Distributed ledger technology (DLT) is a digital system for recording the transaction of assets in which the transactions and their details are recorded in multiple places at the same time. Unlike traditional databases, distributed ledgers have no central data store or administration functionality.
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.
Why they’re important
Distributed ledger technologies have the potential to speed transactions because they remove the need for a central authority or middleman. Similarly, distributed ledgers have the potential to reduce the costs of transactions.
Experts also believe that a distributed ledger technology is much more secure because each node of the network holds records, thereby creating a system that’s more difficult to manipulate or successfully attack.
Many also consider a distributed ledger a much more transparent way of handling records because the information is shared, and thereby witnessed across a network, which also makes a successful cyber attack much more unlikely.
Distributed ledger benefits
Much of the early interest in distributed ledger technology has been around its application in financial transactions. That’s understandable, considering that the cryptocurrency bitcoin gained worldwide use, while also simultaneously proving that DLT can, indeed, work. Banks and other finance-related institutions became early innovators in this space, as well.
However, DLT proponents say digital ledgers can be used in multiple areas, including government and business dealings, in addition to financial transactions. Experts believe digital ledgers can be used in tax collection, property deed transfers, social benefits distribution, and even voting procedures. They also say DLT can be used to process and execute legal documents and other similar exchanges.
Some believe that individuals can use this technology to hold and better control personal information, and then selectively share pieces of those records when needed; use cases here include individual medical records and corporate supply chains.
Additionally, proponents say digital ledgers can help better track intellectual property rights and ownership for art, commodities, music, film and more.
Distributed Ledger Technology has great potential to revolutionize the way governments, institutions, and corporations work. It can help governments in tax collection, issuance of passports, record land registries, licenses and outlay of Social Security benefits as well as voting procedures. The technology is making waves in industries such as finance, music and entertainment, diamond and precious assets, art, supply chains of various commodities, and more.
In addition to start-ups, many big companies such as IBM and Microsoft are experimenting with blockchain technology. Some of the most popular Distributed Ledger protocols are Ethereum, Hyperledger Fabric, R3 Corda, and Quorum.