Distributed Ledger Technology: The Secret Technology Beyond The Blockchain

Thanks to its association with Bitcoin and other cryptocurrencies, the blockchain has become a familiar term in the minds of the general public.

Distributed Ledger Technology (DLT), on the other hand, hovers under the media radar.

Yet it is the computing powerhouse that enables blockchain to function. DLT was initially seen as a niche technology to power cryptocurrencies.

However, the opinion has shifted in the last twelve months.

As more industries discover how DLT can be utilised to improve company operations and industry services, this niche technology is destined for mainstream adoption.

There is little doubt that DLT is a disruptive technologysome blockchain is just one of the innovations it supports.

Expect to hear the trumpets sound for DLT more often in the months and years to come because this essential innovation will propel the world full-steam into the digital age.

Powered by DLT, the financial industry is likely to be the first to benefit. Fintech’s are popping up everywhere and thrusting itself into mainstream markets.

Could control of the financial system be wrestled away from bank domination? Probably not, but DLT promotes decentralisation together with faster, secure and cheaper payments.

It is already apparent that this technology has the potential to overhaul the current infrastructure.

However, together with financial institutions, governments are experimenting with ways of adopting digital technologies to distribute benefits, track money, maximise efficiency and minimise the costs of energy consumption.

But given distributed ledger technology is going to have such an impact on our lives in the future, it’s worth getting to know what the fuss is about.

Distributed Ledger Technology Explained

Distributed Ledger Technology

Source: Michael Casey, MIT

Distributed ledgers are public databases that go far beyond static-ledgers we currently use in the business world.

The technology’s greatest asset is to create a decentralised system that eliminates the need for a central power such as the bank, government or other intermediaries typically involved in multiple processes to validate or authenticate various transactions.

Subsequently, records stored in a ledger will be validated and authenticated by a network of participants.

Each network has a number of “nodes” (computers) which communicate with one another until a consensus confirms a transaction can be authorised.

All this information is recorded in a public ledger. While remaining secure and private, any suspicious activity is identified by every node on the network.

Once a consensus is reached, a record that is distributed on the ledger is timestamped with a cryptographic signature that cannot be changed or corrupted.

The architecture, therefore, paves the way to develop a new system of records that eliminates fraud, money laundering and other criminal activity that is being conducted through digital channels.

Distributed Ledger Technology Vs Blockchain Technology

Distributed Ledger Technology

Because distributed ledgers form the basis of the blockchain, it can be quite easy to consider them both as the same technology.

However, this is not the case.

Blockchain technology is just one part of DLT, and although they work together, they are separate technologies.

A distributed ledger oversees and maintains transaction and ‘smart contracts’ in a decentralised database. All the information stored on the ledger is saved indefinitely using an incorruptible cryptographic code, known as a digital signature.

The system is designed to protect property in the virtual space such as cryptocurrencies, intellectual property and digital media.

Once the technology is adopted by mainstream users, making online purchases will be quicker, more comfortable and more affordable.

DLT will reduce the costs of various fees and enable buyers and sellers to create and execute transactions directly.

Developers intend to eliminate bank charges on transactions altogether.

Although the revolutionary technology can theoretically support new customs, banks are unlikely to sacrifice such a significant source of income. So far a reduction of fees up to 60% has been muted.

Blockchain Technology

Blockchain technology is a particular type of distributed ledger that is most commonly used for the exchange of digital currencies such as Bitcoin and Ethereum.

The technology is used by “mining” firms that use high-powered computers to identify online transactions using cryptocurrencies.

Miners create a block by creating a digital signature, known as a hash. Each block is then added to previous blocks to make a chain – hence its name.

Once a mining company creates a hash and adds the block to the chain, the record becomes part of a public ledger.

Hashes are sealed using cryptographic signatures which identifies the parties involved in the transaction. They are then liable for carrying out the conditions of the ‘smart contract’ which is verified by the technology.

Conducting transactions digitally will eliminate disputes over contractual arrangements.

Although blockchain technology relies on information from earlier transactions, it is not essential for all distributed ledgers to require recorded information nor proof of work.

The technology is versatile and has the potential to transform numerous industries.

Are Distributed Ledger Technologies Good For The Public?

Distributed ledger technology will revolutionise the way governments, institutions and corporations interact with the general public.

In theory, the technology heralds many positives and in the majority of instances will bring many benefits.

But we also know from history that corporations and institutions cannot be trusted.

Banks and insurance companies are sticklers for hiding limitation clauses in the small print and can use records in public ledgers as a mark of law – but at the expense of unsuspecting customers.

