The blockchain ecosystem as we have it today is no longer a new fintech industry. At least many have heard about Bitcoin or cryptocurrencies. Attentive observers must have heard about Central Bank Digital Currencies from some world governments as a new form of digital money. What many may not know is that this innovation is being powered by two key technologies known as blockchain and distributed ledger technology.
Making a distinction between blockchain vs distributed ledger has often posed a major challenge to many trying to understand how these technologies work. This article is dedicated to unraveling the thin differences between both technologies.
Read on to gain more insight on this topic.
- 1. Are blockchains and distributed ledgers the same?
- 2. What is the difference between blockchain and distributed ledger?
- 3. How does blockchain and distributed ledger technology work together?
- 4. Distributed ledger vs blockchain use case comparison table
- 5. Blockchain vs distributed ledger use case examination
- 6. Key Takeaways
- 7. FAQs
Are blockchains and distributed ledgers the same?
Blockchains and distributed ledger technology (DLT) are both open-source decentralized technologies but are not the same in many regards. In reality, blockchains are a type of distributed ledgers. However, not all distributed ledgers can be called blockchains as we would soon see. This analogy is similar to the distinctions between computers and smartphones. All smartphones are a type of computers, but all computers are obviously not smartphones.
While some features of blockchain and distributed ledgers intertwine, their differences are glaring. These differences will become clearer as we dive deeper into these two new technologies.
What is the difference between blockchain and distributed ledger?
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The difference between distributed ledger and blockchain is essentially in the mode of storage of information in both. This mode of storage borders on the sequence, the consensus algorithms, or the mode of validating transactions or entry, as well as in the underlying structure of both technologies.
What is a distributed ledger? Our definition
A distributed ledger system is a digital database that is used for storing data or information on computers or nodes spread across different locations. With this decentralization being a crucial part of the technology, each node maintains the ledger independently in real-time, and this maintenance by all the nodes brings transparency and removes inefficiencies in data handling.
Each computer or node that contributes to a distributed ledger has an equal authority to influence the system. This significantly differs from other types of databases with a central authority that controls the management of the ledger. With distributed ledgers, data immutability is guaranteed and the model can allow for easy scalability, in case of needed expansion.
The distributed ledger definition will not be complete until it is mentioned that the addition of new data into the decentralized database must receive a unanimous go-ahead from all the participating nodes. When these nodes have consented and the changes have been made, each node in the decentralized network automatically receives the updates made to the database.
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What is distributed ledger technology (DLT)?
A Distributed Ledger Technology (DLT) is a protocol that enables the secure functioning of a decentralized digital database. Understanding what is DLT technology becomes easier when we have a proper perspective of what a distributed ledger is. It is thus a good thing that we have laid the foundation in the previous section.
The biggest manifestation of DLT is blockchain technology, a nascent technology that has become a buzzword among tech enthusiasts today. Distributed Ledger Technology and all of its manifestations are a way of securing a data structure or information such that it is tamper-proof and free from manipulation by any one entity.
Distributed Ledger Technologies are being adopted on a massive scale by financial institutions while the tech has inspired a number of monetary innovations that make audit trails easier and more transparent. More on the use cases of DLT will be unveiled as we go on.
So how does blockchain differ from DLT?
Before we highlight the differences between these two in detail, it is necessary to gain an understanding of what is blockchain. Even more information about blockchain technology can be found in our blog post. To summarize the core tenets of blockchain, let us consider the definition below.
Blockchain technology is essentially a transparent, trustless, and publicly accessible ledger that allows us to securely transfer the ownership of units of value using public-key encryption and proof of work methods. Let us not get confused. In a simpler way, Blockchain technology allows for data to be stored in blocks or compartments. These blocks are sealed with a cryptographic signature when the capacity of each block is filled, and the blocks are merged with previous compartments to form a chain of blocks.
In proper profiling of Blockchain vs DLT, it is worth re-emphasizing that blockchain is indeed a type of decentralized ledger technology. Although the former differs from the latter in unique ways, these differences do not negate the fact that every blockchain is an offshoot of DLT. Having said that, let us outline the following fundamental differences between these two technologies:
- Data Storage Structure
- Consensus Model
- Real-world Applications
The data structure or mode of data entry in a blockchain is organized in blocks while it takes the form of a regular database in DLTs. Per the sequence structure, a DLT stores data essentially as a database with no special sequence. In a blockchain, however, the sequence takes the form of a chain of new blocks sutured together with encryption.
While DLTs generally have a consensus model for validating entries among the various nodes, this consensus is typically simplified when compared to that of blockchain that requires a more sophisticated system. The consensus model in Blockchains is numerous but the two most popular include those utilizing either a Proof-of-Work (PoW) or a Proof-of-Stake (PoS) model.
Tokenization is also a unique feature that notably distinguishes blockchains and the broader DLT ecosystem. Blockchain networks such as the Bitcoin blockchain, Ethereum blockchain boosts their functionalities with token economics which are generally non-essential in other DLT infrastructures. The real-world applications of both technologies are also a crucial distinguishing factor. While both private and public entities are beginning to gain appreciation DLTs, Blockchain technology is now more widely used in various industries including financial services, supply chain, healthcare, and real estate amongst others.
These differences are non-exhaustive but these few highlight the fact that both DLTs and Blockchain by their very nature exhibit remarkable differences. On top, both are existing innovations and trendy on the hype cycle for emerging technologies.
Types of distributed ledger technology & their benefits
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There are 4 basic types of distributed ledger technologies and they are profiled below:
1. Private blockchain benefits
Private blockchains are DLTs with a restricted authorizer which is often by a few individuals. Private blockchains are permissioned and typically, a single organization controls the management of the network. Private blockchains offer a simplified data handling mechanism and they generally offer a faster and more energy-efficient system.
