What is a distributed ledger technology?
(also called a shared ledger, or Distributed Ledger Technology, DLT)
Ledgers, the foundation of accounting, are as ancient as writing and money.
These early digital ledgers mimicked the cataloguing and accounting of the paper-based world, and it could be said that digitization has been applied more to the logistics of paper documents rather than their creation. Paper-based institutions remain the backbone of our society: money, seals, written signatures, bills, certificates and the use of double-entry bookkeeping.
In its simplest form, a distributed ledger is a database held and updated independently by each participant (or node) in a large network.
The distribution is unique: records are not communicated to various nodes by a central authority but are instead independently constructed and held by every node. That is, every single node on the network processes every transaction, coming to its own conclusions and then voting on those conclusions to make certain the majority agree with the conclusions.
Distributed Ledgers are a dynamic form of media and have properties and capabilities that go far beyond static paper-based ledgers.
A peer-to-peer network is required as well as consensus algorithms to ensure replication across nodes is undertaken. One form of distributed ledger design is the blockchain system, which can be either public or private.
How does the Distributed Ledger work?
The distributed ledger database is spread across several nodes (devices) on a peer-to-peer network, where each replicates and saves an identical copy of the ledger and updates itself independently.
The primary advantage is the lack of central authority. When a ledger update happens, each node constructs the new transaction, and then the nodes vote by consensus algorithm on which copy is correct.
Once a consensus has been determined, all the other nodes update themselves with the new, correct copy of the ledger. Security is accomplished through cryptographic keys and signatures.
In 2016, some banks tested distributed ledgers for payments to see if investing in distributed ledgers is supported by their usefulness.
Distributed ledgers may be permissioned or permissionless regarding if anyone or only approved people can run a node to validate transactions. They also vary between the consensus algorithm. (Proof of Work, Proof of Stake, or Voting systems). They may also be mineable (you can claim ownership of new coins contributing with a node) or not mineable (the creator of the cryptocurrency owns all at the beginning).
Why do we need Distributed Ledger Technology (DLT)?
The invention of distributed ledgers represents a revolution in how information is gathered and communicated. It applies to both static data (a registry), and dynamic data (transactions).
Distributed ledgers allow users to move beyond the simple custodianship of a database and divert energy to how we use, manipulate and extract value from databases — less about maintaining a database, more about managing a system of record.