Guide to Distributed Ledger Technology (DLT)

distributed ledger technology
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By 2030, there will be 50 billion smart devices collecting, analyzing, and sharing data. The range of technology in the world grows daily and includes distributed ledgers. As distributed ledger technology starts to take on the world, many curious minds want to know more about it.

Ledgers have been around for hundreds of years. They are the heart of every single economic transaction. The purpose of a ledger is manyfold. Recording transactions is a must. No matter if you do a payment, buy or sell, moving property, or any type of asset.

But what if we would be able to record transactions without an accountant. What if we could create a ledger on any transaction maintained decentralized and across locations and people?

The dream came true. Blockchain technology made it possible. Eliminating any central authority, validating and authorizing transactions and contracts through a decentralized network of computers is now possible.

Welcome to the new world. If you are new to all this, you might want to start and understand what blockchain technology is. As a second step, continue here and read our complete guide to distributed ledger technology.

WHAT IS DISTRIBUTED LEDGER TECHNOLOGY?

centralized vs distributed ledger technology
A centralized ledger needs an authority (bank, cloud, etc.) while distributed ledger technology is a p2p exchange over nodes

Relatively speaking, distributed ledger technology, otherwise known as DLT, is easy to understand. It is a database that exists in multiple locations. It can also be one database used for multiple participants.

You may have heard of DLT but have never seen it because most companies use a database that stays in a fixed location. This is commonly referred to as a centralized database.

Knowing the answer to what is distributed ledger technology is understood by decentralization. This technology type is decentralized to eliminate certain needs such as a need for an intermediary to process, central authority, authenticating transactions, and validations.

DLT gets used by enterprises to validate, process, and authenticate types of data exchanges and transactions. The records tend to get stored in the ledger that the parties involved decide on.

The files store in the ledger get timestamped and are available for viewing by the participants. The history of distributed ledger technology will be verified and auditable.

History of Distributed Ledger Technology

To really understand these machines, you need to learn a bit about the history of distributed ledger technology. Ledgers have been around since ancient times. Their purpose has always been to complete economic transactions such as payments, buy-sell deals, recording contracts, and even moving assets or property.

Of course, ledgers were not as advanced back then because of the lack of technology. The use of clay tablets was beneficial until the invention of paper came along. After paper, computers provided an even better convenience for ledgers to get accessed with speed and convenience.

Even after computers, technology has kept growing. Ledgers were able to become decentralized making the information move faster. More importantly, the data within these machines get secured.

Companies should take advantage of distributed ledgers because of their benefits. Distributed ledger technology are transactions maintained through decentralization for different people and locations. This means central authority is unnecessary to validate transactions and check for manipulation.

The history of distributed ledger technology has turned it into what it is today. Information in the ledger is stored in an accurate and secure way. The network rules govern the information when it gets stored.

Use of Distributed Ledger Technology

Although the ledger has grown throughout the decades, it has even more potential. DLT can revolutionize the way institutions, corporations, and governments work.

From a government standpoint, DLT can aid in issuing passports, collecting taxes, recording land registries, licenses, and social security benefits. It can also change the way voting procedures work.

The biggest industries that are making waves with this technology are music and entertainment, finance, diamond assets, artwork, and supply chains for various commodities. It is only a matter of time for other industries to pick up the use of distributed ledger technology. Companies are still working to figure out how this technology can be adopted.

Benefits of Distributed Ledger Technology

There are many benefits of distributed ledger technology other than their vast potential. For one, distributed ledgers are harder for cybercriminals to attack because every copy distributed needs to get attacked. Although these machines are prone to cyber-attacks, it is less likely for one to be successful.

It is also impossible for the records to get changed by a single party with malicious intent. This is because the records are resistant. Because they are difficult to attack and manipulate, there is plenty of transparency.

Another one of the benefits of distributed ledger technology is that operational inefficiencies get reduced. They are also automated and can speed up the transaction time while being able to function 24/7. These aspects of DLT reduce costs overall for places that use them.

Distributed ledgers can provide information easily. This means the audit trail is easy for accountants to follow when they review financial statements. This may seem specific, but this can help prevent a company from the possibility of fraud in their financial books.

