Distributed ledger technology, sometimes abbreviated as DLT, has been gaining traction across a wide range of industries as a result of the growing awareness of digital currencies. For some people, “distributed ledger” has secured its place as a buzzword of the decade, but many people remain foggy about what distributed ledgers are, what they do, and why they matter.
Ledgers have been used by humanity for as long as writing and money have been in existence. They are used to document transactions, including credits and debits. Ledgers have evolved from clay tablets and tally sticks to double-entry bookkeeping to Excel spreadsheets; they are now taking the form of distributed ledgers.
Before distributed ledgers, records were stored and controlled by a centralized authority, and there was no option other than trusting the owner of the ledger to maintain the veracity of the records. As history has shown, this opens up many opportunities for fraud, such as fudged or fabricated figures.
Record loss was also an issue. For pre-digital era ledgers, a fire, flood, theft, or other disaster meant the record was forever lost because only one complete copy existed. This fear eased somewhat with the advent of spreadsheets, which could be backed up to multiple locations; still, trust remained a concern. Distributed ledgers resolve all of these issues, and they do so in a revolutionary way.
How distributed ledgers resolve issues of the past
The “distributed” part of a distributed ledger refers to the peer-to-peer facet of their design. Distributed ledgers are stored on multiple “nodes” (usually computers) within a network, meaning that records are kept in multiple geographic locations. This is in contrast to previous digital record keeping methods that stored the ledger in a centralized location, such as a server, and were administered by select trusted individuals. Even if multiple systems had access to a record, only one master ledger existed.
When using DLT, there is no central server that provides the most up-to-date information and version of a ledger. Instead, distributed ledgers are designed with consensus algorithms, which allow nodes on the network to automatically “vote” on information and replicate it among all the connected systems. This means every node holds an up-to-date and verifiable copy of the record that cannot be fraudulently altered , as there is no “main” file to change, and the majority of nodes must agree on the records.
Distributed ledger technology is a revolutionary step in information collection and communication because it significantly impacts the cost of trust and the reliability of information. This world-changing technology underpins blockchain and some of the earliest and most widespread digital currencies, such as Bitcoin.
How are distributed ledgers related to blockchain and digital currency?
Blockchain is only one use case of distributed ledger technology, although the growing popularity of blockchain has prompted interchangeable use of the terms. Enterprise-level companies utilize blockchain for tasks that lie well outside the digital currency umbrella—for example, they use it for data exchange, validation, and authentication.
However, blockchain has been the most publicly popular use of DLT because it underpins popular digital currencies, such as Ethereum and Bitcoin. In distributed ledger-based blockchains, all of the previously mentioned facets of DLT still apply. Records are distributed across multiple nodes, which must reach a consensus about the data within, and no central authority holds a master copy from which these records proliferate, nor does anyone hold total administrative power.
With blockchain DLTs, however, data is combined into blocks and chained together using a cryptographic signature. In blockchains, data is sequential, just like links in a chain. You can’t inject a new “link”—or block, as it’s called in this case—without breaking the data chain. This append-only structure works well for situations that need an ever-growing list of verifiable information that cannot be readily altered, such as voting and transaction records for digital currencies, like Bitcoin.
Linear blockchains, such as those associated with Bitcoin and Litecoin, utilize the distributed ledger structure in order to track and verify transactions. This forms the foundation that allows users to buy, sell, exchange, and spend digital currencies.
That is not to say that all DLTs and digital currencies use blockchain, as the two terms can stand separately using data structures that apply to only one or the other. Digital currencies that use directed acyclic graphs (DAGs), such as ByteBall and IOTA (which uses partial proof-of-work stake and is not a full DAG application), arguably may not fall into the blockchain category, yet still utilize distributed ledgers. That said, DAG is on the forefront of digital currency technology, and it remains to be seen whether it will compete with blockchain, have separate use cases, or work in an interconnected way in the long-term.