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Distributed Ledger Technology – How does it work and how it affects blockchain?

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In 2008, the Bitcoin Whitepaper took the internet by storm. More than an alternative currency, Satoshi Nakamoto introduced to the world the blockchain technology that is here to revolutionize both the relationship that people have with the virtual and the “physical” world.

Much has been said about Bitcoin and cryptocurrencies but, for the most part, only regarding bear markets, bull markets, and investments. What is not spread across the news is what the technology is about and how can it solve current problems and limitations of specific industries.

In this article, we aim to show what lies beneath the surface that most people can grasp and, hopefully, improve the general knowledge on the technology itself, making simultaneously clear what are the differences between a Distributed Ledger and Blockchain.

Distributed Ledger Technology (DLT)

To start, it is vital to discern what is the Distributed Ledger Technology.

We are confident that the concept of a simple ledger is already understood. It traces back to times when the sole way to keep a record of a set of transactions was to carve it on a stone. With computers and digital devices’ propagation, it became considerably

easier and faster to keep a record of transactions whether we are talking about a banking institution or just a student that needs to work on an excel spreadsheet.

Excel spreadsheet - IIB Council Blockchain Blog

However, in the last years, we witnessed advancements in both cryptography and computing power that enhanced what a ledger can look like. Now, instead of having a central authority (government, institution, person) keeping one single record of all the transactions, hence, having the power to manipulate it, we can maintain a network of interested parties, all around the world, each of them keeping the same ledger and making sure its data is replicated, shared and synchronized in the entire network.

This is where the word distributed comes from or, if preferred, decentralized. These people/devices on the network are called nodes and their “work” is to reach a consensus every time the ledger is updated with a new transaction. As each of them has to update their copy of the ledger, they have to then agree on which version of the ledger is the correct one (to prevent false transactions). Once this is achieved, then all the ledgers are updated with the same version.

Behind this process are sophisticated mathematical and cryptographic algorithms that ensure each transaction is auditable and immutable.

There are several ways to conduct such operation. It can be accessible to everyone or be private, it can allow people to be rewarded for confirming transactions (mining), or it can merely have varied ways of reaching consensus (Proof-of-Work, Proof-of-Stake, dPoS or even voting systems).

As one might expect, these different approaches will also have distinctive names. In this regard, some of the most famous are block directed acyclic graphs (blockDAG), transaction-based acyclic graphs (TDAG), and…

…Blockchain

That is correct: blockchain is a specific type of Distributed Ledger with unique features that compose its value.

Back in 2008, the world saw the breakthrough that Satoshi Nakamoto came up with when a solution to the renowned “double-spending” problem was proposed. This was the barrier to Nick Szabo’s bit gold, where users of the network with bad intentions could spend the digital money twice, making the whole system obviously unsustainable.

To resolve this, Satoshi (a person or a group of people, it is yet unknown), came up with the block confirmation process and it is accomplished through computational power directed at solving very complex cryptographic puzzles. In a straightforward way, transactions are grouped into blocks which have to be confirmed by the nodes on the network. These blocks have a cryptographic hash that relates them to the previous ones producing the so-called “chain”. But before one block becomes part of the chain it has to be confirmed by the nodes on the network. For that, these nodes have to spend computational power (hence the electricity costs associated with mining) to unravel the abovementioned puzzles and the first one to do it is rewarded with new Bitcoin (this is the consensus method called Proof-of-Work).

Besides Bitcoin, there are several other uses for blockchain technology and this is where its power lies. After its creation, several projects emerged, and we witnessed the appearance of smart contracts that allow conditional transactions. Just like a regular contract, it can contain several clauses, rules, and penalties but this time they will be automatically enforced without the need for a middleman (notary, government, authority).

Besides the financial and contractual applications, storing data in this fashion is possible for almost any industry. From digital governmental IDs to energy sharing and digitized health records, the potential is limitless.

Currently, the need for scalability is the main conductor of innovation in this technology and it open doors for what is called the blockchain 3.0. Governments, tech giants, car manufacturers, and every other industry are investing their resources to develop solutions that can work for a large number of people. Currently, centralized solutions deliver higher throughputs and for that, they charge steeper fees.

When the scalability issue is resolved (which will still take some time), the mass adoption of blockchain will be natural and smooth.

Conclusion

As you might have understood, you can have a DLT without blockchain, but, unless you give up on decentralization, you cannot have a blockchain without DLT. This is their main existing connection. However, the fundamental aspect to remember is that blockchain is a specific technology based on the DLT principles and that decentralization is the main attribute that makes blockchain so valuable.

The decentralization concept is here to stay and it will revolutionize how data is stored and how people and devices interact with each other. The number of researchers and companies trying to come up with even more different kinds of DLT is impressive and it shows that the ledger as we perceive it today might be so different in 10 years as the Roman system is for us now.

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