What is distributed ledger technology?
Since ancient times, we’ve relied on ledgers for recordkeeping in various domains, including contracts, payments, ownership of assets, identities, etc. Ledgers have come a long way and have been at the heart of trust in communities since humans first began writing on clay tablets and papyrus. The discipline evolved over centuries as paper was invented and new methods such as double-entry accounting were devised to leverage the use of ledgers in new and more calculated ways.
The advent and propagation of computers in the 20th century added great speed and convenience to the process of creating, updating and managing ledgers. The internet later made it possible to create digital ledgers that could be accessed from anywhere across the world.
However, while ledgers changed in parallel to technological innovations, one thing about them remained constant, and that was their centralized nature. Centralized ledgers are managed by intermediaries, such as banks, notaries, governments, or large tech companies. These entities assume responsibility for storing and securing the ledgers and act as gatekeepers for people who want to access their information. They also process new transactions and mediate between different parties that want to add or modify records stored on the ledger.
The centralized ledger model has been one of the core components of modern human society, but it suffers from several fundamental flaws.
First, the services of trusted authorities don’t come for free. Intermediaries charge parties involved in a transaction on the ledgers they maintain. For instance, in the finance industry alone banks take billions of dollars in various fees every year.
Another problem with centralized ledgers is that they force us to put too much trust in the intermediaries to maintain the integrity of ledgers. While they usually do a good job of protecting ledgers from tampering, intermediaries are not immune to attacks from outside parties such as thieves, fraudsters, and hackers.
Centralized authorities are a single point of failure in any ledger system, which attackers can exploit to achieve their evil goals. Moreover, the central authorities themselves can become corrupt, too, and manipulate the contents of the ledger for their own benefit.
Distributed ledgers were invented to address the flaws of centralized ledgers. Distributed ledgers store and update their information on several concurrent nodes. These participants, which function independently of each other, each keep an identical copy of the ledger and verify and coordinate changes between themselves before applying them.
Distributed ledgers obviate the need for centralized authorities. The information of the ledger exists on several (possibly thousands or millions) nodes, which effectively makes it public knowledge.
There no longer exists a single point of failure and if an attacker wants to tamper with the information of the ledger, they’ll have to access and manipulate all or at least a considerable number of nodes that hold the ledger.
As a result of removing intermediaries, distributed ledgers also reduce the cost of trust by a considerable amount.
While the concept of distributed ledgers has been around for a long while, it wasn’t until in recent years that it became a reality. The most popular implementation of distributed ledgers is blockchain, the technology that supports cryptocurrencies such as bitcoin and ethereum.
Blockchain uses computing power and cryptography to maintain its distributed ledger. Every node that participates in the network stores a copy of the blockchain. Blockchain records are grouped into blocks and are sequentially linked together through cryptographic hashes. Hashes are mathematical representations tied to the data structure of each block. The slightest change in any transaction changes the hash of its block and all blocks that come after it, making it invalid. This mechanism further protects the blockchain against tampering and makes it easier for the nodes to validate new transactions.
Blockchains have a consensus mechanism that enables the participants in the network to agree on transactions that can be added to the ledger. Every few minutes, a network of computers called "miners" runs mathematical operations to create new blocks from recently submitted transactions. Once a new block is confirmed, all the nodes append it to their copy of the blockchain (learn more at Blockchain explained and How does bitcoin mining work?).
Blockchain isn’t the only implementation of distributed ledgers, but it is the most widely adopted. Other types of distributed ledgers include direct acyclic graph (DAG) and hashgraph, which are based on the same fundamental tenets as the blockchain but use different technical means to achieve the goals.
While digital currencies were the first application of distributed ledgers, the technology is now finding its way into many other industries, including real estate, advertisement, healthcare, voting and elections, gaming and more.
Distributed ledgers provide an entirely new way to manage information between different people, but they will have far greater implications. They will introduce new ways to create decentralized and autonomous businesses, organizations, full-fledged economies and communities that can span across several million people across the world without the need for centralized authorities or governments.