Understanding Distributed Ledger Technology

If you've ever exchanged cryptocurrencies on an automated market-maker like Uniswap and wondered how users are able to verify the integrity of such systems, a lesson on distributed ledger technologies might just be what you're looking for.

In this guide, we'll explain what distributed ledgers are and how they're being implemented to solve real-life problems. We will also cover the major types of distributed ledger technologies and list some interesting DLT-inspired projects.

What is a distributed ledger?

A distributed ledger is a database that is stored, validated, and updated across multiple points in a system. The history of distributed databases dates back to Ancient Rome, wherein people — especially influential people — could perform borderless transactions across regions in the empire without gold or silver coins.

The idea has since developed into one of the most secure forms of decentralized technology.

How does distributed ledger technology work?

A DLT implements the core principles of distributed ledgers. In distributed ledger technology, access to information isn't limited to just one entity, group, or authority. Instead, data is shared across a peer-to-peer network of nodes.

Each node — or computer — stores a copy of the ledger in its system. Anytime someone tries to update the ledger, participating nodes verify the authenticity of the information contained in the update before adding it to the ledger.

A DLT's workings are very similar to a blockchain. However, since distributed ledgers existed long before the first blockchain was created, it's safe to say blockchains are a form of distributed ledger technology.

The relationship between distributed ledger technology and crypto

A cryptocurrency is a decentralized currency that uses cryptography to secure its transactions. These transactions are logged on a public ledger - a blockchain — and as we mentioned earlier, a blockchain is a type of distributed ledger.

So, distributed ledger technologies act as a foundation on which almost every cryptocurrency is built.

How distributed ledger technology facilitates crypto transactions

Cryptocurrency transactions are basically timestamped digital files. To ensure the safety and integrity of the network, copies of the ledger containing every transaction that has ever been performed using that currency are readily provided for willing participants to download.

These participants act as the gatekeepers of that cryptocurrency. They validate every transaction by achieving a majority consensus with other nodes.

So, instead of a single, central third party, the power is shared equally among multiple parties. Blockchain technology implements the concept of distributed ledgers. In a blockchain, the entire system's transaction history is spread across a network of nodes.

These nodes must reach a majority consensus before a transaction can be validated and added to the ledger. After the transaction has been added to the blockchain, it becomes immutable (unable to be hidden, changed, or otherwise trifled with).

Types of distributed ledger technologies

In the past decade, we have witnessed different innovators implement the distributed ledger mechanism in distinctive ways. There are, however, three major categories of distributed ledger technologies: Public, Private, and Hybrid.

1) Public or Permissionless DLTs

Publicly distributed ledger technologies are accessible to anyone and do not have strict requirements for entities looking to participate in their protocol. In a public DLT, the ledger, or database, is distributed throughout a network of nodes such that each node has equal rights to create and validate new blocks of data.

In most cases, outsiders looking to participate in public DLTs must have access to a computer with stable internet connection as the process of updating the ledger can require significant computational power.

2) Private or permissioned DLTs

Private DLTs are more like closed networks. They are often used by enterprises or corporations to keep track of operations within the company.

Viewing and validating data in this type of distributed ledger technology is restricted to permissioned participants (where they get the name "Permissioned DLTs" from). A central authority or administrator has the ability to add and remove participants, set and reset preferences, and ultimately control how the entire network operates

3) Hybrid DLTs

A hybrid DLT combines the architecture of both private and public distributed ledgers. In a hybrid distributed ledger technology, the information stored on the system is public - open for anyone to examine.

However, participating in the network is restricted to a few, trusted entities. This mode of operation speeds up the transaction validation process (due to fewer nodes validating transactions) and ensures that data isn't easily replicated or manipulated (since the ledger is public).

Use cases for distributed ledgers

Distributed ledger technologies have grown into one of the most secure and versatile solutions for storing data and automating transactions. With the recurrent emergence of uniquely structured DLTs over the past few years, it has now become clear that the distributed ledger system is not limited to applications in finance alone.

Below we will discuss a few DLT use-cases that have potential outside the finance sector.

1) Supply chain and logistics management

One of the major problems facing logistics worldwide is access to data. With a public DLT, suppliers, wholesalers, retailers, and final consumers can efficiently track the progress of a shipment in real-time.

A fully transparent network also helps final consumers trace the origin of products. For example, consumers would like to verify if luxury products or medical supplies are genuine.

2) Arts

Gone are the days when art pieces could be illegally reproduced and sold without the original creator receiving any compensation for their work. DLTs, like the Ethereum blockchain, allow creators to convert physical art pieces into unexchangeable digital tokens or non-fungible tokens (NFTs).

Each token in the ledger cannot be recreated or duplicated because it has a unique digital certificate. Using systems like these ensure that artists get compensated for their work and buyers only purchase authentic pieces.

3) Electoral system

Distributed ledger technologies could be very beneficial to countries experiencing high rates of electoral fraud. Unlike paper or electronic voting processes that can easily be manipulated, data recorded on public DLTs have to be validated first by participants in the network before they can be successfully added to the ledger, at which point they become unchangeable.

Using a decentralized system whereby votes are only authenticated when a majority consensus is reached among network nodes greatly reduces the influence any single entity or group can have over the entire process.

The future of distributed ledger technologies

The use of distributed ledger technologies in public and private sectors is quickly gaining traction worldwide. While the technology aspect is still in its infancy, governments and businesses worldwide might incorporate DLTs into everyday tasks if applied correctly.

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