable, decentralized transaction archive consisting of a chain of encrypted data blocks is stored as a complete copy on the computers of all participants of the blockchain or network. Data blocks are connected and linked together using an algorithm.
The blockchain is used through electronic user nodes, while participation in the network is possible if a participant has a corresponding (public or private) key.
In this context, the verification of transactions in the blockchain is important. This is determined by the protocol rules. These rules prescribe how network participants agree on a certain sequence of data in the blockchain (“consensus”).
The most well-known consensus mechanisms are “Proof of Work” and “Proof of Stake”:
- Proof of Work (PoW): PoW means that each node can check whether the blockchain complies with the rules. To do this, you need to perform arithmetic operations to find a result with certain properties. The result should be obtained by an algorithm known to all nodes. PoW is called “mining” in Bitcoin.
- Proof of Stake (PoS): The PoS consensus mechanism is mainly used for private blockchains. Here, participating nodes must prove that they have a special permission to participate in the network. The generation of a new block is related to the node’s share in the network in terms of cost.
7 most Important characteristics of a distributed ledger
DLT is most easily described in terms of the characteristics associated with this technology. In addition to the decentralized nature of the register, there are seven important characteristics that are described below.
- Community and Network
DLT brings together a group of people with a common interest in using DLT applications.
This group of people can be called a network. In this network, information is exchanged, stored and processed in excess. This also corresponds to the characteristic of decentralization.
The degree of technological freedom to configure or modify the DLT application is very high.
The architecture of the blockchain can be adapted according to the requirements of users. In particular, you can change the degree of publicity and access (see the section “Permitted and unauthorized” or “Public and private DLT”).
- Regulation and legislation
The authorities have the opportunity to determine measures to ensure compliance of DLT systems with regulatory requirements through the regulatory framework.
From a legal point of view, it is necessary to take into account that in practice there are major problems associated with long-term and permanent data storage. On the one hand, the reliability of the data must be ensured before registration, since subsequent deletion is no longer possible. On the other hand, there are also conflicts with European data protection, due to the “immutability” of personal data.
- Transparency of the distributed ledger
DLT is transparent. Network members can fully inform themselves about the activities and properties of other network members.
This is ensured by providing a common, unified and public visibility of transactions carried out on the network.
DLT performance is the performance of a specific task within a DTL application, measured by accuracy, completeness, cost and speed.
Especially in the context of cryptocurrencies, aspects such as transaction fees and scalability play an important role here.
- Distributed Ledger and Security
DLT is characterized by confidentiality, integrity and the ability to store data in a distributed registry.
In this context, confidentiality is also considered an important characteristic, which is ensured through the use of aliases and cryptography. At the same time, ownership rights are clearly documented. As soon as an asset is entered into the blockchain, the ownership of it remains unchanged until the owner confirms the transfer. Verification of ownership rights is also possible at any time by any participant.
The design of the database on the network is immutable and therefore protected from unauthorized access. After adding a transaction to the network, it can no longer be changed.
DLT has a high usability, so that users can realize their own application goals efficiently, efficiently and according to their needs.
At the same time, DLT is scalable. In other words, the system is capable of constantly processing a growing volume of transactions.
DLT: public, private, permitted and unauthorized
The various characteristics of DLT consist of:
- Permitted and Unresolved DLT
The difference between authorized and unauthorized distributed ledgers lies in the restrictions on participation and distribution of roles in the network.
Unauthorized DLT applications are open to everyone, there are no restrictions.
An example is the Bitcoin blockchain network. Access to permitted DLT applications, on the other hand, is regulated. Members of authorized ledgers usually have to register and meet certain requirements to access the network. An example of this is the leading financial DLT Corda from R3.
They are assigned different roles. The group of participants can be open or limited. This, in turn, describes the characteristics of public and private DLTs.
The difference between permitted and unresolved DLTs affects the choice of a consensus mechanism. Unauthorized ledgers primarily use proof-of-work mechanisms. On the other hand, in the case of authorized e-books, a Proof-of-Stake consensus mechanism is used.
- Public and Private DLT
There are no access restrictions in public DLT applications, and any participant who wants to join can do so. In this case, one piece of software is needed that interacts with the network. Network participants can directly control transactions themselves. Examples of public blockchains are Bitcoin and Ethereum.
Private blockchains are available only to a predetermined, limited group of participants.
Transactions are controlled not directly by the participants, but indirectly through an intermediary. This intermediary also serves as the central legitimation body that controls the entire system. Thus, the intermediary acts as the organizer, operator and operator of the private blockchain platform.
Possible applications of DLT
A significant advantage of DLT in practice is the elimination of intermediaries. The integrity of data and processes is ensured by a decentralized network. Thus, arbitrary use of digital content is prevented.
The application is obvious where a direct transaction between network participants should be possible and desirable without dependence on a third party. At the same time, such use cases are interesting in which the immutability of data is essential.
Specific usage examples may be as follows:
- In the financial sector, financial service providers often face the challenge of effectively developing audit processes. Such time-consuming processes can be made more efficient with DLT.
- Within international or global supply chains, DLT can offer the opportunity to make the supply chain transparent and traceable. Important information can be stored in the blockchain automatically and protected from unauthorized access.
- In the public sector, DLT offers the ability to automatically verify and store the validity of certain documents. This allows two independent parties to view the current status of the document at the same time.
- Additional opportunities for general use or advantages in application are due to the fact that DLT guarantees a neutral platform, provides digital identifiers and, therefore, can store digital documents in a tamper-proof form. Documentation of information is also possible in a form protected from forgery. In general, it can be imagined that services can be provided without a service provider or intermediary.
DLT is a promising innovation, mainly used in cryptocurrencies today. Its potential applications in the financial industry, open science, healthcare and logistics are simply enormous. Although, it is still unclear what other application scenarios will appear in the future.