What is Distributed Ledger Technology? A Detailed Overview and a Look into the Future.
Distributed Ledger Technology (DLT) refers to a shared database that can be accessed, updated, and validated in an immutable manner by different entities from different locations. DLT removes the dependency, of traditional databases, on a central data store and a central authority. This improves the safety, speed, efficiency, and cost of operating a shared database.
Distributed ledgers can be accessed by different participants from different nodes at the same time. When the ledger is updated or appended, the changes are replicated and shared to all participants in a synchronized manner. Due to its transparent and safe nature, DLT is becoming more popular and has a lot of potential going into the future.
A distributed ledger can be used to record both static and dynamic data. Blockchain, the technology used by Bitcoin, is the best known and established distributed ledger. In a distributed ledger, each node verifies and generates a record of each item creating a consensus on each transaction. In other words, the idea behind a DLT is to do away with the conventional centralized system. This will take away the reliance on a central authority to authorize and oversee transactions, making such operations faster, efficient, and low cost.
Origin and History of Ledgers
The principle of ledgers in accounting has existed for millennia in paper form. Details of every business transaction are entered into journals, from where summarized information is posted into ledgers. The information from the ledger is used to develop financial statements. In other words, the ledger is the backbone of any accounting system.
However, the current business ledger system is inefficient, insecure, costly, and susceptible to tampering leading to frequent inconsistencies and disputes. Each party keeps their own copy of the ledger which they can maliciously alter and is also subject to genuine accounting errors. These possibilities call for the provision of insurance which comes at additional cost. Discrepancies in the ledgers may cause delayed or missed business opportunities due to decisions made based on out-of-sync copies.
Ledgers became digitized in the late 20th century with the invention of the computer. The digitized ledger however mirrored exactly what existed on the former paper ledger without much improvement. Recent technological advancements including advanced algorithms, cryptography, and more computing power have made the new distributed ledger system a more feasible system of record keeping.
How the Distributed Ledger System Works
Distributed ledgers enable the secure storage and transaction of ledger information using cryptography. Transactions are recorded onto blocks in a blockchain accessible to member nodes using system-generated digital keys and signatures. Participants use an agreed-upon consensus protocol to transact instead of relying on a third party to mediate ledger transactions.
Consensus ensures that the exact copies of a transaction are sent to each node in the chain. Blockchain technology enhances transparency and lowers the risk of fraud and cyberattacks. For fraud to happen, exact alterations have to be done on each copy simultaneously. It’s practically impossible to attack all nodes at the same time. Additionally, the system’s computational algorithm is built to detect and flag the smallest alterations to transaction inputs. Digital signatures are used to indicate safe transactions originating from senders in the system.
A decentralized peer-to-peer blockchain network prevents any single participant from taking control of the system. All participants remain equal actors governed by the rule of the network. The system records in chronological order all the validated transactions. This results in transactions that cannot be altered or reversed unless all the members agree to the change in a subsequent transaction.
Advantages of Distributed Ledger Systems
1. Distributed Ledgers are Highly Transparent
In distributed ledgers, each node has access to the same information in the blockchain. Through an agreed-upon consensus protocol, every member has to approve changes to transactions.
2. Distributed Ledgers are Safe and Secure
Blockchain is a tamper-proof shared digital ledger that records transactions in a peer-to-peer network. The ledger is distributed to all member nodes in the blockchain and recorded in cryptographic hash-linked blocks. For a successful cyberattack to happen, all the distributed copies have to be attacked simultaneously. Additionally, the ledgers are resistant to malicious manipulation by a single member node.
3. Eliminates the Need for a Third Party to Mediate Transactions.
The elimination of a mediator for transactions saves a considerable amount of money, time, and effort. These savings come without compromising on the ledger’s security and efficiency.
4. Blockchain is Tamper-proof and Immutable
No single party can alter ledger transactions once they have been written onto a block on the blockchain. This ensures a perpetual availability of all original transactions on the system.
5. Reduces the Cost of Operation
The elimination of a third party to mediate transactions, reversal of transactions, and chances of loss of business due to out-of-sync ledgers are great savers. The process is also automated and fast saving time and effort.
6. Increases Efficiency
Distributed ledgers speed up the process of ledger transactions. The system is also able to detect any omissions or duplicity in the ledger.
7. Enables an easy flow of information
A distributed ledger enables the tracking of transaction history up to the member who initiated the transaction. This allows for auditors to review transactional information with ease and more accuracy during an audit.
The Future of Distributed Ledger Technology
This technology has a lot of potential to transform the way both government and private institutions operate. A distributed ledger is inherently secure, decentralized, and transparent convenient for application in elections, tax collection, demographic registration, recording land registries, and many other operations.
While this technology has a lot of advantages, it is still in the initial stages of exploration on how best it can be applied. One of the widespread concerns has been whether this technology is sufficiently reliable to be put into wide-scale use as it is. Everything considered the future format of the ledger is to be decentralized.