What is Distributed Ledger Technology?
Distributed Ledger Technology (DLT), as the name implies, works on the same principles as the ledgers of old that were made of clay, stone, or paper – it keeps and records information and transactions. The primary difference is that distributed ledgers store information and transactions in digital form.
This technology also has no centralized database: the transactions are recorded and kept in different places at the same time. Having distributed ledgers means there’s no more need for a central authority to process and validate transactions. Once a consensus has been reached, each of the transactions will be recorded.
Each of these transactions is timestamped and given a unique cryptographic signature. Anyone who has a stake in the distributed ledger can access all the details of the transactions. Thus, distributed ledger technology stores an auditable and verifiable history of all the data stored on that specific dataset.
Distributed Ledger and Blockchain
Since the key feature of a distributed ledger is its decentralization, many wonder if it is similar to blockchain. They are not the same, but rather blockchain is a type of digital ledger.
A good analogy is a photocopier and Xerox. Photocopier is the generic term; Xerox is the brand. However, Xerox has become so well known that people think of it as the product and not as a brand.
The same thing happened with distributed ledger and blockchain. As the term blockchain has become more popular, it has become ingrained in people’s mind as the umbrella term for the technology.
Cryptocurrencies that Use Distributed Ledger
Bitcoin isn’t the only cryptocurrency that uses distributed ledger technology. Others include:
Key Features of Distributed Ledger Technology
Distributed ledger features are often confused with blockchain because they are almost similar. However, distributed ledgers possesses some features that cannot be found in blockchain. Below are some of these key features, most of which might be familiar already.
– It is decentralized.
– They have better scaling options and superior processing between the transaction components than blockchain.
– They don’t operate based on incentives.
– They do not necessarily need the data structure of blocks.
– They can be permissioned or permissionless.
– They can be mined or not mined.
– They’re immutable – validated records can never be changed.
– The identity of the participants remains anonymous.
– They have superior storage and processing of data than the blockchain.
Permissioned and Permissionless Ledgers
Permissionless (also called unpermissioned) ledgers have no owner; they cannot be owned. This allows people to contribute data and gives them identical copies of the ledger. It also prevents anyone from adding to or changing anything in the ledger without the permission of the others. Such a system allows what is known as censorship resistance, and so the ledger retains its integrity and authenticity. An example of a permissionless ledger is none other than Bitcoin.
Permissioned ledgers, in contrast, have a single or many owners. Their integrity and authenticity are preserved through a limited consensus process. The consensus comes from trusted participants, making the maintenance of permissioned ledgers much easier and faster than for permissionless ledgers.
Permissioned ledgers and similar blockchains create highly verifiable data because of the digital signature created by the consensus process. The signature can be viewed by everyone who possesses a copy of the shared ledger.
Benefits of Distributed Ledger Technology
Distributed ledger technology has a lot of potential across all industries. Some of the advantages it offers are:
Distributed ledgers reduce the manual effort of reconciling and resolving disputes. The current process of entering and keeping data in different ledgers results in inconsistencies, errors, and duplicated information. It also wastes a lot of time just to find, reconcile, and correct data. With a distributed ledger these processes will be simpler and more efficient.
Distributed ledger technology eliminates intermediaries, making the validation and verification process much faster.
Distributed ledger technology establishes a full transaction history and asset provenance in a single source of truth. In other words, distributed ledgers both register and authenticate the assets owned by each user.
Applications of Distributed Ledger Technology
Distributed ledger technology will surely disrupt how businesses work and how processes are handled in the future. Here are a number of possible applications in different sectors:
Because of the nature of distributed ledgers, cross-border payments will have lower fees and simpler fee structures. Settlements will occur in real time, which will optimize capital usage. Since the information will be transparent, regulators will be able to monitor them directly and problematic payments that must be investigated will be rare.
Distributed ledger technology could allow a structure that would automate the execution of smart contracts. The completion of specific events would act as a trigger to keep the process moving.
Replacing paper documents with digital ones would reduce the incidence of fraud, eliminate discrepancies in transactions, and reduce courier delays and costs significantly.
Digital ledgers will allow insurance policy holders to manage their risks with peer-to-peer platforms that are based on blockchain. Insurers, on the other hand, can create a platform where insurance holders can pose their insurance-related questions.
Distributed ledgers have anonymity features whereby users don’t have to share their personal information when they join and do business. This protects people’s information from hackers.
Distributed ledgers also have security features that create secure transactions. Such features prevent people from manipulating the system. Instead, winnings are calculated immediately and sent to the winner.
Tax collection is one area which will greatly benefit from distributed ledgers. The technology will allow regulators to directly access all the data from all the transactions made.