Distributed ledger technology (DLT) is a digital system for recording the transaction of assets in which the transactions and their details are recorded in multiple places at the same time. Unlike traditional databases, distributed ledgers have no central data store or administration functionality.
In a distributed ledger, each node processes and verifies every item, thereby generating a record of each item and creating a consensus on its veracity. A distributed ledger can be used to record static data, such as a registry, and dynamic data, such as financial transactions.
Blockchain is a well-known example of a distributed ledger technology.
What is distributed ledger technology?
Distributed ledger technology (DLT) refers specifically to the technological infrastructure and protocols that allow the simultaneous access, validation and updating of records that characterizes distributed ledgers. It works on a computer network spread over multiple entities or locations.
DLT uses cryptography to securely store data, cryptographic signatures and keys to allow access only to authorized users.
The technology also creates an immutable database, which means information, once stored, cannot be deleted and any updates are permanently recorded for posterity.
This architecture represents a significant change in how information is gathered and communicated by moving record-keeping from a single, authoritative location to a decentralized system in which all relevant entities can view and modify the ledger. As a result, all other entities can see who is using and modifying the ledger. This transparency of DLT provides a high level of trust among the participants and practically eliminates the chance of fraudulent activities occurring in the ledger.
As such, DLT removes the need for entities using the ledger to rely on a trusted central authority that controls the ledger, or an outside, third-party provider to perform that role and act as a check against manipulation.
Interest in distributed ledger technology grew significantly in the decade after the 2009 launch of bitcoin, a cryptocurrency powered by blockchain technology that was the first to demonstrate that the technology not only worked but could scale and remain secure.
From that time onward, organizations across industries experimented with DLT and how it could be used in enterprise processes. Financial services, healthcare and pharmaceutical sectors were early leaders, and supply chain management a common application.
It's important to note that the concept of a distributed ledger is not new. Organizations have long gathered and stored data in multiple locations either on paper or in siloed software, bringing the data together in a centralized database only periodically. A company, for example, might have different bits of data held by each of its divisions, with divisions contributing that data to a centralized ledger only when required. Similarly, multiple organizations working together typically hold their own data and contribute it to a central ledger controlled by an authorized party only when requested or required.
The great advancement of DLT is its ability to minimize or eliminate the often time-consuming and error-prone processes needed to reconcile the different contributions to the ledger, ensure that everyone has access to the current version and that its accuracy can be trusted.
Origins of ledgers
Ledgers -- which are essentially a record of transactions and similar data -- have existed for millennia in paper form. They became digitized with the rise of computers in the late 20th century, although computerized ledgers generally mirrored what once existed on paper.
Ledgers historically have required a central authority to validate the authenticity of the transactions recorded in them. For example, banks need to verify the financial transactions that they process.
Now, 21st century technology has enabled the next step in record-keeping with cryptography, advanced algorithms, and stronger and near-ubiquitous computational power, making the distributed ledger an increasingly viable form of record-keeping.
This advance comes at a time when such technology is greatly needed. Economic activity has always involved multiple participants, and commerce has almost always crossed multiple jurisdictions and borders. But modern business networks involve an even broader number of participants in more regions, and they have more need to record data for their own uses as well as to satisfy the demands of other participants in their networks. This has stressed conventional ledgers, making them costly to maintain and more vulnerable to errors, computer hacks, manipulation and tampering.
Examples of distributed ledger technology
Various types of distributed ledger technology are currently in use.
Blockchain, which bundles transactions into blocks that are chained together, and then broadcasts them to the nodes in the network, is the best-known type of DLT. It powers bitcoin and other cryptocurrencies.
Tangle, another type of DLT, is geared toward IoT ecosystems. The Eclipse Foundation and the IOTA Foundation created the Tangle EE Working Group, which describes Tangle as "a permissionless, feeless, scalable distributed ledger, designed to support trustworthy data and value transfer between humans and machines."
Other well-known distributed ledger technologies include Corda, Ethereum and Hyperledger Fabric.
Why DLT is important
Distributed ledger technology can bring drastic improvements to record-keeping by changing some of the fundamentals of how organizations collect and share the data that goes into their ledgers.
