There is a huge spike in the interest given to digital innovations in finance (fintech) across the financial industry. One of the innovations in fintech that is used as a means of transferring payment, clearing, and settlement processes is the distributed ledger technology (DLT). A popular example of a DLT is blockchain.
There is a wide range of ways to deploy a distributed ledger technology, from distributed data storage to peer-to-peer networking. This article will break down everything you need to know about distributed ledger technology, from what a DLT means to its importance.
What Is Distributed Ledger Technology (DLT)?
Distributed ledger technology is known as the technological infrastructure and protocols used for validation, simultaneous access, and record updating in an immutable manner across a network spread across multiple locations. DLT is getting more popular in the technology world because of its potentials across various sectors and industries.
The Origins of Ledgers
Ledgers are essentially the record of transactions and similar data and they have been in existence for millennia in paper form. However, the rise of computers in the late 20th century allows ledgers to become digitized, but computerized ledgers are usually similar to what existed on paper.
Throughout history, there is a need for a central authority to validate the authenticity of the transactions recorded in the ledgers. However, at the turn of the 21st century, technology has created the next step in record keeping with advanced algorithms, cryptography, stronger compute power, etc. It makes the distributed ledger technology a great form of record keeping.
Key Features Of DLT
Some of the key features of distributed ledger technology are stated before.
- It is immutable. This helps to ensure that any data stored in a distributed ledger technology cannot be changed or altered.
- It is append-only as they only provide full transactional history.
- It is distributed in nature. This means that data in a DLT is not stored in a single place as every peer has a copy of the ledger.
- It is shared among nodes.
Role Of Consensus Mechanism
The core of any distributed ledger technology usually features some consensus mechanisms. A consensus mechanism can be regarded as the procedures and rules that govern how transactions are validated by the nodes in a distributed ledger network. Furthermore, the DLT technology will choose the nodes for validation purposes.
However, when a network is permissionless, the nodes will compete with others for block validation. Some of the popular consensus algorithms that are out there is Proof of Stake, Proof of Work, Byzantine fault tolerant-based, Delegated Proof of Stake, etc.
Proof of Work (PoW)
This is the most popular consensus algorithms out there. Proof of Work uses energy-intensive computations to solve the puzzle set by a network. However, the puzzle gets more computationally complex with time which makes it difficult for nodes to validate. This is why the reward for solving a block is usually distributed among the players and everyone will get an incentive for participating in the process.
Proof of Stake (PoS)
The Proof of Stake uses another method for solving a consensus problem. In the mechanism, nodes that have an existing stake can participate in the consensus method. Furthermore, PoS is energy efficient and can be used to solve a lot of problems with PoW. This means a participant using PoS will need to invest before he/she can participate in the consensus method of a DLT.
Overview Of DLT Ecosystem
There are four different aspects of a distributed ledger technology ecosystem, namely hardware, business, software, and protocol.
Before a DLT ecosystem can work, it needs nodes that can work as storage devices, computers, or servers. Furthermore, the nodes can have three modalities, namely:
Block producing validating nodes: these nodes take part in the consensus method and they usually have a copy of the entire distributed ledger plus all the transactions.
Partial/light nodes: the nodes store a limited transaction list that makes them functional and also to take part in the network.
Non-block producing full validating nodes: these nodes produce full validating nodes but do not participate in the consensus process. However, they contain the entire distributed ledger coupled with all possible transactions.
A distributed ledger technology uses different types of software applications. When it comes to the DLT’s software ecosystem, you will discover that applications are written using different programming languages such as Rust, Java, Python, C++, etc. This means that the choice of a programming language in DLT depends mainly on the language’s weakness and strength.
Applications that are running on DLT can be categorized as stated below.
- Semi financial
DLT needs to take care of the users, developers, investors, corporations, and block producers when we talk about the business development aspect. All the stakeholders of DLT need to use DLT-oriented apps, solutions, and services for the completion of their tasks. For instance, investors will invest in an organization by providing the funds needed for the creation and management of a DLT ecosystem.
The goal of an investor is to make a profit from the investment while succeeding in terms of the business vision. However, developers help with the development of applications, products, and services. They can do this by using the DLT network and protocols and they also provide the ecosystem with technical support.
Block producers usually take active participation in the DLT’s consensus method. However, corporations can use the DLT to carry out their business activities while providing value to end-users.
This is the place where DLT’s protocol is developed and managed. In this layer, academia and developers will work on the distributed ledger technology. Furthermore, the layer will help to take care of the way that cryptographic keys relate to the network.
Implementations of Distributed Ledger
The type of distributed ledger technology known is the blockchain, as it bundles transactions into blocks that are chained together before broadcasting them to the nodes in the network. It was used to power bitcoin, the popularly known digital currency created in 2009.
Why Is Distributed Ledger Technology Important?
Organizations can use the distributed ledger technologies to speed up transactions as it removes the need for a central authority or middleman. Furthermore, distributed ledgers can help to reduce the costs of transactions. According to experts, they believe that using a distributed ledger technology is more secure as every node of a network hold records, which in turn create a system more difficult to manipulate or attack successfully.
It is also believed that distributed ledger offers a more transparent way to handle records as the information shared will be witnessed across a network. This also helps to make cyber-attacks much more unlikely.
Benefits of Distributed Ledger Technology
Most of the early interest in distributed ledger technology is how it can be used for financial transactions. This is understandable because of the way that bitcoin cryptocurrency gained its worldwide application and also helped to prove that DLT can work in the financial sector. This is why banks and other finance-related institutions start to adopt this technology.
However, digital ledgers can also be used in numerous areas such as business and government dealing coupled with financial transactions. According to experts, digital ledgers can be used in property deed transfers, tax collection, voting procedures, and social benefits distribution. They also stated that distributed ledger technology could be used for processing and executing legal documents and other types of exchanges.
It is also believed that individuals can use distributed ledger technology to hold and control personal information and selectively share pieces of those records when needed.
Furthermore, digital ledgers can help individuals and organizations to better track intellectual property rights and ownership for commodities, art, film, music, and so on.
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