Distributed Ledger Technology

DLT: Distributed Ledger Technology – What is it and how does it work?

A distributed ledger is a database that exists across several locations or among multiple participants. By contrast, most companies currently use a centralised database that lives in a fixed location. A centralised database essentially has a single point of failure. However, a distributed ledger is decentralized to eliminate the need for a central authority or intermediary to process, validate or authenticate transactions. Enterprises use distributed ledger technology to process, validate or authenticate transactions or other types of data exchanges. Typically, these records are only ever stored in the ledger when the consensus has been reached by the parties involved.

All files in the distributed ledger are then timestamped and given a unique cryptographic signature. All of the participants on the distributed ledger can view all of the records in question. The technology provides a verifiable and auditable history of all information stored on that particular dataset.

Blockchain

Blockchain is one type of a distributed ledger, which organizes data into blocks, which are chained together in an append only mode.

Several computers across a network have the blockchain software installed. Each transaction is shared to these nodes in the network and they compete (in Bitcoin jargon ‘mining’) to verify the transaction. The first one that verifies it also adds the block of data to the chain and gets an incentive for being first. The other nodes next check the transaction, agree that it’s correct and replicate the record. All the computers then keep an updated copy of the ledger, and this acts as a form of proof that the transaction occurred. Just as in cryptocurrencies like Bitcoin and others, which are based on blockchain technology, encryption software guarantees no one can ever delete or change blocks.

Its main advantages are:

  1. Speed – The absence of a central authority in theory makes blockchain faster. If you’re relying on a central certifier, you depend on limited resources. Clearing and settling stock trades, for instance, can take days and usually involves some human intervention. With blockchain you have lots of computers competing to process your transaction as quickly as possible. Today they can do it in a matter of minutes. In the future it may only take seconds.
  2. Cost – Blockchain is also cheaper. All the computers holding the blockchain are paid for by the participants in the hope that they will earn the incentive for being the first to validate the transaction.
  3. Transparency – Blockchain is more transparent. It can give regulators and compliance officers clearer insight into the provenance of financial transactions, helping them to combat money laundering and manage risk.
  4. Tracking- As nothing can be changed and the ledger is present across multiple nodes, blockchain is easier to track. It won’t come as a surprise that blockchain is often used for asset tracking as a consequence.

 

Differences between blockchain and DLT?

The most important difference to remember is that blockchain is just one type of distributed ledger. Although blockchain is a sequence of blocks, distributed ledgers do not require such a chain. Furthermore, distributed ledgers do not need proof of work and offer – theoretically – better scaling options.

Removing the intermediary party from the equation is what makes the concept of distributed ledger technology so appealing. Unlike blockchain, a distributed ledger does not necessarily need to have a data structure in blocks. A distributed ledger is merely a type of database spread across multiple sites, regions, or participants.

On the surface, distributed ledger sounds exactly how you probably envision a blockchain. However, all blockchains are distributed ledgers, but remember that not all distributed ledgers are blockchains. Whereas a blockchain represents a type of distributed ledger, it is also merely a subset of them.

The benefits of DLT

A distributed ledger gives control of all its information and transactions to the users and promotes transparency. They can minimise transaction time to minutes and are processed 24/7 saving businesses billions. The technology also facilitates increased back-office efficiency and automation.

Distributed ledgers such as blockchain are exceedingly useful for financial transactions. They cut down on operational inefficiencies (which ultimately saves money). Greater security is also provided due to their decentralized nature, as well as the fact that the ledgers are immutable.

Alternatively, blockchain technology offers a way to securely and efficiently create a tamper-proof log of sensitive activity. This includes anything from international money transfers to shareholder records. Financial processes are radically upgraded to offer companies a secure, digital alternative to processes run by a clearinghouse. Altogether avoiding these often bureaucratic, time-consuming, paper-heavy, and expensive processes.

When you write data to a blockchain, it gets etched on the network. When you have a series of transactions over time, you gain an accurate and immutable audit trail. This is very useful for financial audits. Having data stored in a place where no single entity owns or controls it, and no one can change what’s already written, gives you benefits similar to double-entry book-keeping. Ultimately, this means that there are fewer chances of errors or fraud.

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