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Distributed Ledger Technology Demystified

Basics of Cryptocurrency
Last updated April 24, 2020

The physical registries kept by different organizations in different places, and with all those databases that never communicate with each other, it becomes quite troublesome to try proving you own something or you simply bought/sold a proprietary. But that is meant to change through the implementation of Distributed Ledger Technology (DLT).

A big part of our society’s functioning relies on agreeing on facts. But when you have 7 billion people on Earth and not all are well intended, it’s quite hard to agree on what’s true and what is not.

In our world, these facts go from ownership to all sorts of transactions and situations. And since ancient times, people managed to do that with ledgers. 

The electronic databases we developed in our days brought new levels of efficiency. But although the technology evolved, we’ve got ourselves in a situation where we work with copies of copies of copies to agree on information that relies on databases that do not communicate with each other.

So let’s see how we can solve that with DLT.

What is Distributed Ledger Technology?

what is dlt

Distributed Ledger Technology is a digital system of distributed ledgers in which different types of data, like transactions and ownership, are recorded and can be managed from multiple places at once. 

In DLTs, every member can contribute to the stored data not on a central cloud-based platform but locally on each device on the network.

The technology innovates by allowing the distributed ledgers to be replicated, shared, and synchronized even though they are spread on multiple devices in different locations.

One of today’s best known distributed ledger technology is blockchain.

What is a ledger though?

Essentially, a ledger is an accounting instrument that keeps a record of all economic and social relationships and their changes, in order to keep consensuality about facts.

The ledgers go back into human history and appear in antiquity as stone tablets and scrolls. They were used to keep track of who owns what, which citizen belongs to what city, what’s his social status, or what economic relations different cities have.

The main central authority of those ledgers was always the state.

Although the ledgers developed together with the society, until recently they only existed in physical format. But with the evolution of technology, ledgers started being digitized, and complex database technologies were born.

The centralized ledgers

Once moved from analog to digital, ledgers became computable and searchable digital databases that were more efficient. But since ancient times, the economic and social relationships have become more and more complex. There are countless institutions and businesses that keep ledgers regarding finances, employment, property ownership and much more. In most cases, the ledgers must be communicated from an entity to another to reach a consensus about the current state of affairs. 

The modern economy evolved around the centralized ledgers, but a database is only as reliable as the organization that maintains it is. So, centralized ledgers have turned into a laborious attempt to keep track of all the truth from around the world. 

Although it sounds like a mad man’s job, the world did it. But even at a national level, keeping track of a centralized ledger turned out into a massive slow system that needs lots of intermediaries, costs a lot to maintain, and is prone to errors.

Where distributed ledgers come in

Distributed ledgers are formed of records regarding any transaction backed by a decentralized geographically spread network, eliminating the need for a central authority.

Right now, the ledgers are kept secret within the databases of centralized organizations. Mostly, they cannot be accessed without special authorization for the benefit of other systems. However, they are open to manipulation by members within those organizations, which creates many legal requirements that come with even more costs. Also, they are centralized points of failures and are inefficient to constantly update and synchronize data across many centralized databases. 

In a distributed ledger, the information is easy to access and view by users. Because it’s tamper-proof, the risk of corruption is decreased and the need for regulation is lowered. Being spread over multiple nodes, the distributed ledger has no single point of failure and is able to continuously synchronize at low costs, creating a single source of truth for all users.

How does DLT work?

how dlt works

There isn’t a single way DLT works because the term is a general class for more technologies that may be somewhat similar but have different ways of functioning.

Yet, DLTs are similar to a point. So, whether it is a blockchain or a variation of blockchain, or a completely different distributed ledger alternative, the data has to be distributed to nodes in a network. The digital databases cannot be manipulated by a single entity but in return, every member of the network can access the same latest information and is able to contribute to the stored data. Thus allowing peer-to-peer exchanges of information.

Furthermore, DLTs have the trust element built in the system by employing consensus mechanisms when validating data. Once the data is in the ledger it has to be immutable and synchronized all across the network. 

When it comes to structuring, things really start to diverge. Blockchain took its name from creating a chain of blocks. But as we’ll see, that’s not necessarily the case with other distributed ledgers.

