One of the first things you will learn about in cryptocurrency is blockchain technology, as most of what you will discover or learn more about as you research will often tie back to it. Along with this recurring term, there is another that exists that frequently gets mistaken for blockchain or it will sometimes be abruptly identified as being the exact same thing. That similar term is called a ‘distributed ledger.’
What is it?
A distributed ledger is a database that is collectively shared and coordinated across a series of sites, institutions, and geographies. It permits transactions to have public ‘witnesses’, thus making any type of cyber-attack more difficult to conduct. The participant within each node belonging to the network is able to access the records that are shared across that network and can also own an identical copy of it.
Furthermore, any changes made or additions included to the ledger are reflected and copied to all of the participants in a matter of minutes or even seconds. Existing beneath the distributed ledger technology is the blockchain, which is the technology that also underlies Bitcoin.
A more detailed look
To go further into detail, a conventionally distributed ledger can often be described as being a ledger of any transactions or contracts being maintained in decentralized form across various locations and people, effectively disposing of any real need for a central authority to keep a check against manipulation. All of the information on it is securely and accurately stored with the use of cryptography and it can be accessed by utilizing keys and cryptographic signatures.
As soon as the information is successfully stored, it will become a database that is completely unchangeable, which is what the rules of the network govern. While regular centralized ledgers are vulnerable to cyber-attacks, distributed ledgers are pretty hard to attack due to the fact that all of the distributed copies would need to be attached at the same time in order for the attack to be successful. On top of that, these records are impervious to any malicious changes that are made by a single party.
The ledger system has existed since ancient times and has essentially been the core component for economic transactions since its conception. They have been used to record contracts, payments, buy-sell deals, or the movement of assets and property. The medium that began with clay, wooden tally sticks, stones, and being written on tablets and/or papyrus has taken a huge leap since the creation of paper. Around the ’80s and ’90s, computers had started to become normalized and from this popularization, paper records became digitized.
These early types of digital ledgers imitated the cataloging and accounting system associated with the paper-based world and, in a way, the digitization of paper records has been applied more to the logistics of paper documents as opposed to their creation. Regardless, institutions that are paper-based still remain to be the backbone of our society, financial and otherwise.
By utilizing computers in the ledger system, they have inherently provided the process of record-keeping and ledger maintenance with exceptional convenience and speed.
Blockchain: what’s the difference?
At this point, you might have noticed that what has been said about distributed ledgers sounds awfully similar to blockchain technology. That observation is certainly understandable, especially because it is, after all, a ledger; a decentralized ledger at that. The two are actually different from one another.
Let’s first elaborate on what exactly blockchain technology is. It is a list of records (‘blocks’) that are linked together with cryptography and stored onto a public database (the ‘chain’). It allows digital data to be distributed, but not copied. The information that makes up these blocks are divided into three categories:
- The information about the transactions, like the date, the time, and the dollar amount of your most recent purchase.
- The information regarding who is involved in the transaction. Rather than using your actual name, your purchase is recorded using a unique ‘digital signature.’
- The information that sets it apart from other blocks.
How a blockchain works can be broken down into four steps. First and foremost, a transaction must occur. Second, after the transaction takes place, it must be verified by a network of computers. Third, the transaction must be stored in a block following it being greenlit after it is classified as “accurate.” Finally, that block must be given a ‘hash’ (a function that changes an input of letters and numbers into an encrypted outcome of a fixed length) and only then can it be added to the blockchain.
The key difference to remember that differentiates blockchain from distributed ledger is that blockchain is simply one type of distributed ledger. Even though blockchain is essentially a sequence of blocks, distributed ledgers do not require the use of such a chain. Moreover, distributed ledgers do not need ‘proof of work’ (POW) and provide comparatively better scaling options.
The very act of omitting the middleman or the intermediary party from the equation is what makes the concept of distributed ledger technology so appealing to the public. Contrary to the blockchain system, a distributed ledger is basically a type of database that is spread across an array of sites, regions, and participants.
Through a more superficial perspective, a distributed ledger would sound exactly like what many would envision a blockchain to be. As previously stated, they do indeed look and sound like they are very similar and interchangeable. With that being said, all blockchains are distributed ledgers, however, you should keep in mind that not all distributed ledgers are blockchains. While a single blockchain represents a certain type of distributed ledger, it is also merely a subdivision of them.
There is so much potential that can be drawn from distributed ledger technology, as it can essentially revolutionize the way in which governments, institutions, and corporate carry out their work. It can aid in the collection of taxes, issuance of passports, record land registries, and also play a part in voting procedures.
As it has continuously been touched on, distributed ledgers such as blockchain are beneficial for financial transactions, as they cut down on operational inefficiencies and will ultimately save a lot of money. A greater level of security is also provided, thanks largely to their decentralized nature and also the fact that the ledgers are designed to be immutable.
This particular kind of technology is already starting to make waves in several industries, some of which include:
- Music and other forms of entertainment
- Diamonds and other precious assets
- Supply chain of numerous types of commodities
Alternatively, blockchain technology provides users with a way to not just securely but also efficiently construct a log that is tramper-proof. This includes anything ranging from transferring international currency to shareholder records. Financial processes are upgraded considerably as a means to offer companies a safe and stable digital alternative to other processes that are run by a clearinghouse. Overall, blockchain assists in avoiding the procedures that are typically time-consuming, expensive, and paper-heavy.
Oliver Belin, writer for Tradeix, explains that:
“When you write data to a blockchain, it gets etched on the network. When you have a series of transactions over time, you gain an accurate and immutable audit trail. This is very useful for financial audits. Having data stored in a place where no single entity owns or controls it, and no one can change what’s already written, gives you benefits similar to double-entry book-keeping.”
Like blockchain, distributed ledger technology is a system that is still in its infancy. Be that as it may, it shows great promise for the full digitization of record-keeping and helping in making it run at a more efficient pace.