What is a Distributed Ledger Account?
A distributed ledger account, often referred to as an “account” in Blockchain Journal’s articles, pertains to the provision that all distributed ledgers make it possible for their users to have an account in which the current balance of their funds is stored (usually in the form of a cryptocurrency and often the cryptocurrency that’s native to the chain in question).
Distributed ledger accounts are akin to bank accounts in that the same entity that maintains a ledger of your account also maintains the account where the funds are stored. In the case of the bank, the ledger (an ordered record of the transactions made with your account) and the funds themselves (usually a pile of fiat currency like US dollars) are distinctly separate from each other. The former is digital and includes systems and business logic; the latter is analog. In theory, it’s cash (although, whether banks are liquid enough to cash out all of their depositors can be an issue). However, with a distributed ledger, because both the currency and the ordered record of your transactions are digital, they are so deeply entwined that they’re essentially the same thing. Liquidity should therefore be an absolute on a distributed ledger. According to Bitcoin’s ledger, if you have 5 BTC, that 5 BTC is always available to you. As for what that 5 BTC is worth in fiat terms (i.e., US dollars or euros)? That’s a different question that’s subject to market volatility.
Given the role that public key cryptography has traditionally played in the security of Distributed Ledger Technology (DLT), some distributed ledger accounts (including those that used an earlier version of Bitcoin) relied on the account’s public key as the account’s unique identifier (otherwise known as the account’s address). Account addresses are like bank account numbers. Transferring cryptocurrency from an originating account to a target account is often referred to as sending that crypto to the target account’s address. For this reason, the word “address” is sometimes synonymous with the word “account.” Today, there are plenty of ledgers that use a unique address that’s different from the account holder’s public key.
Any person or organization can establish an account on a public ledger. But transferring cryptocurrency into that account is not as simple as going to a bank and depositing $10 into your savings account. Typically, the process involves using a special digital wallet, of which there are different types. As long as your wallet technology is compatible with your distributed ledger, the wallet technology should be able to, on your behalf, establish a new account on that ledger.
Many newcomers to cryptocurrency will first try this process with a cryptocurrency exchange that not only provides the means to exchange fiat currency for cryptocurrency, it comes with a built-in wallet technology known as a custodial wallet.
A custodial wallet is a wallet that another entity, like a cryptocurrency exchange, maintains on your behalf. It’s as if you entrusted a personal assistant — another human being — to keep custody of your physical wallet (the one that has your driver’s license, credit cards and US dollars). When you need to exchange some US dollars for euros, your assistant goes to a currency exchange, buys some euros using the US dollars in your wallet and then brings it back to you.
The process is of course slightly different with a cryptocurrency exchange. First, you must use the exchange’s web site to register as a customer. Then, the exchange will set up a custodial wallet into which you must transfer some fiat currency. Many first-time exchange users choose to wire-transfer money from their bank to their exchange of choice (e.g., Coinbase, Binance, etc.). Once you have loaded some fiat currency into your exchange-based custodial wallet, you can instruct the exchange to swap some of that fiat currency for any of the cryptocurrencies that are supported by the exchange. For example, most exchanges support Bitcoin (BTC). When the transaction takes place, if the wallet isn’t already connected to an account on the Bitcoin public ledger, then it will create a new Bitcoin account for you.
It’s important to note that, especially when using exchanges, that the distributed ledger accounts to which your custodial wallet is connected are different from your user account ID with the exchange itself. Typically, the user account ID for the exchange is one of your user credentials to login and use the services of the cryptocurrency exchange. On the other hand, the account ID for the distributed ledger to which your custodial wallet is connected is your account on that distributed ledger.
Working with exchanges and custodial wallets has proven risky for some customers. Going back to the example having a personal assistant; if he has your wallet in his custody, there’s not much you can do if he disappears with your wallet and never returns. If you are using a custodial wallet that’s managed by a cryptocurrency exchange and something goes terribly wrong with that exchange (as happened with the collapse of FTX, one of the largest exchanges in the world), the outcome may be the metaphorical equivalent of a personal assistant running off with your wallet. This is one reason why, in addition to custodial wallet technology, there is also non-custodial wallet technology.