A digital system where transactions of assets are recorded in multiple places simultaneously. This is a database where there is no central authority. Instead, nodes are set up that each run the software and synchronize the transactions. These nodes are the ones responsible for reaching consensus on all transactions.
The consensus of replicated, shared, and synchronized digital data is geographically spread across many sites, countries, or institutions. This can be either permissionless or permissioned.
Distributed Ledger Technology brings enhanced security since nodes are run individually, processing and validating each transaction, before synching up. Without a central database, cybercrime is reduced.
Under such a system, there is no central point of failure. With a typical server system, entry gives one access to the entire network. Since consensus is done and shared, most version of the data are simply mirrors of the other. A change on one will be replicated across all.
This does not happen with distributed ledger technology. If a transaction on any node does not match consensus, it is rejected.
Distributed ledger technology is the foundation of a blockchain such as Bitcoin. This is nothing more than a series of financial transactions, similar to what a bank or a corporation like Visa might have. Instead of being under single control, the software is replicated on thousands of unrelated computers around the world.
Bitcoin was revolutionary in that it solved a very difficult problem that thwarted earlier attempts at decentralized digital currencies. Some of those, such as Bit Gold, could not solve the double spend problem without a central validator. Through the mining process, Satoshi Nakamoto was able to overcome this, unleashing a new form of ledger management on the world.
This aligns well with finance, which produced the first major use case: cryptocurrency. Satoshi's goal was to create a form of money that could operate outside the control of any government or central bank. More importantly, his innovation of bringing decentralized distributed ledger technology brought forth a new monetary system.
Over the years, since the introduction of Bitcoin and the fork of Litecoin, distributed ledger technology evolved. Some are now able to record text, similar to any other network database. The difference is the decentralization.
Ethereum was a blockchain that really introduced the world to smart contracts. This allowed for a host of useful services such as the creation of coins and non-fungible tokens (NFTs). It also serves as the foundation for decentralized finance (DeFi). Here we see the moving beyond just a medium of exchange. Many forecast that most financial services in the future will be under DeFi, thus tied to DLT.
Steem emerged in 2016 and brought DLT to the social media word. Established as a blogging platform, content creators could get rewarded for their posts based upon the voting of the community. This blockchain housed not only the financial records but also text documents similar to Medium or Substack.
In 2020, Steem was forked to create Hive. This is a blockchain that advanced DLT even further by bringing the social media and finance to a higher level. To start, one of the upgrades to the system implemented one block irreversibility. This means transactions are completed and settled within one block. In terms of time, this averages 1.6 seconds. The ledger is locked in at that point, requiring super majority to reverse.
Public Versus Private
Most blockchains are public although they can be private. Blockchains utilize distributed ledger technology but not all DLT utilize blocks. These started in the 1990s, long before Satoshi even put forth the Bitcoin White Paper.
DLTs can be operated by a number of different players within an industry.
Some industries that have used DLT:
- Brand protection
They can also be incorporated into a single companies supply chain, which allows multiple suppliers to update the records pertaining to their inputs. The rest of the participants can see the changes and adjust their operations accordingly. Even though these are commonly different companies, they will engage since they are all part of the same process.
Obviously, these are private databases that nobody outside the approved list can access. This contrasts with the data on blockchains which is most often public for all to see.