A distributed ledger is a database that exists in multiple points of a network. It’s the underlying technology for cryptocurrencies such as Bitcoin and Ethereum. Distributed ledger technology (DLT) prevents data from being held in any single location. Data is completely decentralised and requires consensus and validation from all participants in order for it to be added to the ledger.
Distributed ledger technology consists of the entire technological infrastructure and associated protocols required to collect, validate, and access immutable data that’s replicated across several nodes of the same network.
How does distributed ledger technology work?
Without a central administrator, distributed ledger technology relies on a consensus mechanism to replicate information across each node in the network.
These nodes will individually check and validate each transaction, communicating their independent conclusions to the rest of the network until a consensus is reached and the operation in question is approved.
At this point, the transaction is given a timestamp and is added to the historical ledger replicated across every node. It can be accessed from any machine, but the information it contains can’t be changed. It’s immutable and secure.
What are its benefits?
Distributed ledger is the logical next step in the effective management of dynamic data. While this is certainly a reason to justify the surge in investment experience by this technology, there are other benefits we can identify.
Trust, immutability and transparency
If data is public, transparent, and can’t be changed, it can be trusted. More importantly, this whole process occurs without reliance on central institutions.
Decentralisation and security
Decentralisation underpins the whole concept of distributed ledger technology. With the same database replicated across a network’s independent nodes, there is no single point of failure.
If one node submits false information because it’s been compromised by a hacker, it is expelled from the network without endangering the data. Decentralisation ensures the data is secure, while also acting as a strong deterrent to malicious hackers.
Cost reduction and efficiency
Without a centralised database, a lot of the IT costs usually associated with database management disappear. Distributed ledger technology makes it possible to have easily accessible, fully secure, and reliable data without having to rely on as many engineers as traditional centralised databases. Data centres are no longer required, which means that costs of equipment, cooling, and electricity are also eliminated.
All of these benefits working together makes DLT a no-nonsense choice for the organisations that have the opportunity to adopt this technology.
Is blockchain technology the same as DLT?
Distributed ledgers come in different forms. Mainstream media uses the terms blockchain and distributed ledger technology interchangeably, but the truth is that blockchain is only a type of distributed ledger.
Blockchain is often seen in the same light as DLT because of the way it groups transactions in blocks before validating the data these contain. Only then are the blocks added to the historical ledger.
DLT doesn’t have to operate in this specific manner to deliver all the benefits we’ve discussed.
The next time you’re discussing blockchain and DLT remember that DLT refers to all distributed ledgers while blockchain relates only to the ledgers where unrelated transactions are grouped into blocks.
The truth is that every potential application of blockchain technology is even more relevant when applied to DLTs — not only because the latter encompasses the former, but also because it contains other solutions. These solutions can include Hyperledger Fabric and Microsoft Framework. So be careful when getting caught up in “blockchain is the future” conversations. Maybe you should take a step back and ask yourself if it’s really DLT that’s the future.
If you want to know more about distributed ledger technology or blockchain, read our dedicated series.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.