Blockchain and Distributed Ledger Technology (DLT)

In our effort to learn blockchain to its full length, we need to understand the underlying concepts. One such crucial concept is Distributed ledger technology (DLT). Blockchain and DLT work on the same concept. And that is why Blockchain is said to be a type of distributed ledger technology used for specific purposes. In this tutorial, we will set our focus on the details of the distributed ledger technology and understand it better. This in terms will help us understand the concept and working of blockchain better. 

What is Distributed ledger technology (DLT)?

The Distributed ledger technology distributes a copy of the same version of digital ledger to each node in a point to point network. That is, a record or digital ledger is shared between all the participants of a network. This eliminates the need for a centralized authority having control over the ledger. 

It is a technology that provides a framework for a lot of related technologies like Blockchain.  As we know, a decentralized peer to peer network is like a large web that has a lot of points of connection. Similarly, the distributed ledger technology operates on a decentralized network that has a lot of nodes irrespective of their location. Thus, such a network can expand over the entire globe. 

In such a network, each node has its own private copy of the ledger and is free to carry out transactions with any node in the network directly. They do not need to mediate a transaction or request access to the ledger through a centralized authority. Every time the ledger is updated, every node gets to refresh it. Such a system also helps in establishing trust between the nodes in a network. It is by the means of mathematical procedures and algorithms like hashing, cryptography, and digital signatures. 

Distributed ledger technology and blockchain

We can also understand distributed ledger technology as a decentralized database that stores information regarding value exchange. This digital ledger is shared between a global network of computers. Each computer or node can own an identical copy of the ledger, hence, it is called a distributed ledger. Every node has the right to access the ledger whenever they want and verify the time and date of a transaction. 

Thus, a digital ledger is used to record, track, monitor, and share information about the exchange of valuables and assets. Assets such as property, automobile, votes, health data, currency, cryptocurrency, etc can be recorded on a ledger with a timestamp. 

Blockchain is a type of Distributed Ledger Technology that is specifically used to record and share financial transactions. Blockchain was first used as an underlying technology to facilitate Bitcoin transactions. It is a peer-to-peer distributed network. Whenever two nodes within the network wish to exchange tokens, the details of the transaction are sent to all the nodes for verification. The other nodes verify a transaction by the means of a digital signature procedure. The transaction details are also secured using the process of cryptography and hashing. 

All the transactions are stacked in a block and this block is given a unique identity in the form of its hash value. Also, every block is linked to its previous block using the hash value of the previous block. In this way, these blocks of transactions form a long chain that is unbreakable. This gives this technology the name blockchain as it is an immutable, tamper-proof log of sensitive data and transaction activity.

Thus, a blockchain securely stores digital ledgers having files, money tokens, smart contracts, media, health records, or codes. Anyone having the right to access this ledger can have access to this content. 

Now let’s focus on how Blockchain works along the lines of distributed ledger technology. So, the chain of blocks (Blockchain) is a ledger that we store on the network cloud. Every node that is a legitimate part of that network can access the ledger and possess an identical copy of it. Each node will see the same information stored on a block that the others see. This promotes transparency in the network.

In addition to this, each node is given the freedom to directly exchange tokens (cryptocurrency) with another node without an intermediate. Therefore, DLT makes blockchain quick, reliable, and transparent. 

Significance of DLT in Blockchain 

A ledger is a record of data that is chronologically stored in it. The concept of maintaining ledgers is not a recent one. Ancient cultures used stones to etch the records on, clay slates, papyrus, etc. Later, with the dawn of civilization came the invention of paper. Then the process of maintaining records or ledgers was done on papers. Thick stacks of ledger books were maintained. These ledgers can contain important information about the exchange of assets like money, goods, bonds, property, and other valuables.

Ledgers are believed to be the backbone of the economy and banking. However, in the humongous wave of digitization, the ledger system also got digital. It got introduced into the digital realm where everything is just a few fingertips away. 

The distributed ledger technology is a modern interpretation of the idea of ledgers. Traditionally, such transaction records are owned by a central authority, for instance, banks. Whatever exchange of money we initiate, it occurs via the bank and sometimes even some intermediaries. This gives all the power and control of the transactions to the banks. They are the ones we need to reach out to every time we need to access, send, or receive money. 

Currently, such centralized organizations like Google, Facebook suck up most of the data left behind by us and use it to influence our choices. This data is used to influence societies and manipulate their preferences by analyzing societal trends. Technologies like DLT and Blockchain disrupt such scams completely by providing a decentralized peer to peer network. 

