Distributed Ledgers

Databases shared across a network and can be accessed at various geographical locations.

What are Distributed Ledgers?

Distributed ledgers are the databases shared across a network and spread over various geographical locations. A ledger is a collection of financial accounts and, in such a case, distributed means spread out and controlled globally. Thus, distributed ledgers are held and reorganized by multiple parties in different locations and institutions.

 

Distributed Ledgers

 

Distributed ledgers can be assessed by the participants at each network node; the participants can obtain an identical copy of the recordings shared across the network. In case the ledger is edited or appended, the changes are replicated and copied to the participants. In order to make sure that the database is accurate, it is synchronized. Distributed ledgers and bitcoin use the same technology.

 

Summary

  • Distributed ledgers are the databases shared across a network and can be accessed at various geographical locations.
  • They are held, reorganized, and controlled by individuals called nodes. The need for a third party is eliminated in distributed ledgers.
  • Distributed ledgers are considered highly secure, as they are inherently decentralized and provide a high amount of transparency.

 

How Distributed Ledgers Work

 

How Distributed Ledgers Work

 

Distributed ledgers are held, reorganized, and controlled by individuals called nodes. The database is constructed independently by each node. Every transaction occurring on the network is processed, and a conclusion on the development of the database is created by each node.

Based on the transaction, voting is carried out on the changes completed on the database. All nodes participate in the voting, and if at least 51% of them agree, the new transaction is accepted on the database. Afterward, the nodes update the versions of the database so that all the devices or nodes will be of the same version. The new transaction is written onto a block on the blockchain.

Nodes in Proof-of-Work blockchain are also called miners. When a miner successfully puts a new transaction into a block, they receive a reward. It requires a dedicated 24×7 computer power. It is the responsibility of miners to compute the cryptographic hash for new blocks. Whoever, among the miners, successfully finds the hash first, gets the reward.

Miners dedicating more computational power to find the hash will be more successful. However, as blocks keep generating, it becomes more difficult to find subsequent hash scales. The goal is to keep a constant speed of generating the blocks.

 

Benefits of Distributed Ledgers

 

1. Highly transparent, secure, tamper-proof, and immutable

In distributed ledgers, the entries happen in the database without third-party involvement. After records are written into distributed ledgers, they cannot be altered by any other party. Hence, until the ledgers are distributed, the records cannot be tampered with.

 

2. The need for a third party is eliminated

Although it is not necessary to always operate the distributed ledgers without a third party, it can save a lot of money and time in some cases. In the supply chain business, results can be written directly by sensors to the blockchain without the need for a third party. It saves a considerable amount of money, effort, and time.

 

3. Inherently decentralized

The distributed ledgers’ inherently decentralized nature adds another layer of security. As the database is spread globally, it is difficult to attack.

 

4. Highly transparent

Distributed ledgers present with a high level of transparency. They allow all the stored information to be freely and easily viewable. It provides a significant amount of transparency desired by many industries.

 

Examples

Bitcoin is a highly popular example of a distributed ledger. It is a virtual currency that can be used for payments on a network that enables users to make non-reversible payments with transaction fees less than conventional online payment methods.

Ethereum is a popular distributed ledger that enables the developers to create their own applications. It is very popular because it introduced smart contracts. The smart contracts are self-executing and are triggered if certain pre-set, real-world conditions are fulfilled, and related data is entered into the blockchain.

Ripple is another example of a distributed ledger that is an open-source ledger focusing on payments, especially cross-border transactions. It was originally intended for banks.

 

Related Readings

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Bitcoin Mining
  • Dark Pool
  • Knowledge Engineering
  • Machine Learning (in Finance)

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Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!