To understand this, consider both paper-based and conventional electronic ledgers that require all additions and changes to go through a centralized point of control.
In such a system, organizations must commit significant labor and computing resources to maintain centralized control. Moreover, centralized control means ledgers aren't always complete or up to date.
The process is also prone to mistakes and manipulation, as every location that contributes data to the ledger could become a source of fraud or errors.
Additionally, none of the other participants contributing data to the central ledger is able to efficiently verify the accuracy of data coming from the other contributors.
Distributed ledger technology, however, allows for real-time data sharing, which means the ledger is always up to date.
It also enables transparency, as each participating node can witness those changes.
It is more secure by nature, because it eliminates the single point of failure and single target for hackers and manipulation that exists with centralized ledgers.
Distributed ledger technology has the potential to speed transactions because it removes the need to go through a central authority or middleman. Similarly, DLT could reduce the cost of transactions. However, running the highly decentralized verification process and distributing copies of the ledger take substantial computing resources, which has been shown to hurt the performance of DLTs in certain networking environments compared to centralized ledgers.
Distributed ledger benefits
Much of the early interest in distributed ledger technology has centered on its application in financial transactions. That's understandable, considering that bitcoin cryptocurrency gained worldwide use while simultaneously proving that DLT can, indeed, work. Banks and other financial institutions became early innovators in DLTs.
However, DLT proponents say digital ledgers can be used in other industries besides financial services. Government agencies are exploring how to use the technology to record transactions such as real estate title transfers. Healthcare organizations are piloting DLT to facilitate a more efficient way to update patient records. Many businesses are testing DLT for maintaining supply chain data. And the legal profession is looking at how it can use DLT to process and execute legal documents.
Additionally, experts see the technology as enabling individuals to get better control of their personal information by allowing them to selectively share parts of their records when needed and restricting access or limiting the time information is available to other entities.
Additionally, proponents say digital ledgers can help better track intellectual property rights and ownership for art, commodities, music, film and more.
Although DLT adoption is in its early stages, the technology has already shown its ability in many cases to bring benefits to users, including the following:
- increased visibility into and transparency of data contributed to the ledger;
- lower operational costs thanks to the elimination of a central authority;
- faster transaction speeds because there's no lag in updates to ledgers;
- greatly reduced risks of fraudulent activity, tampering and manipulation;
- increased reliability and resiliency because there's no longer a central system that creates the potential for a single point of failure; and
- significantly higher levels of security.
Blockchain and DLT: How they relate and differ
The terms distributed ledger technology and blockchain are often used together -- and sometimes even interchangeably. They are not the same, however.
Most simply put: Blockchain is a type of DLT, but not all distributed ledger technology uses blockchain technology.
This confusion is understandable, given how interest in the technologies jumped after the advent of bitcoin and how interchangeable the technologies can be in actual use.
Both are used to create decentralized ledgers using cryptography. Both create immutable records that include time stamps. And both are considered nearly unhackable.
Both can be public, making them open for anyone to use, as is the case for bitcoin, or they can be permissioned (private) and thus restricted to authorized users who agree to certain standards of use.
Now, here's the big difference: Blockchain employs blocks of data that are chained together to create the distributed ledger, just as the name describes. But DLT also includes technologies that use other design principles to create a distributed ledger. To be considered a DLT, the technology need not structure its data in blocks.
The future of distributed ledger technology
Whether distributed ledger technology such as blockchain will revolutionize how governments, institutions and industries work is an open question.
Experts in this area promote DLT as an important technology that could not only drastically improve existing processes but could spur innovative new applications.
Moreover, they see DLT as part of the "internet of value," where transactions occur in real time across global networks. Indeed, digital ledger technology only exists because the internet that enables it is so pervasive.
However, experts generally believe that adoption of DLT will follow the typical technology curve, with a few leaders out in front, then fast followers and finally the laggards. They also note that organizations face challenges in implementing, scaling and operationalizing DLT.
To that end, enterprise executives, entrepreneurs and visionaries are now faced with the challenge of establishing the networks of entities that together can take advantage of DLT to radically change how they share and keep records, and innovating where DLT can enable entirely new processes and business models.