What is Distributed Ledger Technology?

What is Distributed Ledger Technology (DLT)? 

DLT is a network of computers (known as participants or nodes) that create a database system to store and share replicated and identical transaction records across the network. Transaction Records are validated by nodes on the network before being added to the distributed ledger. Distributed Ledgers enable individuals with privileges to securely access the encrypted digital database (the ledger) at any point in time to provide a single source of truth. It is more secure and tamper-proof than individual databases as they don’t require a central authority to validate transactions and is simultaneously checked by the decentralised nodes. Participants in the network are compensated through cryptocurrency coins (or tokens) and through transaction fees. 

Blockchains and Distributed Ledger Technology explained 

Blockchain, the most recognisable example of a DLT, is a system that facilitates the process of recording transactions shared across an immutable ledger. Once the records are entered into the ledger on the blockchain, they cannot be altered. There are different forms of Blockchain, each with its own distinct qualities. 

Public vs private 

• Public: The network is accessible to the public and anyone can participate in blockchain activities. A key advantage is a more robust network due to public participation and the promotion of a more decentralised and autonomous operation.  
• Private: The network is only available to individuals with the right authentications and permission. A key advantage is that it can be tailored to meet the specifications of an organization and can provide higher levels of control over data access.  

Permissionless vs permissioned 

• Permissionless: A public blockchain that is completely decentralised and allows everyone to contribute towards the network and make changes. 
• Permissioned: Blockchain with customisable options that can only be accessed through an authentication process. Permissions can further be restricted to certain tasks within the blockchain network to ensure data integrity. Private blockchains are usually permissioned and are also known as consortium blockchains. 

Benefits of Distributed Ledger Technology 

DLT provide accurate information immediately, visible to everyone (with permissions) in real-time. Due to DLT’s inherently decentralised characteristic, the data is securely distributed across the network which makes it safe from malicious hacking attempts. Some of the most significant advantages of using DLT are: 

• Removes the intermediary: Distributed Ledgers can connect end users without any intermediaries. This also saves time and money as intermediaries (such as banks) are no longer required to oversee and validate operations.  
• Accessibility: The data is accessible and available to all the participants (nodes within the network) with access. Participating nodes can enter new data which will be validated by the other nodes and then added to the database. 
• Security: Transaction records have end-to-end encryption and which increases their resistance to tampering and malicious data hacking attempts, as simultaneous changes must be made to all copies of the database. DLT uses encryption and complex algorithms to ensure information recorded in the network cannot be altered.  However, an insufficiently decentralised network is open to manipulation so the network must remain sufficiently decentralised.
• Transparency: data and transactions are recorded in a verifiable way and are visible to all participants which can be useful for supply chain management, voting and financial transactions. 
• Accuracy: through automation, the risk of human error is reduced.
• Currency: All authorised participants can access the same real-time information, which makes it makes it easy to track and audit transactions.  

Disadvantages of Distributed Ledger Technology 

Like any new and emerging technology, there are still areas where DLT has some teething pains which will need to be reduced before it sees wider adoption. 

• Operational energy costs: these costs are very high as a large, distributed network of ledgers is constantly active to ensure record keeping which results in high carbon emissions. The mining of cryptocurrencies is also a high consumer of energy. 
• Limited adoption: although there is a strong case for DLTs use in a variety of industries, there has been a low adoption and limited application as industries are taking small steps toward integrating this technology into daily use.  
• Speed: DLT, and sometimes blockchains can be inefficient, especially during heavy traffic flow when transaction speed can slow significantly which results in high transaction fees. 
• Complexity: The systems are complex to set up and maintain which can be a challenge for those not proficient in the use of the technology. 
• Lack of regulation: As DLT is an emerging technology, regulations and standardisations governing its use are still fluid so may impact its use in the future. Non-reversible transactions can also put the sender at a disadvantage, especially in rare cases of fraud as there is no recourse. 

Conclusion 

Like any emerging technology, there are some teething issues with Distributed Ledger Technologies to resolve before we can expect to see wider adoption. However, there are many benefits to using DLT in a range of industries and applications and it will be interesting to see how this continues to evolve.