What is distributed ledger technology (DLT)?
A distributed ledger technology is a type of database used to record transactions related to assets or data. The transaction details are recorded at multiple locations simultaneously. The distributed ledger does not involve any central authority, intermediary or central data storage system but instead involves the distribution of data among numerous participants spread across various geographical locations.
In a distributed ledger, participants are allowed to record, share, replicate and synchronise transactions and data across the decentralised network. The participants are responsible for governing and using consensus mechanisms to approve changes to the transaction records. These transactions in a distributed ledger are auditable and immutable, as all transactions in the distributed ledger have a unique cryptographic signature and timestamp.
Blockchain & Distributed Ledger Technology: How It Works?
Distributed ledger technology is one of the elements that make up the blockchain. Blockchains use various other technologies, such as distributed networks, digital signatures, encryption and decryption methods, to make blockchains functional.
A blockchain can be described as a digital ledger of transactions that are distributed throughout the network of nodes or computers. It uses distributed ledger technology to record, replicate, share and synchronise transactions on various independent nodes, in their respective ledgers, instead of a centralised server.
DLT uses cryptography, which makes transactions on the blockchain ledger impossible to alter. Blockchain technology makes digital asset transactions more transparent, secure and trustworthy.
Distributed Ledger Technology (DLT) vs Blockchain
Distributed ledger technology and blockchain are often mistaken to be the same and are used interchangeably. However, it is important to note that blockchain is a type of distributed ledger. In short, all blockchains are distributed ledgers, but not all distributed ledgers are blockchains. Although they are very similar, it is essential to understand what makes them different.
Advantages of Using Distributed Ledger Technology In Blockchain
Transactions once recorded on the network cannot be altered, this ensures the integrity of the blockchain is preserved. Its immutable and irreversible nature makes the blockchain reliable.
Chances of fraud or errors are also tremendously reduced as it does not have a single point of failure.
- Reduce overall costs
The use of DLT in blockchain reduces operational inefficiencies. This is because the need for a third party is eliminated in a distributed ledger, increasing automation and speeding up the process, all of which contribute towards reducing the overall costs for organisations that use them.
Data on the blockchain ledger is timestamped, making tracking and verifying information easy.
This simple flow of information creates a very secure audit trail which comes in handy for financial audits.
- Empowers the user
DLT and blockchain allow users to participate without any central authority overlooking them. This gives the users control over the information and data on the digital ledger, empowering them to maintain the network.
Types of distributed ledger technology
This technology can be categorised into three types:
- Permissioned distributed ledger
In this type of distributed ledger, the nodes are required to take permission from a central authority to access or modify data on the ledger. The permission controls usually include identity verification.
- Permissionless distributed ledger
In permissionless distributed ledgers, all nodes on the network have access to the complete and updated copy of the ledger. As the name suggests, no permission is required as there is no central authority. All the nodes are responsible for validating transactions on the ledger.
- Hybrid distributed ledger
Hybrid distributed ledgers are a mix of both permissioned and permissionless types providing benefits of both these ledgers.
Uses of Distributed Ledger Technology
- Finance and banking
Distributed ledger technology is transforming the financial industry as multiple processes are being streamlined and automated, such as trade finance, clearing and settlement, and identity verification. The banking sector also leverages DLT’s decentralised structure to make cross-border payments less complex, quicker, and cost-effective.
- Supply chain management
The use of distributed ledgers improves the transparency and traceability of supply chains. Its immutable and secure nature makes recording interactions and transactions between various parties easy to track. This improves accountability and efficiency while reducing the risk of fraud and errors.
In the healthcare industry, patient records can be securely stored and managed using DLT. Clinical trials and drug supply chains are also made more efficient and transparent.
Distributed ledgers make voting systems more transparent and secure as they provide an auditable and secure record of votes. Other government processes that involve issuing permits and licenses and managing public records can be made more efficient using DLT.
Blockchains were born out of distributed ledger technology, which brought about recognition and popularity for this technology. DLT is now becoming necessary in modern businesses to increase efficiency and security. Due to its benefits, several industries like finance, banking, supply chain, healthcare and many more are relying on DLT. To use these technologies for you or your business, understanding how blockchain and distributed ledger technology work together is essential to make the most out of these technologies.
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