Distributed Ledger Technology (DLT) allows transactions between individuals to be replicated and stored on a decentralized network, providing synchronization. With DLT, data is distributed across multiple networks rather than being centralized on a single server. Participants with access to these networks can access and verify the data. With DLT, data access, validation, and other updates are provided through a consensus mechanism created by network users.
DLT is used for recording transactions that occur on the network, such as payments and transfers. This is different from centralized systems used by various businesses and financial institutions. These centralized ledgers are easily manipulated, and problems with synchronization can arise if different versions of the ledgers are created. Centralized ledgers also pose a risk of erroneous or incomplete information being recorded or transactions being performed.
In contrast, DLT is not controlled by a single authority, but rather by the nodes, or participants, on the network who each have a copy of the data that is updated every few seconds. Network participants use consensus mechanisms to agree on the records and modifications recorded on the ledger. DLT provides a high level of security and utilizes cryptographic and digital signature technologies to ensure the accuracy of transactions recorded on the ledger.
Distributed ledger is a peer-to-peer (P2P) system used to simultaneously record transactions between individuals in multiple locations. Distributed ledger technology (DLT) uses cryptography and consensus mechanisms to allow users to create and share copies of the same ledger, eliminating the need for a centralized database and authority.
DLTs involve anonymous participants, and do not require permission from any authority. Information on all transactions is shared and recorded in the ledger among all participants through consensus mechanisms. An example of a DLT is the Bitcoin blockchain network, which is considered a public and distributed ledger.
DLT also allows for private ledgers to maintain data privacy. The data from transactions on a private ledger is shared only among the parties involved. Consensus mechanisms on private ledgers are achieved by adding a digital signature to a smart contract, rather than consulting ledger participants.
What Are the Characteristics of Distributed Ledger Technology?
- Data can be stored in multiple copies synchronized among different participants instead of being stored in a central server.
- Participants in a distributed ledger ensure the accuracy of transactions and constantly update data in the ledger.
- It increases trust in transactions made over the internet.
- It provides users with data access freedom.
How Does Distributed Ledger Technology Work?
Distributed ledger technology allows data to be securely and accurately stored through cryptography. Access to the data on the ledger is achieved through keys and cryptographic signatures.
Because DLTs operate in a decentralized, private, and encryption-focused manner, they minimize the risk of being attacked. For a successful attack, all copies in the network would need to be attacked simultaneously, which is nearly impossible. The peer-to-peer nature of distributed ledgers and synchronized record-keeping make the system fast, efficient, and cheaper.
All devices in a distributed ledger network, which are called nodes, have a copy of the ledger. There can be multiple nodes in a network. All changes, such as information transfer from one block to another, are hosted on nodes.
Where Is Distributed Ledger Technology Used?
Distributed ledger technology can be used for various purposes and sectors. Some sectors that benefit from distributed ledger technology include:
- Aviation
- Healthcare
- Insurance
- Logistics
- Public transportation
Distributed Ledger Technology and Blockchain Technology
Although blockchain and distributed ledger technology have similarities, they are different from each other. Blockchain utilizes multiple technologies, one of which is DLT. Blockchain networks are a type of distributed ledger that uses cryptography technology and is more difficult to manipulate.
Data in blockchain networks is stored in blocks, which are chained together. Blockchain networks operate publicly, which means that the transaction history can be accessed by anyone.
Unlike blockchain networks, distributed ledger technology does not have to use blockchain. DLT creates a decentralized ledger to achieve consensus.
What Factors Set Blockchain Networks and DLT Apart?
Some of the factors that set distributed ledger technology apart from blockchain technology are:
Distributed Ledger Technology
- Data can be chained together, but blocks are not used in this process.
- Data can be encrypted.
- Ledgers can be private, permissioned, or permissionless.
- Data is immutable.
Blockchain Technology
- Data is hosted on "blocks" that are chained together.
- Data is encrypted.
- Blockchain networks are usually public and permissionless.
- Data is immutable.
What Are the Advantages of Distributed Ledger Technology?
Some of the advantages of distributed ledger technology are:
- Transactions are fast and secure.
- Data can be processed on the blockchain network after the transactions are approved.
- In distributed ledgers, individuals do not need intermediaries to perform their transactions, minimizing transaction costs.
- Distributed ledgers do not store data on a centralized server, providing more protection against attacks.