One of the major benefits of distributed ledger technology is that it helps the environment. Without the use of extra paper, DLT becomes an eco-friendly option.

Lastly, there are different types of DLTs out there that can benefit companies in different ways. The most common type of DLT that people hear about is blockchain.

BLOCKCHAIN TECHNOLOGY

the Blockchain Process explained
Blockchain is a type of DLT to send and receive any kind of assets using crypto-hashing

People hear about blockchain the most and think the terms DLT and blockchain are interchangeable. However, they have some distinct differences. For one, blockchain is a type of DLT.

Not only is blockchain the most common, but it is also the most simple DLT example. The term means that there are blocks of data connected through data identifiers. These identifiers begin with a hash.

In a blockchain transaction, there are about four stages. Someone must initiate the transaction and it needs to get verified by nodes on the network. This happens through an agreement.

Verifying the transaction involves figuring out if it occurred as it was claimed to be. This must happen before the transaction gets stored. The last step of the blockchain is assigning the data code. This is how the chain of blocks is maintained in the end.

Different types of blockchains can prevent other people from seeing the transactions. For example, a federated chain is the most restrictive because of the limited access it has.

However, there are less restrictive types such as permission or private blockchain. This type can make access public or private with verification to only a few.

In contrast, there is a permissionless/public blockchain that is an open-source public network. There is no third-party involvement, minimum costs, and no maintenance needs.

The last type is the hybrid. This is a combination of a public/private network. It is partially restricted, offers data flexibility, and a consensus that is not required by every node on the network.

In shorter terms, a blockchain is a shared database with entries that have to get encrypted and confirmed. You can learn blockchain or watch blockchain webinars. The difference between blockchain and a DLT should be understood.

Blockchain vs. Distributed Ledger Technology

The main difference between the two is that blockchain is a type of DLT. When speaking on blockchain vs. distributed ledger technology, it is important to note that blockchain is a sequence of blocks and DLT does not require a chain. In theory, distributed ledgers offer better scaling options than blockchain coding.

When thinking about the term on a surface level, it sounds as if DLT is a blockchain. However, the intermediary party gets removed from distributed ledger technology. Merely, it works as a database spread across different regions, sites, and participants.

The most important thing to remember when discussing blockchain vs. distributed ledger technology is that every blockchain is a distributed ledger. Whereas, not all distributed ledgers can be considered a blockchain.

HASHGRAPH

hashgraph blockchain
Blocks getting connected through crypto-hash codes while Hedera Hashgraph enables node to node consensus

Another type of DLT is Hashgraph. A Hashgraph’s purpose is similar to that of a blockchain. This means it is also a transparent monetary system that is decentralized.

Although the purpose of the two is more or less the same, a Hashgraph gets to this solution differently than a blockchain. A Hashgraph relies on a consensus mechanism for their network to verify transactions.

Another way the Hashgraph differentiates from blockchain is that multiple transactions can get stored. This can get done with a single timestamp that is referred to as an event. The number one difference between these two DLT types is the consensus mechanisms.

A Hashgraph will verify a transaction in the order that it received it. This significantly reduces the transaction time as a whole.

After an event gets initiated in a Hashgraph, the nodes in the network will randomly choose other nodes to send the information to. This occurs until the entire network is aware of the transaction which takes a few minutes.

The validation happens through consensus making the Hashgraph less intensive. After every node is aware of the transaction, they can adjust accordingly and discard it. This means there is no need to keep a transaction record on the ledger.

Directed Acyclic Graph

The directed acyclic graph (DAG) is another DLT that has a highly efficient consensus mechanism because it uses a different data structure. The best advantage of this type of DLT is that it can offer no fees for the transactions. The more transactions a DAG has, the faster it works.

The nodes on a DAG can complete two tasks. They can validate the transactions and represent the transaction too. To be able to validate the transaction, a node must verify two previous transactions. A branch is a term used to describe a sequence of transactions.

It is important to keep in mind that the two previous transactions get chosen randomly. Implementing DAG allows you to benefit from firewalls that prevent break-in attempts. It also performs secure and encrypted information between any two nodes.