Distributed Ledger vs Blockchain

dlt and blockchain

Distributed Ledger Technology and Blockchain are often used interchangeably. However, Blockchain represents only a subcategory of DLT, and DLT is a much wider field of study.

DLT is a database of records that aren’t stored or confirmed by a central entity and is spread across a number of nodes. 

The nodes hold a copy of the ledger and every participant of the network function and update independently from one another, reducing the cost. 

Although it sounds just like Blockchain, DLT offers more control over how it is implemented, the owner being able to control the structure and function. Also, it does not automatically create a chain of blocks. The distributed ledger can be stored across many servers which then communicate to update to the most accurate record of transactions.

On the other hand, blockchain creates groups of transactions that can be accessed through cryptographic signing and are linked in a continuous chain.

Other DLT implementations

applications of dlt

Putting aside all the hype, we discover that there are more distributed ledger options, other than the Blockchain, that can be used for applications that require transparency or decentralization.

Although revolutionary, Blockchain has a scalability issue for not being able to handle the volume of transactions that are performed across the world every minute.

Blockchain Alternatives

There are quite a few DLT alternatives and variations of blockchain. However, for the purpose of this article, we will only talk about Hashgraph and Directed Acyclic Graph.

Hashgraph

Same as Blockchain, Hashgraph can offer decentralization, security, and network transparency but it does not have the scalability issue. Hashgraph is able to process enormous volumes of transactions in seconds. 

It employs a “gossip” consensus protocol in which a node randomly chooses neighboring nodes to transmit information about who, when, and what until all the network reaches consensus. The transactions are handled asynchronously and have a theoretical capacity of 250,000 transactions per second. Different from on a blockchain, the transactions are fairly managed in order. 

However, Hashgraph is patented and requires a software development kit. 

Currently, the only project in the cryptocurrency market employing Hashgraph is Hedera Hashgraph (HBAR).

Directed Acyclic Graph (DAG)

Directed Acyclic Graph is another DLT alternative that employs no blocks and no miners. In a DAG system, users confirm each other’s transactions through a process in which every new transaction confirms at least one previous transaction. The system is lightweight and fast because users are able to process each other’s transactions on a microscale. This way, the processing and validation of transactions become an activity that requires few resources. With fewer resources involved, the transaction fees are close to none.

One of the most prominent cryptocurrency to have implemented The Directed Acyclic Graph is Iota in its Tangle protocol.

The Future of DLT

the future of dlt

As discussed in ASX’s conference, DLT is much like the internet in the way that it has a lot of potential, but “nobody really knows how to use it.” For now, just like Blockchain, Distributed Ledger Technology is an option considered and researched by companies in all markets in order to further upgrade and improve their processes.

Companies started DLT developing projects and replacing core critical infrastructures, also evolving business strategy around them. 

Through the spread and adoption, not only by market infrastructures but their customers as well, the connection between an issuer of the information and the final beneficiary will be established.

But the widespread use of DLT won’t be the end of intermediaries like the Bitcoin peer-to-peer pitch. It’s true that the process of intermediation is an enormous part of the financial services. However intermediation activities are not really value-added, and they are not carried for the purpose of extracting fees. They are carried on because they have to be done.

With no shared source of truth, the information has to be repeated all over again, which is extremely costly to agree on something.  

With the common record DLT would provide, companies with intermediary services will be able to take the enormous amounts of resources from the task that just had to be done and direct them to more productive matters.

It’s true that some of the organizations may have to close if they resist adapting, but the majority of intermediaries offer other services as well and might welcome this transaction as an opportunity.

Key Takeaways

  • Distributed Ledger Technology is a digital system of distributed ledgers spread across a network of nodes, in which the different types of data are synchronized and can be accessed by all members as a single source of truth.
  • A ledger is an accounting instrument that keeps a record of all economic and social relationships and their changes, in order to keep consensuality about facts.
  • Distributed Ledger Technology and Blockchain are often used interchangeably. But in fact, DLT is the category of technologies and the Blockchain is a subcategory.
  • Aside from Blockchain, the DLT concepts are implemented in Hashgraph and Directed Acyclic Graph.
  • Companies from all markets started researching DLT and hope for the creation of a common database as a single source of truth.
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