It is widely known that, among countless other things, cryptocurrencies allow users to conduct transactions in a decentralized manner - that is, without the existence of a centralized entity (like a company) to oversee such data transfers. But how are cryptocurrencies able to keep track of the right amounts being transferred, and to the right accounts?
In this Gate Learn article, we explain the concept of Distributed Ledger Technology, also known as DLT; what it is, the main features present in the technology and the difference between a DLT and Blockchain itself.
Before jumping into the DLT concept, it’s important to understand what a ledger is. Present for over a thousand years in records of empires, manors and even tribes, ledgers are financial systems that keep records of a company’s financial information - such as cash flow, investment inflow, payment outflows, expenses and more. A company without a proper ledger system will most likely face a lot of trouble in the long run, as this practice is essential for keeping track of every single transaction involving the organization, thus making sure that the ledger book is “balanced” - meaning all transactions considered match what is in possession of the treasury.
Distributed Ledger Technology has the exact same principle as traditional ledgers - to keep track of financial records. However, since it relies on the frameworks of decentralized finance, such DLT ledgers also include a few extra features. First, these books are fully open to those with access to the network, which means there is no secrecy as any user is able to see all records of transaction histories. DLTs are also immutable: unlike traditional ledgers, where an accountant can fix a previous record that was misplaced or just a simple wrong number, DLT relies entirely on the code to verify that transactions are correct. To update a distributed ledger, which can only occur on future transactions and not those that occurred in the past, requires mutual consensus of most autonomous parties involved in the record-keeping of the code. Therefore, it lacks a centralized entity.
But how is a DLT able to develop such disruptive frameworks? In a nutshell, it does so through copies (hence “distributed”) and of course, cryptography.
Unlike centralized ledgers, which inevitably rely on a central system, DLTs can store the information of the network across countless different computers that function independently and yet remain connected to one another to create one source of truth. Records are updated simultaneously across these computers, each holding their individual keys to access the information and maintain the automatic verification of the transactional content. In order for a distributed ledger to be successfully attacked by hackers, it would require all hardware involved to be attacked simultaneously - therefore, virtually impossible.
Do these concepts sound familiar? They sure should, as DLT seems very similar to Blockchain terms. Although they can be seen as close relatives, there are some key differences.
It does seem like DLT and Blockchain technology, both extensively applied in crypto, are all-too-similar. Openness, decentralization, and encryption are commonalities between blockchains and DLTs that often make it seem like the two concepts are the same thing. For some experts and crypto developers, blockchain - which enables bitcoin to function - is more innovative and technically superior to DLTs. On the other hand, for other professionals in the field who don’t often deal with cryptocurrencies and concepts of full decentralization, DLTs are much more useful technologies compared to the commercial use of blockchain.
There are two main differences between blockchains and DLTs : Firstly, blockchains are completely public, which means literally anyone can view transaction history or participate in these operations if they want. Blockchains are networks that do not require permission to access. Anyone who wants to become a verifier (also known as nodes or miners) can do so if they have the right technical knowledge and powerful enough hardware.
For DLTs, only selected participants can access and use the functionality of the network in question, which also determines its size. The bitcoin blockchain, for example, wants to grow in scale to fit as many users and operators as possible.
Simply put, the public aspect of blockchains generally implies three interconnected points:
On the other hand, a DLT generally does not enable most of these features for the public. It restricts who can use and access it and also who can operate as a Node. In many cases, governance decisions are left to a single company or centralized body, or at most a set of them.
Compared to the ideal of a decentralized public blockchain, it only exists to serve the interests of a small group of players - which is why it is a preferred mechanism for traditional companies, as it allows them to have some form of governance over the system.