What is Distributed Ledger Technology?
Distributed ledger technology refers to a digital system that records transactions related to assets. The transactions and other details are simultaneously recorded at numerous places. The database recorded through distributed ledger technology does not include an administration facility or central data storage. Instead, the database exists among several participants or across different geographical locations.
Distributed ledger technology allows users to record, share, and synchronize data and transactions across a distributed network consisting of numerous participants. It can also be understood as a range of technologies with comparable structures but can be executed in various ways with different rules.
Distributed ledger technology can be classified as either public or private, depending on the accessibility of the ledgers by anyone or by the devices (also called nodes). It can also be categorized as permissioned or permissionless, based on whether participants require permission from a certain entity to edit the ledgers.
- Distributed ledger technology is a digital system that records asset transactions at numerous places simultaneously.
- Distributed ledger technology usually comes with restrictions on its access and use. It is called a permissioned technology.
- It creates ledgers in a decentralized way to obtain consensus from all the participants.
Importance of Distributed Ledger Technology
Distribute ledger technology can make the finance sector more resilient, efficient, and reliable. The technology can be used to improve features of the finance sector, such as processing transactions without third-party involvement and cross-border payments. It can also help make finance accessible to the unbanked population, which is presently outside the traditional reach of finance.
The distributed ledger technology can also be applied to various other industries, such as government financial systems, clean energy, and manufacturing, and can help to improve the prevalent processes.
Distributed ledger technology removes the requirement of a central authority; hence, it is capable of increasing the speed of transactions. Moreover, it can reduce transaction costs.
In addition, since the records are held at each network node, manipulating or successfully attacking the system is very difficult; hence, distributed ledger technology is believed to be a more secure way to handle records. As the information is shared and viewed across a network, distributed ledger technology provides a more transparent means of handling records.
Experts believe that distributed ledger technology can be utilized in the distribution of social benefits, transfer property deeds, tax collection, and even in voting procedures. It can also be used for processing and executing legal documents. The technology may be used by individuals to hold and control their personal information in a better way and share selective pieces of information when required.
Distributed Ledger Technology and Blockchain Technology
Blockchain and distributed ledger technology are frequently used as synonyms. However, both are quite different. Blockchain uses many technologies for its application, and distributed ledger technology is one of them.
Blockchain is a type of distributed ledger technology that makes use of cryptography, making it difficult to manipulate. It is an unchangeable and distributed ledger used for recording transactions, transferring ownership, and tracking the assets. Blockchain ensures security, transparency, and trust in different types of transactions involving digital assets.
In blockchain technology, as the name suggests, data is organized and stored in packages known as blocks, and the blocks are chained together. The blocks in the chain cannot be edited, as the blockchain technology allows only the addition of more blocks of data.
Furthermore, blockchains are usually public, implying that transaction histories can be viewed by anyone. In a blockchain, anyone can become a node and participate in the operations. Thus, blockchain is permissionless.
On the contrary, not all distributed ledger technologies necessarily use chains of blocks. However, they still use cryptographic validation. Distributed ledger technology creates a ledger in a decentralized way for obtaining consensus from the participants who distrust each other. Hence, new information is added only when all the participants consent to the action.
Unlike blockchain, distributed ledger technology usually imposes restrictions on its access, use, and who is permitted to be a node. Also, it uses a cryptographic signature to automatically timestamp a new entry.
Distributed ledger technology provides both public and private features. Also, it can be both permissioned and permissionless.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: