What is a Distributed Ledger?

What Is A Distributed Ledger?

What Is A Distributed Ledger?

Ledgers have been used for recording economic transactions (contracts, payments, sales transactions etc.) since ancient times. Clay, wooden tally sticks, stone and papyrus were all used as the medium for them at some point. The invention of paper was a great step ahead in this process.

However, the greatest improvement was the process of digitization which started in the 1980s and 1990s when computers were beginning to be used in everyday business.

Paper records were digitized, too. Digitization referred mainly to the logistics of paper documents, not so much to their creation. These early digital ledgers improved the procedure of cataloguing and accounting to an unprecedented level. Distributed ledgers are a step even beyond that. Read on and see what we mean.

Distributed ledgers in every computer

Today, with new technological achievements and innovations much higher forms of digitalization (cryptographically secured, fast and decentralized) are being used. Those achievements ensured great convenience and speed in the ledger maintenance and the process of record keeping. 

New algorithms, computing power and new achievements in the field of cryptography have enabled the creation of a distributed ledgers. Such ledgers represent a revolution in recording, gathering and exchange of information and a are true innovation in the cryptocurrency market. They allow us to improve the way how we use, manipulate and extract value from databases

We can describe distributed ledgers as a common record of activity shared across computers in different locations. This includes both a registry and transactions.

The idea of a distributed ledger is not new. Organisations with branches or offices (like large international corporations, supermarket chains etc.) across a country of their origin or across other countries often use distributed ledgers. However, in a traditional distributed database, key functions, necessary for consistency among the multiple copies of the ledger, are performed by a system administrator.

Distributed ledger technology can help in tax collection, issuance of documents, recording land registries, issuing of various kinds of licenses as well as in voting procedures. As we’ll see later in this article, distributed ledger technology has many advantages (security of information, for one). However, its technological capabilities are still being explored. DLT is still nascent and rapidly evolving. Many areas must be resolved, including security, liquidity, speed, expenses etc. This is a long-term endeavour.

Let’s see now how distributed ledgers can simplify the process of recording various business transactions.  Investors interested in cryptocurrency trading are certainly familiar with Blockchain technology, so later we’ll focus on the distributed ledger vs. blockchain comparison.

How do distributed ledgers work?

Distributed ledgers are a type of ledgers (books of record where financial transactions are kept) with technical properties and capabilities that go far beyond simple traditional paper-based ledgers. While traditional ledgers are static, distributed ledgers are a dynamic form of media. They enable us to formalize and secure new kinds of relationships in the digital world.

The main characteristic of distributed ledgers is that there is no central authority and the database is constructed, held and updated independently by each participant (or node) in a large network. It means that each node in the network processes every transaction. After drawing their own conclusions about the transaction, all nodes will vote on those conclusions. The majority has to agree with the conclusions and the distributed ledger has been updated when the consensus is reached. Each node maintains its own identical copy of the ledger. To ensure replication a peer-to-peer network and consensus algorithms are required.

Distributed Ledger Scheme

Distributed Ledger Scheme

Each participant is informed about any changes or additions made to the ledger and gets the copy of it almost immediately. As we can see, decentralization is one of the main characteristics of the distributed ledgers.

Therefore, we can define a distributed ledger as a decentralized (multiple identical copies exist) database. This database is then shared and synchronized in a network of users and spread practically all over the world. Distributed ledgers also have one more advantage in comparison to centralized ledgers. While centralized ledgers are prone to cyber-attacks and manipulations, in distributed ledgers all the information are securely, accurately stored and cryptographically protected. They can be accessed only by using keys and cryptographic signatures.

Distributed ledger vs. Blockchain

If you are interested in cryptocurrency trading you have certainly heard about one type of a distributed ledger, namely the blockchain technology.

So, blockchain is a type of distributed ledger (very popular on cryptocurrency market) that modifies DLT in order to provide a more secure trading experience. Blockchain systems use a chain of blocks to ensure consensus.

In other words, blockchain technology is a cryptographically protected distributed ledger where we have separate but connected blocks. So, no one can make a copy of your Bitcoin. It is core technology of Bitcoin and many other cryptocurrencies, and it is what allows them to exist and operate the way they do today.

Blockchain Scheme

Blockchain Scheme

Conclusion

DLT could completely change the way we store and transmit money and information and keep records of financial transactions. It offers a large number of benefits for organizations (mostly banks) that use it. They offer instant global access and information about funds and this enables cash to be in continual motion which is really important for efficient cash management and liquidity.

Distributed ledger technology and blockchain technology represent a real revolution in the way we look at the speed and efficiency of global transactions. Modern business requires flexibility in the way of recording financial transaction. We can say it’s imperative for organizations to use the newest modern technologies that ensure flexibility, speed and efficiency. In the future, we will be able to build technologies which allow one shared ledger to connect all central banks, financial institutions and companies. This new level of connectivity makes possible for banks and other financial institutions to develop new solutions for managing and optimizing cash and liquidity in numerous ways through technologies convergence. Distributed ledger technology is a foundation for more efficient connection between financial institutions (banks e.g.) and their clients, more efficient recording of financial transactions and exchange of information. And if you want to see how all of this is connected to cryptocurrencies, just take a look at our other articles.

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Author: Ben Prescott
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