In such networks, you have complete ownership and control over your data. It is your choice to share your financial, personal, or healthcare information with the respective organizations. For instance, you can keep your entire medical record on the ledger and give permission to only selected doctors and hospitals to access it in need. 

In this way, DLT states its significance in technologies like Blockchain where the users can claim ownership on their assets, have transparency, accessibility, security, feasibility, and much more.  

Types of Distributed ledgers

Depending on its accessibility, distributed ledgers are divided into two main categories; the Public ledger and the Permissioned ledger.  These are also the types of blockchains. Although, the fundamental principle of working is the same for both the ledgers. They only differ on the basis of who can access its contents. The public ledger is available for all whereas a permissioned ledger is open for a selected few. 

1. Public ledger

A public ledger is openly accessible to all the nodes that wish to be a part of the distributed ledger network. There is no restriction whatsoever on the node to access, verify, or transact in the network. The Bitcoin network is a well-known example of a public ledger that is spread across the globe. Anyone who is a registered node in the network from any part of the globe can make bitcoin transactions and mine them. 

2. Permissioned ledger

A permissioned ledger involves only those participants whom the creator allows. This means that the creator of the network has the authority to grant permission. Only those who get permission to be a part of the network can transact and verify transactions rightfully. Popular examples of these systems are Ripple and Corda. Where Corda is a network of more than 70 financial institutions. These institutions share their financial information only to those who have permission. 

Advantages of Distributed ledger technology

Distributed ledger technology brings with it a lot of advantages as follows:

1. Accessible: Distributed ledgers are easily accessible to everyone who is a part of the network. The users do not need to request access to a central authority. They can access the ledger, which they also have a copy of any time they want.  

2. Decentralization: A ledger is distributed efficiently on decentralized networks. Decentralization takes away control over your data from centralized authority and gives it to individual users. Every user has a legitimate copy of the record which they can use for transactions, verifications, or for auditing. 

3. Transparent: DLT promotes transparency within a network. This means that as everyone is having access to the ledger, they can trust the network. No piece of information present in the ledger can be hidden from them. Also, if a user tries to lie about something, others can immediately check for it on the ledger. This develops trust and transparency in the network. 

4. Tamper-proof: The way distributed ledger systems are designed, it makes it absolutely tamper-proof. Meaning, no one can make changes in what is already recorded on the ledger. If anyone tries to change the contents stored on the ledger, he can only do so on one node. All the other nodes in the network will have the original copy of the ledger. They can easily detect a security breach through disrupted hashes and cross-check the ledger contents with their own. 

5. Fast: With a central authority or intermediate eliminated from the scenario, the transactions occur at a much faster rate. The point to point or peer to peer nature of such networks makes every process happening on it a lot faster. As two nodes are directly uploading data on the ledger or transacting with the other node, it is a quick process taking only a few minutes to complete. 

6. Cost-efficient: One major drawback of having a centralized authority and an intermediary was that a portion of your money is cut as a payment for their service. This made the entire process of transacting costlier in transitional systems. Suppose you are shopping online and you choose to pay via a debit card. Your transaction is going to be facilitated via a payment gateway acting as a middle man. 

This means that you are paying for the product as well as for its services. In a point-to-point distributed system, there is no need for a middle man and the cost of operations will naturally go down. Thus, reducing overhead costs.

7. Secure: The framework of distributed ledger technology is such that it secures the database or record from any potential attacks. This is because if at all there occurs a successful attack on one node, the ledger will be safe and intact on the others. Suppose the network is having 200 nodes in total. If an unauthorized user (hacker) hacks the ledger on one node, the other 199 will still be fine. Therefore, DLT makes sure that there is no single point of failure that disrupts the functioning of the entire network upon attack. 

8. Synchronized: Another advantage of DLT is there is no delay or hindrance in the availability of information. No matter how many nodes that information is shared between, The same (latest) version of the ledger is going to be available as well as accessible to everyone who is a part of the network. This ensures easy flow information within the network. 

9. Disintermediation: DLT promotes disintermediation i.e. there are no intermediaries needed to carry out a transaction. Nodes on a DLT based network can directly upload their data onto the shared database. They do need a third-party to do it for them. This makes the network fast and affordable. 

Summary

This concludes our tutorial on “Distributed ledger technology” short as DLT. Here, we learned about the concept behind DLT, it’s types and advantages. In addition to this, we saw how Blockchain is rather a type of distributed ledger technology. We hope this information is useful and helped you understand blockchain and DLT better. It is important to understand here that Blockchain and Distributed ledger technology is not essentially the same thing. DLT is an underlying concept for Blockchain’s blueprint.