What is Distributed Ledger Technology?
Distributed Ledger Technology (DLT) and its relevance to businesses and enterprises as a platform for digital transformation, business innovation and industry disruption are what Blockchain Journal is all about.
The idea of a ledger is probably as old as any form of recordkeeping known to mankind. Throughout history, ledgers have been used to make not just a record of transactions; they also keep a record of the order of those transactions. If you think about it, we can make a record of each deposit and withdrawal from our bank account on separate pieces of paper. That certainly qualifies as a record. However, what’s different about a ledger is that the transactions are recorded in a specific order. The reason ledgers do this is because the order in which transactions occur is critical to the successful completion or “settlement” of each transaction.
For example, let’s say you have $27 in your bank account and you try to make three withdrawals: one for $10, another for $15 and a third for $26. If the transactions are recorded into the ledger in the order listed, then the first two transactions for $10 and $15 will settle because the account has $27, which is enough to cover the $25 total for the first two transactions. The third transaction for $26 will not settle because the $2 that remains in the account is not enough to cover it. Now imagine that the order is reversed and the $26 transaction goes first. The $26 transaction will settle because there’s $27 in the account. But neither of the remaining two transactions for $10 or $15 will settle because the $1 that remains in the account is not enough for either to settle.
Ledgers are used as the basis of agreement between multiple parties (e.g., you and your bank). That agreement is not just about the exact amount of each transaction, but even more importantly, the order in which all transactions take place. In the world of DLT, this agreement is called a “consensus.” When you agree with your bank on the transactions and the order in which they’re represented, you are acknowledging that the bank has not only accurately recorded the transaction amounts, but that it has also fairly ordered them. Fair order is the fundamental key to consensus. It is the most important outcome of any ledger, analog or digital. A ledger’s entire basis as a shared source of truth to whomever that truth matters — you, your bank or 25 independent entities from the beginning to end of some supply chains — is tied to the fair ordering of the records it keeps.
However, whether it’s on scraps of paper or in a ledger that reflects some order, when humans are making records of transactions, there exists the possibility of two major problems: human malfeasance (malicious and purposeful tampering with the amounts or fair order of ledger entries) and/or human errors. Fortunately, computers have led to the creation of digital ledgers, which record data and store it as bits and bytes. Digital ledgers have helped to control human errors and malfeasance. But, as long as a central group of humans has some degree of control or governance over the computers that maintain digital ledgers, the possibility for errant or purposeful inaccuracies still looms.
This idea of a “central group,” — such as a single bank, a small group of people within that bank or just one person who has exclusive governance and control over the single source of truth for multi-party consensus — is another common concept in the DLT world known as “centralization.”
Enter DLT. To the extent that centralized systems are prone to abuses and errors, DLT relies on a decades-old computer science called “distributed systems,” whereby no single party has exclusive control over the ledger and the consensus it represents. Instead, ledger maintenance is democratized across systems (known as “nodes”) that not only belong to multiple independent parties, but that are also distributed across the internet. The more such independent nodes to which a given digital ledger’s maintenance is democratized, and the more those nodes are distributed across the world, the more that ledger is often said to be “decentralized.”
Decentralization is the core ethos of blockchain and other digital ledger technologies. When a digital ledger such as Bitcoin is sufficiently decentralized, it essentially deprives any single centralized party, such as a bank, from having exclusive control over that ledger. This prevents the central party from mistakenly or maliciously altering the record and fair order of transactions. Although we won’t digress into that rabbithole here, the standard of measure for this “sufficiency of decentralization” is one of the most hotly debated questions in the DLT industry.
The key for enterprises is to understand that DLT is not only about accurately maintaining a shared consensus — a shared source of truth — regarding financial transactions. There are tons of enterprise use cases involving other forms of business data where its beneficial to all stakeholders that no single party has sole control and responsibility over that truth.