Distributed Ledger Technology, DLT refers to the protocols and supporting infrastructure that enables computers in various places to offer and authenticate transactions and update records in a synchronized manner across a network. DLT is a database that can be provisioned or distributed across multiple locations. Each of those allocations may be managed by numerous people, making tampering with the data more challenging. DLT makes it easier to protect information while ensuring that those who need access have it when and where they need it.
Conversely, the concept of a ledger system is not new. In the traditional ledger system, institutions and organizations –banks, corporate firms, supermarkets, etc.– use ledger systems. However, a system administrator typically performs the critical functions required to maintain consistency across multiple copies of the ledger in a traditional distributed database. In fact, the system administrator keeps a master copy of the ledger that is updated regularly and shared with all network participants.
In contrast to the traditional ledger, DLT is a flexible system of recording information. The information on the ledger is updated by network participants rather than a central authority. The ledger can be accessed by some or all users (depending on the ledger type), and the data it contains can be verified and audited.
Furthermore, DLTs are classified as either public or private depending on whether the ledgers can be accessed by anyone or only by network devices (nodes). Also, they can be permissioned or permissionless, depending on whether network participants need authorization from a specific entity to make changes to the ledger.
How Does DLT Work?
DLT employs cryptography to securely store data, cryptographic signatures, and keys, allowing only authorized users within the peer-to-peer network to gain access. Peers communicate with one another in any peer-to-peer network without needing a centralized entity. As a result, the peer-to-peer network ensures replication across nodes by using consensus algorithms. These mechanisms are the procedures and rules that govern how DLT nodes validate transactions.
Each node constructs the database on its own. Every network transaction is processed, and each node generates a conclusion about the database's progress. As a result, nodes are selected and tasked with validating new blocks when they are created. All of these are decided by the distributed network's chosen consensus mechanism. The popular consensus algorithms are Proof-of-Work, Proof-of-Stake, and Byzantine fault tolerant-based.
In addition, voting is done on the database changes that have been completed based on the transaction. Then, all nodes vote, and the new transaction is accepted on the database if at least 51% of them agree. Following that, the nodes update the database versions so that all devices or nodes are on the same version.
DLT and Blockchain Technology: The Difference
Distributed Ledger Technology and Blockchain technology are frequently and even interchangeably used. However, they are not the same. DLT is an umbrella term for any system that processes, records, and verifies transactions in an open network using a shared database. On the other hand, blockchain is a type of distributed ledger technology. However, some DLTs, unlike blockchains, do not share all of the data with all participants. Therefore, not all DLTs are blockchains, but all blockchains are DLTs.
Blockchain is a distributed ledger technology that records transactions using a hash, an immutable cryptographic signature. The transactions are then organized into blocks, with each new block containing a hash of the previous one, effectively chaining them together, which is why distributed ledgers are also known as Blockchains. It is the technology and the driving force behind Bitcoin and other cryptocurrencies.
Types of DLT
Permissioned
To access or change the network, nodes must first obtain permission from a central authority. Hence, permissioned DLTs are private networks. They are intended to operate in a closed ecosystem where users must be granted access through a KYC process. This means users can access the features of the permissioned network once they have been validated. The validation nodes responsible for validating the network's transactions do the heavy lifting in a permissioned network.
Also, permissioned networks can be set up so that only a few users have full access to some of the network's features, and any party may be removed at any time without notice. This feature is handy for businesses on the blockchain network who don't want their identity public.
Permissionless
There is no centralized authority to validate transactions; instead, existing nodes must do so collectively. Hence, permissionless DLTs are public networks. As a result, permission is not required for users to participate in a permissionless network. As a result, everyone can use the distributed ledger system to make transactions, validate blocks, and interact with the network in other ways.
Hybrid
A Hybrid distributed ledger technology system combines permissioned and permissionless network features to create a network with the best of both networks. Businesses will appreciate hybrid DLTs because they can choose which aspects of the system they want to make public and which they wish to keep private.
Benefits of DLT
High Transparency
Because all transaction records are visible to everyone, distributed ledgers provide a high level of transparency. Adding new data must be validated by existing nodes using various consensus mechanisms. The transparency of DLT encourages participant trust and virtually eliminates the possibility of fraudulent activity in the ledger. Therefore, if anyone attempts to alter, modify or delete data in the ledger, it is immediately reflected across all network nodes.
High Integrity
The transactions will have a high level of trustworthiness as they will be carried out precisely as planned, with no opportunity for modification. Furthermore, DLT is dependable because the ledger is immutable and irreversible, and there is no single point of failure.
Scalable
DLT becomes more scalable when consensus mechanisms are used to make it more fast, more dependable, and updated. The blockchain is one of the most well-known examples of distributed ledger architectures. Hashgraph and Holochain are considered more advanced and secure versions of Blockchain DLT.
Decentralized
Because distributed networks are decentralized, there is no risk of a single point of failure, unlike centralized networks, where errors at the central authority level can disrupt the entire network. Also, the cost of transactions is drastically reduced due to the decentralized nature of validation.
Third-party not Required
The distributed ledger can also eliminate the need for intermediaries, as sensors can write results directly to the blockchain, eliminating the need for a third party. As a result, it saves a significant amount of money, time, and effort. As a result, efficiency, business agility, and resilience will improve.
Final Takeaway
A distributed ledger is a new method of storing data and processing transactions that keeps a record of transactions across multiple computers. It is an information database that can be replicated, synchronized, and shared across multiple regions, users, and servers without authorization from a predetermined data structure. Distributed Ledger Technology has the potential to solve problems in the financial and banking sectors, as well as cyber security, healthcare, government, data security, and other areas.
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