The words “blockchain” and “distributed ledger technology” sounds like synonyms for most people. Only a few can tell the distinction between this two terms. But DLT is not equal to the blockchain, even though they have so much in common.
Distributed ledger technology definition
The term “Distributed ledger technology” (DLT) is a broad definition of a decentralized database that is managed by various participants and spread across different devices. Instead of keeping data centralized, DLT uses independent computers (nodes) to record, share and synchronize transactions. Each node in it replicates a copy of the whole ledger.
A ledger can be distributed among all users, so you don’t need control of the third party anymore. There are no central authorities; nodes are independently constructing and recording updates to the ledger. When the nodes reach a consensus about new updates, the last version of the ledger with all changes and additions made in it is saved on each device in a few seconds. That’s why DLT based decentralized systems are much harder to attack: to achieve the goal all these copies need to be attacked at the same time. Besides, because every transaction is completely transparent for every participant, it’s almost impossible for a single party to make some malicious changes.
There are many different DLT types with different models of access control. “Unpermissioned” ledgers are completely open, while “permissioned” ones allow adding data only for the owners (this owners also have the ability to enforce rules on who is allowed to use the platform). This various models suit different goals so everybody can choose the DLT type that most accurately fits a particular need.
What are the advantages of distributed ledger technology? Other data management methods usually involve big and strictly centralised IT systems. But such systems are vulnerable to cyber attacks, and the data they include is often out of sync or just inaccurate. With DLT you always can be sure that all copies of the database match each other and nobody can make unauthorised changes in them. Using the distributed ledger can prevent frauds and reduce the cost of the whole process.
Blockchain definition. Where’s the difference?
The blockchain is nothing else but one of the types of DLT – with a specific set of features. Like DLT, it is a decentralized shared database; and like DLT, it stored across multiple locations and including multiple parties. But its structure makes blockchain different from other DLT-based models.
While distributed ledger is the umbrella term, blockchain is just a subcategory. This means that every blockchain is DLT, but not every DLT is blockchain. But blockchain was the very first and the most popular distributed ledger: because it was the technology behind the Bitcoin, almost the whole crypto community has learned the term ‘blockchain’ much earlier than “DLT” and come to a conclusion that the words are synonyms or that blockchain is the only model of DLT. This is a common phenomenon: when the new product becomes successful, it sometimes overtakes the “umbrella” (for example, not every copier is Xerox, or not every diaper are Pampers, but people often use brand names meaning the whole category).
To define blockchain, we should find its distinction from DLT in general. This difference is in the way of data’s organizing: it is grouped into blocks. Each of the blocks is secured by cryptographic signature (hash) and then chained to the next one. It’s a continuously increasing list of records, which structure only allows data to be added (not altered or deleted). Irreversibility is one of the main blockchain’s features: it’s impossible to later change already existing blocks. Another important feature is the openness of the system: every user can add data to the ledger, read any block or write a new one. All blockchain types of DLT are implemented this way.
The future of DLT
Distributed ledger technology (blockchain and non-blockchain models of it) has huge potential to change different areas within the financial sector, experts claim. Both governments and business structures are becoming more and more enthusiastic about DLT possibilities. Government institutions can make their services and processes (such as tax collection, issuance of passports, record land registries and even voting procedures) more personal, fast, cheap and efficient. The Estonian government, for example, use a DLT-based Keyless Signature Infrastructure (KSI), which including e-Business Register, e-Tax and other digital services.
The business community has appreciated multiple advantages of the technology too. Here it can be used for new payment conclusions, innovative online identity, stock trading, loyalty & reward services. DLT can completely reform these areas by replacing manual processes, making them more efficient and delivering a new kind of trust to many services. Here are a few examples:
- Smart contracts that are executing when specified conditions are met. Smart contracts bypass the need for middlemen: only participants are involved. The most famous platform that runs smart contracts is blockchain based Ethereum Project.
- Peer-to-peer payments. The huge step to a really decentralized sharing economy of the future: direct interactions between the participants without transaction fees.
- Stock trading. Distributed ledger is able to make peer-to-peer purchases instantaneous. Moreover, intermediaries get completely removed from the process.
- Supply chain audition. DLT provides the way to know the truth about where (and when) the things we buy are come from.
- Neighbourhood Microgrids. While your solar panels make excess energy, DLT-based services are automatically monitoring and redistributing it.
- Identity management. Enhanced ways to verify your identity and digitize personal documents. Among other things, DLT can revolutionize “Know Your Customer (KYC)” technology, which helps business identify its clients.