Distributed Ledger: Simply Explained
Blockchain's distributed ledger technology is revolutionizing the way organizations conduct their business transactions.
Distributed ledgers
A distributed ledger is a type of database that is shared, replicated, and synchronized among the members of a decentralized network. The distributed ledger records the transactions, such as the exchange of assets or data, among the participants in the network.
Participants in the network govern and agree by consensus on the updates to the records in the ledger. No central authority or third-party mediator, such as a financial institution or clearinghouse, is involved. Every record in the distributed ledger has a timestamp and unique cryptographic signature, thus making the ledger an auditable, immutable history of all transactions in the network.
The role of business ledgers
In today's connected and integrated world, economic activity takes place in business networks that span national, geographic, and jurisdictional boundaries. Business networks typically come together at marketplaces where the participants, such as producers, consumers, suppliers, partners, market makers/enablers, and other stakeholders own, control, and exercise their rights, privileges, and entitlements on objects of value known as assets.
Assets can be tangible and physical, such as cars, homes, or strawberries, or intangible and virtual, such as deeds, patents, and stock certificates. Asset ownership and transfers are the transactions that create value in a business network.
Transactions typically involve various participants like buyers, sellers, and intermediaries (such as banks, auditors, or notaries) whose business agreements and contracts are recorded in ledgers. A business typically uses multiple ledgers to keep track of asset ownership and asset transfers between participants in its various lines of businesses. Ledgers are the systems of record for a business's economic activities and interests.
A typical ledger looks something like this:
Problems with current business ledgers
Current business ledgers in use today are deficient in many ways. They are inefficient, costly, and subject to misuse and tampering. Lack of transparency, as well as susceptibility to corruption and fraud, lead to disputes. Having to resolve disputes and possibly reverse transactions or provide insurance for transactions is costly. These risks and uncertainties contribute to missed business opportunities.
Furthermore, out-of-sync copies of business ledgers on each network participant’s own systems lead to faulty business decisions made on temporary, incorrect data. At best, the ability to make a fully informed decision is delayed while differing copies of the ledgers are reconciled.
Origin and Significance of DLT
Looking back at the origins of DLT, the arrival of Bitcoin in 2008 is probably the first milestone. Since then, Blockchain technology has gained the attention of the business world with its features of resistance to modification and secure storage of records of different transactions. A closer look at the trends in the Blockchain ecosystem for 2020 can showcase the potential of DLT.
As per reports, the global expenditure on Blockchain-based solutions would most probably reach around $15.9 billion USD by 2023. The global expenditure on Blockchain-based solutions in 2020 is expected to reach a value of around $4.3 billion USD. Blockchain startup companies all over the world were able to garner equity funds amounting to a total of $4.15 billion USD in 2018.
The consumer products and manufacturing industry depicted the highest share of companies, i.e., 29% using Blockchain technology. All these trends clearly indicate the need for reflecting on the intricacies of Blockchain, i.e., DLT technology. The starting point of such a reflection should deal with the definition of DLT technology.
To understand DLT, you can put it specifically as a peer-to-peer technology supported on the internet, such as email, internet telephony, or file sharing. However, such types of P2P technologies always had concerns regarding the transfer of assets of ownership. Bitcoin emerged as a peer-to-peer electronic cash system in 2008.
The underlying technology for Bitcoin established specific approaches for the organizations and storage of information and transactions. Over the course of time, many new approaches for organizing Blockchain-based information and transactions for the transfer of assets emerged. Therefore, the term DLT evolved as an umbrella term for denoting these new technologies for organizing information and transactions to transfer digital assets in P2P format.
What is Distributed Ledger Technology (DLT)?
Distributed Ledger Technology (DLT) basically implies a new and rapidly evolving approach for recording and sharing information across multiple data stores. Each of the data stores (i.e., ledgers) has the same data records, subject to maintenance and control through a distributed network of computer servers, referred to as nodes. You can thus think of DLT as a distributed database with certain unique properties.
Blockchain is just a variant of DLT that uses cryptographic and algorithmic approaches to create and verify a continuously expanding, append-only data structure that gradually turns into a chain of transaction blocks that serve the role of a ledger. Diving into the working of DLT can also help in further refining your knowledge of DLT.
The nodes initiate new additions to the database through the creation of a new data ‘block’ which includes the records of different transactions. Then, the information about the new data ‘block’ is shared across the whole network in the form of encrypted information. As a result, Blockchains ensure that transaction details are not publicly available.
Then, all the participants in the network evaluate the data block and verify its validity according to the pre-defined algorithmic validation methodT. The pre-defined algorithmic validation method is also known as the Blockchain consensus mechanism. When the data block is validated, all participants can add the block to their own ledgers, creating, hence a ‘chain of blocks’: The Blockchain.
To summarize, DLT ensures that changes to the ledger are reflected throughout the whole network, and all network members have a detailed, identical copy of the whole ledger at any specific instance. One can clearly notice that the functionalities of DLT are primarily responsible due to two core components.
