A term most crypto enthusiasts will likely come across as they learn about the exciting new world of blockchain and cryptocurrencies is DLT, which stands for Distributed Ledger Technology.
The term DLT is often mistakenly conflated with the term blockchain, but they do not mean the exact thing. In simple terms, a blockchain is a specific type of DLT that, as its name suggests, works by organizing data into chains of blocks.
DLT is a much broader term than blockchain, and it encompasses a plethora of technologies that allowed for decentralized transactions of various sorts. Blockchain is one of the various types of DLTs that exist.
Here we will explain to you exactly what DLTs are, their relation with cryptocurrencies, and the difference between blockchain and other types of DLTs.
Distributed Ledger Technology: What Exactly is It?
A distributed ledger is a type of software that records all transactions in a financial system and distributes them among the nodes or participants in that system. The data about the system’s transactions are recorded in a ledger across multiple locations simultaneously, allowing for higher security and transparency within the system.
Traditional financial systems and databases are usually recorded by a single central entity, which keeps track of transactions and administers the system at various levels. All of the processing in traditional systems is carried out by a centralized entity.
In distributed ledger systems is no central data store and there’s no need for an entity to fulfill administrative functions such as processing and verification. Instead, every node in the DLT system verifies and processes every transaction, while the ledger records the registry, statistic data, and other relevant information.
What is a Node?
The nodes fulfill an essential role in the functionality of a distributed ledger system. In technical terms, a node is an intersection or connection that communicates the different parts of a data network.
In simple terms, any device such as a computer through which the system is accessible acts as a node, as long as it’s running the software through which the distributed ledger operates.
In a distributed ledger system, the nodes are the devices to which the data is sent and where it’s subsequently stored. Generally speaking, the different types of DLT systems are defined by the way in which the nodes operate and how they gain their data.
In a fully decentralized system, every single device through which the network is accessed acts as a node. One of the most notable examples of nodes in the distributed ledger is the computers and GPUs of crypto miners, which run the software that downloads the system’s ledger and verifies its transactions.
The reason why DLTs are able to provide secure and transparent financial environments is that every single node in a system gets the ledger’s information and then contrasts it and synchronizes it with the one received by every other node, making sure that they all coincide. Therefore, the information cannot be altered by anyone.
It is worth noting that running nodes takes an exceptional amount of energy for some distributed ledger systems, particularly when they’re highly decentralized, like blockchains such as Bitcoin and Ethereum.
Different Types of Distributed Ledger Technology
As we’ve stated before, a blockchain is a DLT, but not every DLT is a blockchain. There are multiple types of DLTs that differ in various manners, such as how decentralized they are and the protocols with which they operate. Each blockchain type can be divided into two categories, permissioned and permissionless. The most well-known types of DLTs include Blockchain, Hashgraph, and Holochain, among others.
Blockchains are by far the most well-known type of DLT. Their name comes from the way in which information is organized in their software’s database, which is usually described as a chain of blocks.
Each block of data in the blockchain contains information about a set of transactions, such as the date, the time, and the amount sent on each transaction, as well as the codes for the sender and recipient. Each transaction has a unique digital signature that ensures transparency.
When enough transactions are made, they’re registered as a block with its own “hash” or special ID, which allows each transaction to be properly distinguished. As each block is created, it is added to the chain and cannot be subsequently altered in any way.
Holochain is a more recent and less decentralized DLT system in comparison to blockchain and other types of DLT. With its agent-centric structure, Holochain provides all agents with their own consensus mechanisms, avoiding the need for global consensus mechanisms, and making it an ideal option for systems run by businesses and institutions.
Among the most unique type of DLTs are Hashgraphs, in which transactions are recorded and stored on the ledger on the same timestamp in a parallel structure, allowing for smaller storage unit requirements and faster transactions.
Records in a Hashgraph ledger are referred to as “events”, containing data from multiple simultaneously recorded transactions.
One of its main advantages over Blockchain is that the data does not have to be stored in the ledger forever, as all the nodes in the network can keep the information after reaching an agreement on the transaction. This, however, comes at the cost of some having a lower degree of decentralization.
Permissionless vs. Permissioned
There are many other types of DLTs besides the ones mentioned above, which are the most commonly used ones. Each type falls into either of two categories, permissioned or permissionless.
In permissioned ledgers, the confirmation and verification processes are carried out by only a few nodes previously authorized by the server’s administrator. Although users with nodes who have administrative privileges can make some changes in the ledger, these changes are all tracked by other nodes and this tracking cannot be publicly accessed.
Permissioned ledgers offer certain advantages over their permissionless counterparts in terms of security and are an ideal option for companies seeking DLT-based financial and organizational solutions.
These types of ledgers are often used in supply chains, contract creation, and server verification.
The most well-known and used types of DLTs are permissionless, with blockchains such as Bitcoin and Ethereum being primary examples. In permissionless ledgers, anyone can participate as a node or regular user and everybody has access to the ledgers’ data.
Because permissionless ledgers cannot be altered in any way, they offer great advantages in terms of transparency, allowing users to have a safe experience based on mutual trust, with most platforms being open source, meaning the software can be changed by users and employed to develop other platforms freely.
Unlike permissioned ledgers, permissionless ones use clauses of anonymity, protecting their users’ privacy. Although these clauses are subject to some specific exceptions.
Because of their openness and freedom for user participation, permissionless ledgers are usually more efficient, however, this can come at the expense of security and a lack of proper failsafe protocols.
What’s so Great About DLT?
The world of cryptocurrencies, NFTs, and other types of tokens has shown us some of the potential that DLTs have to change the digital world. With DLTs as a whole, the horizon is much greater, with endless possibilities for new financial ecosystems with different structures and levels of decentralization.
DLTs can be the answer to many global issues concerning access to banking and the financial system. DeFi platforms using DLT can provide simple and affordable alternatives to the SWIFT system, allowing for faster remittances worldwide.
Likewise, DLT can be the base for independent financial outlets within digital social applications such as social media platforms and blockchain-based video games. By doing so, these platforms can allow their users an unprecedented level of freedom and a secure and transparent way to exercise their digital property.
Through DLT-based smart contracts, regulations across all industries and markets can be exercised more efficiently, without the need for a centralized entity. Likewise, the possibility is open to creating and exercising fully globalized regulations, preventing fraud and corruption across all jurisdictions.
Although DLTs are just in their infancy, they’re paving the road for a technological revolution, as a new tool to bring us towards a more inclusive, interconnected, and transparent world, with full access to the financial system for everyone, as well as a more transparent and globalized monetary system.
If you wish to learn more about distributed ledger technology in its various forms, including blockchain and NFTs, make sure to visit the next venue of Expoverse, where you’ll be able to meet some of the brightest and most creative minds building the future of Web 3.0, and meet like-minded blockchain newcomers and enthusiasts from all around the world.