Radix

Radix is a newer type of distributed ledger technology. With Radix, you can create a tempo distributed ledger without the need for a blockchain. This does not require modifications to be made.

An advantage of this new DLT is that there is no hardware necessary. This means implementing it is easy because it is so lightweight. Although this project is still in the development stage, there is a lot of potential for the future.

Comparing the different types of DLTs proves how far technology has come. Taking decentralization a step further is just one of the things companies can look forward to in the future with DLT.

THE FUTURE OF DISTRIBUTED LEDGER TECHNOLOGY

In the past, ledgers didn’t even include the use of technology because it didn’t exist yet. With the innovation of technology, distributed ledgers have become extremely beneficial. In the future, it can do more for the financial sector than anyone thought possible before.

In short, the future is bright with DLT as a way to make sectors more reliable, resilient, and efficient. In the financial sector, current challenges like the roles of stakeholders can be handled differently. This technology could also potentially change sectors like manufacturing and government.

Distributed ledger technology is still considered nascent. This means there are no real recommendations for international development. As stakeholders monitor and research this technology, the future of it could become international.

A perfect DLT solution does not currently exist. The only way to get there is by implementing this technology to provide people with real-life applications. These types of test runs can be fundamental for the future of DLT.

The beginning of DLT will focus on replacing manually inefficient processes. This could include the reference to data maintenance, trade finance, and more.

DLT has the potential to improve a lot of different sectors. Eventually, this technology should be able to lower costs by increasing efficiency.

Get on Board With the Change

This distributed ledger technology guide covered everything you need to know about this type of technology. Although it has been around for centuries, the innovation of DLT has become even more beneficial. Get on board with the change of DLT and watch how the advantages take over different sectors.

For more information about distributed ledger technology or to have your questions answered, book a consultation today. 

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FAQ ABOUT DISTRIBUTED LEDGER TECHNOLOGY

What is distributed ledger technology (DLT)?

Distributed ledger technology (DLT) is a database that exists in decentralized locations. It is used to record transactions of assets. Their details are recorded in multiple places at the same time. Unlike other systems, a distributed ledger has no central data store and no administration functionality. Hence, it can also be one database used for multiple participants.

When was distributed ledger technology invented?

Distributed ledger technology (DLT) was first invented in 1991 by Stuart Haber and W. Scott Stornetta. These two researchers implement a system where document timestamps could not be tampered with. The first proof of concept was published in 2009 by a ghost named Satoshi Nakamoto who created the bitcoin blockchain.

How distributed ledger technology works?

Distributed ledger technology (DLT) is a database with no central data store or administration functionality. Each node (a participant in the network) is holding a copy of the database to process and verify each record and therefore, creating a consensus on each item’s veracity.

Why distributed ledger technology?

Distributed ledger technology (DLT) can reduce the costs of transactions. Furthermore, it is more secure due to decentralized storage. Last but not least, a DLT system is very hard to manipulate and it eliminates the need for a middleman or third party with administration functionality.

Is blockchain distributed ledger technology?

Blockchain is a type of distributed ledger technology. Blockchain is a sequence of blocks and DLT does not require a chain. In theory, distributed ledgers offer better scaling options than blockchain applications.

How to learn distributed ledger technology?

If you want to learn distributed ledger technology it’s highly recommended that you study computer science at a top-ranked university. It could be MIT, Stanford, Cambridge, Oxford, Nanyang, or ETH Zurich. If this is not possible, there are excellent opportunities to enroll in online courses or attend webinars about DLT.

Is distributed ledger technology the same as blockchain?

Distributed ledger technology is almost the same as blockchain. Blockchain is a part of DLT but a sequence of blocks. DLT itself doesn’t require a chain of blocks. Furthermore, distributed ledgers do offer better scaling options than blockchain systems.

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Marcel Isler

Marcel Isler

Marcel is a Business Economist and founder of iMi Blockchain. A Consultant and international Keynote Speaker. He studied at the University of Oxford. He helps enterprises to implement Blockchain applications. On our blog, he writes about distributed ledger technology, smart contracts, cryptocurrencies, industry news, and future trends.

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