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What Means Distributed Ledger Technology

The publication of the Nakamoto Manifest in 2008 led not only to the start of a cryptocurrency market, but also to a growing interest in the technologies of cryptocurrency. And if attitudes of governments and users to the cryptocurrency stay mixed, distributed databases are going into different spheres of activity, fundamentally changing existing models and structures. How do DLT work and where it is used?

How does DLT work?

Distributed Ledger Technology (DLT) is part of the broader concept of “distributed data storage”. It is a technology for storing and recording information by distributing it among nodes of a single electronic database network. 

DLT is differ by the sequential addition of information and the impossibility or limited ability to make changes to already recorded data (mean roll back a processed transaction). The key features of DLT are:

  • Data storage in a p2p network – each node has the same rights to store and modify the database, and each node has an exact copy of the data. Centralized change or “supernode” with additional rights is allowed, but can reduce network security. 
  • Remote nodes – nodes with copies of bases are geographically remote from each other and are connected through the Internet. This reduces the risk of hacking the network and increases its potential coverage. 
  • Synchronization – nodes must inform each other of any changes made to the registry, check these changes and add them to their copy. Bitcoin uses the PoW consensus algorithm for this purpose, but there are other ways of checking changes. 

DLTs can have different network structures, consensus mechanisms, node stimulation tools, and other technical and organizational features that allow them to be classified according to a variety of criteria. The most popular classification by the network access permission:

  • Federal DLT is a closed database in which access to and processing of information is performed only by trusted users after obtaining rights from the network administrator. A distributed registry of this type uses, for example, China’s central bank to serve the digital yuan, another example is the R3 consortium. 
  • Private DLT – in such networks access to information can be both open and closed, but changes are made only by trusted nodes. The XRP Ledger network runs on this model, where any user can initiate a transaction, but record it with trusted validators elected by Ripple Labs. 
  • Public DLT – initiator of changes and host for storage/processing of information can become anyone. Almost all major cryptocurrencies operate on the public DLT (public blockchain, more precisely). 

There is a comprehensive test for identifying a type of DLT that includes defining the community structure that manages the network, the way to initiate changes to the protocol and the database and mechanisms for synchronization of nodes, etc. 

DLT and blockchain: not synonymous

Words “distributed ledger” and “blockchain” are often used as synonyms, but this is not quite correct. Blockchain is one of the varieties of DLT that is different:

  • Grouping information into blocks;
  • Inclusion in each block information about previously;
  • Cryptographic encryption.

Blockchain is defined as a public DLT, as it has open source code and uses consensus mechanisms in which network security increases with more nodes. Cryptocurrency payment systems are also interested in increasing the number of nodes and users. 

Other distinctive features of blockchain are consensus mechanisms (PoW and PoS), which provide all nodes with all information about the changes initiated and the autonomous verification of such changes by each node. It is a highly secure mechanism (for example, in a Bitcoin network, the correctness of a transaction verifying more than 2,000 times), but it is expensive and limits the scalability of blockchain networks. 

Blockchain is the most common type of new generation DLT, but not the only one. Other technologies have been developed to solve the problems of block registries:

  • A hashgraph is a form of DLT that differs from a blockchain mechanism of node synchronization. Hashgraph networks check a transaction using a “gossip mechanism” – each node transmits transaction information to a random neighboring node, after which nodes voting. That means, each node does not autonomously check the correctness of the changes made, is much faster and less costly than blockchain consensus mechanisms. 
  • DAG is a directed acyclic graph. This DLT differs not only in its synchronization mechanism, but also in the way it stores information. In the DLT network, each transaction initiator is a validator – to initiate a transaction it must verify two other transactions. The initiated transaction is sent to check two random nodes, each of which will send it to two more nodes, etc. The longer the chain of nodes checking the transaction, the more reliable it will be. At the same time, each node stores only transaction data that it has verified. 

The formation of successive “branches” of transactions leads to another way of storing data – instead of transaction blocks, DAG creates transaction trees in which each change can be traced back to the initiator by moving along the branch of validators that checked it. The IOTA network works by this principle. 

