3. Distributed Ledger Technology (DLT)

In the previous two articles we introduced decentralisation and cryptography, which form the foundation of blockchain and other blockchain-based solutions. We saw that smart contracts can be created to automatically execute operational or business rules on a blockchain, which you can read more about here. This process saves an organisation time and money — we’ll talk more about this topic later.

In this article we are going to turn our attention towards distributed ledger technology (DLT), which forms the basis on which the blockchain is built. Distributed ledger technologies (DLTs) have recently attracted the interest of stakeholders across a wide span of industries, including finance, health care, real estate, and government. DLTS are on track to bring major disruption to long-standing industries and market structures in the near to medium term [1].

So, what is this all about, and how will these new technologies impact the way we go about our businesses, banking, investing, and e-commerce? These new technologies will interface with — and often challenge — the logic behind a broad spectrum of existing legal regimes. They will force lawmakers, policymakers and regulators at all levels of government — from the subnational to the international — to rethink how best to advance public policy objectives in an increasingly blockchain-powered world [1].

To understand what makes the blockchain so amazing, we need to take a step back and look at the age-old ledger.

What is a ledger?

In bookkeeping, a general or nominal ledger is a collection of financial accounts, usually a book or a database stored on a computer, which keeps a record of accounts payable, receivable, cash management, assets, purchasing and other transactions. Generally, a ledger includes information like the date, description, balance or the total amount for each account. Figure 1a and 1b are both examples of general ledgers. Figure 1a shows a handwritten ledger, and 1b shows a digital ledger.

Each bookkeeping entry debits one account and credits another account with an equal amount. This process is called the double-entry bookkeeping system. This process helps to ensure that the general ledger is always balanced. In principle, the process is quite simple, but in large organisations with various subsidiaries, like banks, the ledger can grow to be large. Auditing this ledger can take several hours or day. A ledger can be viewed as a type of database that records transactions.

Figure 1a
Figure 1b

Our banking systems can generally be described as centralised ledger systems in which the bank keeps track of transactions. Banks are tasked with the responsibility of verifying and clearing the transactions.

Pirate Ship

To take this discussion further, let us consider the following scenario. Say you are the owner of a company and you record all the profits in a complex general ledger system. You find yourself with a ‘pirate’ in the company which likes to help itself to your hard-earned treasure. The pirate gained access to the ledger and made changes to the data recorded in the ledger to steal your treasure. You became aware of this problem and decided to find a solution that stops one person or entity from changing the entries in your database. The solution needs to be hack-proof, tamper-proof, and overall fool-proof.

A distributed ledger is the technology that solves this problem.

A Distributed Ledger

A distributed ledger is simply a database that is scattered across several locations and distributed among multiple participants, called nodes, across a large network of computers at the same time. Most companies make use of a centralised database that exists in a fixed location. But a distributed ledger removes third parties from the process, which makes them quite attractive. Distributed ledgers are often used for medical records and title deeds.

Figure 2

Figure 2 compares a centralised ledger on the left to a distributed ledger approach on the right.

In Figure 2, the central clearing house has all the records of each party and makes informed decisions about a buyer’s ability to deliver on the promise of payment. This makes the centralised approach work well.

A distributed network enables nodes to independently interconnect with each other. Blockchain, which is a form of DLT, uses mechanisms to allow the nodes to reach consensus about transactions before the ledger is updated across all the nodes in the network. This consensus process makes it nearly impossible to maliciously change the data.

The consensus mechanism establishes trust in the network, and enables parties to interact with each other, without knowing each other directly or even knowing whether they will deliver on the deal, all because the blockchain consensus mechanism does the heavy lifting, enabling trustless interaction.

Advantages of using distributed ledgers

DLT has the following advantages over traditional centralised ledger approaches:

- DLT eliminates the need for a central authority or intermediary to process, validate, or authenticate transactions. Records are only ever stored in the ledger when the consensus has been reached by all the parties involved.

- All files in the distributed ledger are time stamped and given a unique cryptographic signature of authentication.

- All participants in the distributed ledger network can view all the records in question. Centralised ledger systems are not fully transparent because the clients do not have access to the system and transactions, only those shown.

- DLT reduces the ability for data tampering.

That was a lot of info, but well done. You’re getting there! Now you know that a distributed ledger is simply a database that exists across several locations or among multiple participants. You know that the ledger needs to be updated across each nodes in the network, which makes the ledger pretty much impossible to tamper with.

In our next article, we will continue our discussion on DLT, but we will turn our focus towards blockchain, which is a special type of DLT.

A metaphorical overview of key terms in blockchain technology

This article was written by Yknot Blockchain Solutions for educational purposes. We specialise in building on the Telos network. Feel free to contact us for your blockchain-based solution.

** The rest of the series will be published on medium.com and on the Y-Knot website.

References:

[1] J. Maupin, “Mapping the Global Legal Landscape of Blockchain and Other Distributed Ledger Technologies”, Cigionline.org, 2017. [Online]. Available: https://www.cigionline.org/static/documents/documents/Paper%20no.149.pdf. [Accessed: 10- Jun- 2021].

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