When Bitcoin erupted into the scene in 2009, much of the world was astonished by the technology behind the novel concept. The question that rose in most minds at the time was: how was it possible to have a secure and effective decentralized currency? What tech was behind this seemingly-impossible endeavor? The answer was Distributed Ledger Technology.
What is DLT?
Distributed Ledger Technology (DLT) is a digital system that allows users to record transactions. How is it different from a traditional database? DLT stores the recorded information at several locations at any given time while traditional databases store information in one central location. Additionally, DLT is decentralized, which means that there is no central authority that controls the data. The decentralization offers better security, transparency, and trust.
If you are wondering how the database functions without centralized control, the answer is peer-to-peer (P2P) technology. In P2P networks, users communicate with one another and so there is no particular need for a centralized authority. And for this, they use a consensus algorithm. A consensus algorithm is a decision-making process for groups. Fundamentally, it is a resolution method used to solve group decision-making problems.
How is DLT Useful?
Eliminates Middlemen: Unlike centralized agencies, DLTs do not require middlemen; as a result, it removes the cost and inefficiencies they bring along. Without the requirement of a bothersome bureaucracy, users can transfer their assets directly and quickly.
Accessibility: DLTs offer a service that is far more open to the public than centralized systems, which monopolize control and restrict access to ledgers. DLTs enable individuals and companies to conduct transactions freely, without relying on or having faith in a third party. This is furthered by public DLTs, which place no limitations on transactions or participation; no one may be barred from the platform, and no transaction will be given preference over another.
Apart from being decentralized, DLT has several features that help it stand apart from other centralized ledger systems. Here are some:
Unalterable: Data shared on the DLT cannot be altered. This is perhaps the most important feature that gives it its unrivaled security.
Distributed: A key feature of DLT is its distributed nature, which means that there is no single place where the data is stored. Each and every peer has a copy of the ledger. This does vary though, as there are certain systems that store data in different ways.
Append-only: Append-only refers to the property of computer data storage such that new data can be appended to the storage but where existing data is immutable. This is a huge variation from existing traditional databases where data can be changed for the purpose of functionality.
Shared: DLT is not the possession of a single person or entity; it is a shared system among nodes (which is a computer that supports the network.) The information stored on various nodes, however, varies, as some may hold the fully copy the ledger, while others may only hold necessary information.
Fundamentally, there are three types of DLT currently available.
Permissioned: These are Private networks. They are made to operate in a closed ecosystem where users must go through a KYC process in order to gain access. Once verified, users have access to the functionalities of permissioned networks or distributed ledger systems. The validation nodes in a permissioned network are in charge of validating network transactions, and therefore bear the brunt of the work.
Permissionless: These, on the other hand, are public networks. Users cannot join the permissionless network without having permission. Everyone is allowed conduct transactions, verify blocks, and engage in other network interactions using the system. A good example of this type of DLT is Bitcoin.
Hybrid: This type of network has both permissionless and permissioned networks and exploits the benefits offered by both systems. Hybrid models may be the best choice for business ventures.
Federated: In this type of network, multiple organizations will influence the blockchain network. It offers extremely fast and scalable systems and the network regulations preserve security and privacy.
Consensus techniques are the backbone of DLTs. These mechanisms, as mentioned earlier, control how distributed ledger network nodes validate transactions. Some of the main consensus algorithms include “Proof-of-Work,” “Proof-of-Stake,” “Delegated Proof-of-Stake,” and “Byzantine Fault Tolerant-Based.
Proof-of-work: The process of creating fresh blocks of transactions to a blockchain is known as Proof-of-Work (PoW). It involves solving computations set by the network. Solving the computation grants the user the ability to add that block to the blockchain and earn rewards. However, this is highly energy intensive.
Proof-of-Stake: In this method, which is less energy consuming, nodes with an existing stake can participate. With this approach, cryptocurrency owners can stake their coins, giving them the authority to review and add new blocks of transactions to the blockchain.
In a nutshell
Distributed ledgers are undoubtedly the technology of the future. It provides a great feature set for businesses that want to up their game. Not just this, it even has the capacity to address fundamental societal and economic issues that the world is currently facing.