There are also less well-known DLTs, such as Holochain, in which each node operates on its own network. It is likely that in the future we will see even more decentralized and less resource-intensive ways of distributing database storage. 

It is also worth adding that blockchain and cryptocurrency are perceived as an integral whole, although blockchain and DLT can be used not only in payment systems. However, using native tokens, DLT can solve the problem of node stimulation, which is primarily relevant for open networks. 

Strengths of DLT

The ever-expanding scope of decentralized registries derives from the advantages of technology. These include: 

  • Security –  is the most important advantage of DLT compared to centralized databases. A decentralized registry is difficult to crack and make unsubstantiated changes, cose requires simultaneous access to many network nodes that may be thousands of kilometres apart. 
  • transparency – public DLTs allow tracking of all information in the database, including the time of changes. Information about other users of the network and their actions is available to users in open or encrypted form. 
  • Censorship resistance – the absence of an organizational center makes it impossible (or very difficult) to shut down the network, or to edit or delete data at the request of regulators. DLT will die only if all nodes decide to stop running.
  • Automation – synchronization algorithms, consensus mechanism, and protocols on which DLT works can function without human intervention. Even mining cryptocurrency is a semi-passive process , when the farm owner does not participate at the software level. 
  • Economy – automation and no need to maintain an administrative center leads to cheaper content of DLT and as a result, the cost of services built on the DLT is significantly lower than traditional technologies. 

There are also disadvantages to DLT, such as low scalability and high power consumption, but this is only true for some types of distributed registers (like a blockchain on PoW), which are less used in new DLT projects. 

Where DLT can be used

The advantages make it easy to identify areas where DLT has a high potential for expand and development: 

  • Finance – unrequited changes, consistent data recording, and the ability to track changes to a starting point make DLT almost ideal for payment systems and the banking sector. In this direction decentralized databases are used most intensively, and not just cryptocurrencies. 
  • Supply chains – protection against unauthorized changes can guarantee the authenticity of the origin of the goods. Blockchain and other DLTs are useful not only for consumers who know exactly what they are buying, but also for manufacturers who receive accurate logistics control tools.
  • IoT – the Internet of things in Western countries is still lagging behind the Asian region, but it is also growing rapidly and requires a single network that can connect different technical devices. And DLT, which guarantees the security of information, is the best choice for IoT. 
  • State registers – States collect and store huge amounts of data, and DLT makes databases more secure and cheaper by automating many processes. In the public sector, an important area also remains the electoral process, where the DLT can bring democracy to the world through transparent elections. 

This is far from a complete list of uses of DLT. Decentralized registers are also being developed in more unexpected areas such as sports, health care, social media and online advertising. And you can be sure – it’s just a start.

DLT’s perspectives

In the near future, DLT will be able to make a significant difference in the daily lives of every person by implementing technologies:

  • CBDC – Central Bank digital currencies still remain in the theoretical field for many countries, but the positive experience of China has greatly accelerated the development of such projects. Through the CBDC, DLT can literally become the basis for the economy of the future. 
  • Tokenization is essentially the digitization of rights (ownership, voting, participation, etc.) and objects that would be impossible without DLT. We are seeing a veritable boom of tokenization in art and collections, but rather it may extend to real estate, assets and any other property. 

These technologies guarantee the rapid spread of demand for DLT in the near future and will provide developers of such protocols with investment, experience to improve networks and the possibility to create really large-scale projects. 

Conclusions

DLT is a technology for distributing data storage between interacting nodes. The DLT has several characteristic features – node remoteness, synchronization and peer-to-peer. However, the organizational model of such databases may be differ:

  • private;
  • public;
  • federal.

Blockchain is only one type of DLT that uses block of data, cryptographic encryption, and special consensus mechanisms. Along with it, there are also DLTs built on hashgraphs or directed acyclic graphs with differ communication and data transmission mechanisms. 

DLT, as a completely new way of storing information, has the potential to be used in a variety of industries – from the public sector and finance to the Internet of things and supply chains. Already on the DLT created two important technologies that will transform the world – CBDC and tokenization, therefore prospects of distributed registries are promising and broadest. 

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