The first core aspect of DLT-based systems or infrastructure is the ability for storage, recording, and exchange of digital information across different, consenting parties without the need for any central trust authority or record-keeper. The second core component of DLT refers to avoiding double-spending, i.e., sending the same digital asset or token to multiple parties. Without a central controlling authority, the risk of double-spending is quite high, especially between parties that do not know each other.
Now that you know the difference between Blockchain and DLT, it is reasonable to search for information on types of DLT.
Types of Distributed Ledger Technology
There are two general categories of distributed ledgers, such as permissioned and permissionless variants.
The permissioned distributed ledger involves the requirement of permission for nodes from central entities for accessing the network and making modifications in the ledger. The access controls in a permissioned distributed ledger generally include identity verification.
On the other hand, in the case of permissionless distributed ledgers, every node in the network contains (or can access) a full and updated copy of the entire ledger. All the proposed local additions to the ledger by network participants are communicated to all nodes throughout the network.
In either category, nodes are collectively responsible for validating the modification through a consensus mechanism based on a pre-defined algorithm.
Hybrid DLT is another type of DLT that combines both permissionless and permissioned networks and offers a network that benefits from both of them.
After the validation process, the new addition to all the respective ledgers can help in ensuring the consistency of data throughout the entire network. Considering the flexibility of DLT, many projects are opting for implementations of DLT variants.
So, if you have thought that DLT is all about Blockchain, then it’s time to think again! The different types of distributed ledgers that you can find presently include Blockchain itself, Hashgraph, DAG, Holochain, and Tempo (Radix). A closer reflection on these types of DLT and their workings can strengthen your understanding of DLT.
Blockchain
There is no doubt that Blockchain is currently the most popular DLT variant in the world. The transaction records are stored in the ledger in the form of a chain of blocks, like a long list of records. The digital information stored in the blocks includes the time, date, and specifications of a transaction. In addition, the blocks in Blockchain also contain the sender’s information with a unique ‘digital signature’ to safeguard anonymity.
The blocks in a Blockchain contain a special ID termed as the ‘hash’ that differentiates and synchronizes transactions. The hash function provides reliable support to distinguish all the transaction blocks in the ledger.
Hashgraph
The next addition among types of DLT is the Hashgraph, which allows the storage of multiple transactions on the ledger with the same timestamp.
A record on the ledger in a Hashgraph is known as an “Event” and involves the storage of all transactions in a parallel structure. The Hashgraph DLT system ensures that no nodes on the network can change the transactions or information. Upon comparison to the Blockchain, you can clearly notice the additional facilities of choosing the transaction for including a block.
One of the interesting highlights about Hashgraph as a DLT variant refers to the requirement of smaller storage units, as you don’t have to store transaction information in the ledger for eternity. In a Hashgraph, all nodes in the network would reach an agreement on the process of the transaction and list the process accordingly.
DAG
The next addition among DLT types refers to DAG or the Directed Acyclic Graph. DAG is basically an improved DLT with a different structure. DAG is capable of supporting Nano-transactions and better improvement in scalability with the expansion of the network. In addition, DAG also differs from other DLT types on the basis of its consensus mechanism. Every node on the network has to provide proof of transactions on the ledger and could initiate transactions: nodes have to verify at least two of the previous transactions on the ledger to confirm their transaction.
Therefore, transactions with longer branches of previous validated transactions are more likely to be considered valid. Companies that have to deal with massive volumes of transactions could use DAG.
Holochain
Holochain DLT is the next recent addition among DLT types other than Blockchain. It is one of the most advanced DLTs presently that provides developers with new approaches for the creation of decentralized apps. The foremost difference between Holochain and other DLT types refers clearly to the agent-centric structure. Holochain DLT avoids global consensus mechanisms by providing all agents with their own forking system. Therefore, Holochain serves as a promising alternative for business use cases that demand higher scalability and system integrity.
Tempo (Radix)
The final addition among the new variants of DLT refers to Tempo (Radix). The Tempo is a relatively new addition that provides the benefit of timestamp along with other DLT functionalities. One of the major highlights of Tempo is that there is no need for any modification to use Tempo for public and private modules. Furthermore, you wouldn’t need any prominent additions in terms of hardware components for the creation of your own decentralized applications, coins, or tokens.
Challenges with DLT
So, now it should be less obscure to perceive the functionalities of Distributed Ledger Technology beyond Blockchain. However, it is also essential to reflect on the challenges for DLT to anticipate the future of its adoption. One of the foremost pitfalls of DLT refers to the lack of clarity regarding regulations. The limited strength of regulatory infrastructure pertaining to DLT presents risks of compromising user rights on the network.
The next crucial setback for DLT refers to the lack of any solid evidence regarding its global impact. The global implementation of DLT continues to be still at a theoretical level, and without any concrete evidence of its global impact, the adoption of DLT would be mired in doubts. Another prominent challenge that DLT has to overcome is the still relative immaturity of the technology. Apart from Blockchain, the other DLT variants are still evolving and have their own share of flaws.
Even though DLT holds bright promises for the future, it still has to reach a stage of maturity. The most formidable challenge for DLT is to strike a balance between data security, privacy, and transparency. Data security in event of network scalability and transparency amidst strong privacy safeguards continue to pose formidable challenges to DLT.