So what are the benefits of a private blockchain?
- Private blockchains are easier to manage
- Makes room for simplified compliance
- The limited number of validators guarantees speed and low cost
2. Public blockchain benefits
Public blockchains are larger blockchain networks that work via permissionless access. This implies that anyone anywhere can be involved in the system and unlike in private blockchains, no permission is required from any centralized authority. Public blockchains are what digital assets or digital currencies like Bitcoin utilize. Check Bitcoins’ white paper for more information.
And here are the benefits of a public blockchain:
- Improves transparency in the network
- The fact that the system runs itself helps reduce maintenance costs
- It takes immutability and transparency to the next level
3. Federated blockchain benefits
This is a DLT system that is run by multiple startups or organizations. These systems are governed by structured and defined regulations which boosts efficiency and transparency within the networks. Central Banks and the Corda R3 Consortium are known to use this type of DLT/Blockchain model.
The benefits of a federated blockchain are the following:
- Very scalable
- Exhibits high speed
- Enhanced transparency and privacy
4. Hybrid blockchain benefits
These are blockchain networks that combine the elements of both private and public blockchains respectively. In hybrid systems, there is a part of the data that is made public and other parts that are kept private. These systems are brought to life in Hyperledger systems.
Now, let’s look at the benefits of a hybrid blockchain:
- Enhances flexibility in data handling
- The hybrid nature drives scalability as not all nodes have to authorize changes
- Most hybrid DLTs can easily be regulated
How does blockchain and distributed ledger technology work together?
The duo of blockchain and distributed ledger technology work together in most instances either as blockchain ledgers or blockchain distributed ledger. The idea is simple, the data that is stored in the blockchain behaves as though it is resident in a database that is characteristic of the underlying distributed ledgers. Additionally, as a distributed ledger has been known to behave, when the data within the blockchain network is updated, all participating node gets to receive a copy of the changes.
Distributed ledger vs blockchain use case comparison table
The table below depicts a snapshot of the use case comparison between distributed ledger technology vs blockchain. As we have established earlier that blockchain is an offshoot of DLTs, it is worth noting that for almost everything that blockchain can be used for, DLTs can also be utilized. The suitability is what distinguishes them both in the analogy below.
The examples of use cases highlighted below are non-exhaustive as the applications of these technologies are always evolving over time.
|Use Case||Blockchain||Distributed ledger|
|Recording Land Registries||NO||YES|
|Digital Passport Issuance||YES||YES|
|Smart Contracts Creation||YES||NO|
Blockchain vs distributed ledger use case examination
A deeper look will be taken into the compared use cases for the DLT vs blockchain analogy above.
Tax collection poses a significant challenge for most world governments today. While some developing economies have an inefficient taxation system, the advanced economies lack transparency in the process. Both Blockchain and DLTs can be used to solve the inefficient tax collection dilemma. Both technologies bring transparency, immutability, and openness to the stored records.
Recording Land Registries
An accurate, and transparent land records are vital to improving real estate services and cut back on expenses. DLTs are most suitable for this use case because land records may need to be updated as much as possible. The encryption and unchanging model of blockchains may make this a difficult task.
Digital Passport Issuance
Both blockchain and DLTs provides the right level of data security that makes both suitable for the issuance of a digital passport.
Digital currencies are the primary use cases for blockchain technologies. Blockchain and its unique block encryption provide the right type of privacy that forms the basis for digital currencies to thrive. This high privacy level is and computational feature is not so sophisticated in DLTs and while they have their roles in financial transactions, blockchain is most suited for cryptocurrencies.
The duo of blockchain and DLTs can be used in designing a transparent, decentralized, and secure voting or ballot system for use in elections. This use case is currently being explored by some countries including Russia.
Most governments of the world are leveraging DLTs to develop Central Bank Digital Currencies or digital monies to tag along the growing trend introduced by cryptocurrencies. DLTs are most suited as most governments have made known as even though decentralization is at its core, a certain level of oversight is required. The encryption level of Bitcoin makes this somewhat difficult.
Smart Contracts Creation
Smart contracts are designed uniquely to run on blockchains.
Non-Fungible Tokens (NFTs) are becoming a new revolutionary trend for registering digital ownership on the blockchain. Created using a special cryptography code on specific blockchains such as the Ethereum blockchain. Blockchain technology is more suitable for NFTs than DLTs.
The line between Blockchain and Distributed Ledgers is so thin that it takes a deep understanding to be able to pick out the differences. Fundamentally, Blockchains are also distributed ledgers, but a special type!
Per their individual use cases, developers may need to assess the problems they hope to find solutions to and determine which of the two technologies is most suitable. In other words, the solutions may define which decentralized option will be opted for.
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Is blockchain decentralized or distributed?
In order not to be confused with vocabulary, Blockchain is both a decentralized and a distributed technology. The data in a blockchain are registered, kept, and managed by computers or nodes in various locations. No central authority keeps the network secure, rather each node is responsible for the network maintenance.
Why is it important that blockchain have a distributed ledger?
A distributed ledger is the fundamental ideal behind a blockchain. Based on this, it is very important that a blockchain maintains a distributed ledger so as to preserve the way the information is entered and adhere to the consensus for validating entries. Distributed ledgers help blockchains maintain the decentralization feature.
What is an open ledger?
An open ledger is a system that grants public access or where transactions can be conducted without restrictions. In industry-specific terms, an Open Ledger is a decentralized financial platform being fronted by a group of industry players as a new blockchain version. It can foster an open transaction of digital assets or other blockchain-supported items.