Of course, these instances are worse case scenarios, even if they are to be expected.

On the upside, DLT will provide advantages to the general public in the retail and digital media space together with health and other industries that create value between business-consumer relationships.

Less Beaurocracy

Governments can make processes quicker and less painstaking by adopting DLT to facilitate automated taxation processes, the issuance of identification documents and application forms, land ownership, licences, social security information and other types of regulatory processes.

Google is demonstrating how DLT can be used as a benefit to the public in a new project with the National Health Service (NHS) in the UK.

The US tech-giant is using DLT with its artificial intelligence technology, DeepMind to develop processes that protect confidential health data.

Retail

The most notable impact of DLT for the public at large will be felt on the consumer side.

Retailers are already beginning to shepherd in digital payments.

Although initiatives are stalling, like Stripe suspending Bitcoin payments, it is inevitable that digital payments will be adopted en masse over, the next decade.

We are yet to see which cryptocurrencies will come out on top, but the battle makes for interesting observation.

Once government regulation nestles into its new home, we can expect to see a re-acceleration of digital payment options across a growing number of online stores.

However, while the crypto market remains volatile and fiat currency is still the main staple of buying and selling, there may be some reluctance to engage in digital payments.

The paradigm will need ushering in unless it is enforced by a major catastrophe such as the impending credit crash of fiat currencies.

Powered by DLT, cryptocurrencies promise to stabilise financial markets and facilitate faster and cheaper payments.

The ecosystems in public blockchains need realising before the mass adoption takes place, and the issues with scaling do pose a problem, but alternative technologies like Tangle could provide a solution that allows blockchain to make it next evolutionary step.

Companies That Use Distributed Ledger Technology

Although the DLT is mostly associated with digital currencies, such as Bitcoin, Ethereum or cryptocurrency exchanges such us Coinbase, tech companies outside the crypto space also recognise the benefits of investing in this disruptive technology too.

IBM and Microsoft recently launched a platform which is based on the DLT fabric of Hyperledger.

Google use blockchain technology to power it’s DeepMind search algorithm and around 80 world banks are trialling the distributed ledger technology developed by Ripple.

Notable cryptocurrencies that use DLT are:

  • Ethereum
  • Bitcoin
  • Dash
  • Dogecoin
  • Hyperledger
  • Litecoin
  • Monero
  • Ripple
  • Stellar

The Impact Of Distributed Ledger Technology

DLT is making waves because the technology promises to change the flawed landscape of the financial system and the way the world economy is organised.

The principle behind the technology is to establish a system that cannot be corrupted thus eliminate criminal activity online.

The new paradigms will significantly solve standard issues that typically surface in disputes over contractual obligations.

For example, traders that do not fulfil their promise will develop a negative reputation. DLT promotes fair trade and acts as a deterrent against defecting on payments.

Furthermore, public ledgers cannot be altered or falsified. Reputation for companies and consumers is an essential aspect of online consumerism.

Modern consumers rely on peer-to-peer recommendations, yet contentious issues are surrounding the liability of recommendations and star ratings on consumer review websites.

The capacity for DLT to bring stability to the financial infrastructure is arguably its greatest asset.

In the current system, markets are manipulated out of self-interest which inherently debases commodities and fiat currencies at the expense of unsuspecting investors.

Public ledgers record every transaction. Therefore, underhand tactics can be traced to specific firms or rogue traders.

DLT will help investigators pinpoint culprits thus preventing financial institutions from capitalising on loopholes at the expense of the general public.

Sub-prime mortgages that caused the housing market to collapse and trigger the 2008 banking crisis is an excellent example of how the finance industry manipulate markets.

The crash ultimately stunted pension schemes and other savings accounts while banks – the perpetrators of the crash – were bailed out.

Distributed ledger technology, therefore, has the potential to become one of the most innovative inventions in history.

Because the technology makes businesses and people accountable for action and non-action, we can expect to create a society that is honest and co-operative.

The Future Of Distributed Ledger Technology

Although DLT promises to be the future, this disruptive technology is still in the infant stages of development.

Before tech firms can deliver on their promise, they have to find solutions that benefit users without incurring too many risks.

Developers behind various DLT projects have already made significant strides – blockchain being a case-in-point.

It is the technology that is the most interesting established corporation in the tech and finance industries and investment in DLT which ultimately prompted the surge in Bitcoin prices.

The hype around DLT may be subsiding, but there is more to come from the technology before media attention dies down.

With exciting projects underway that includes artificial intelligence, robotics, cloud computing, digital payments and machine learning, we can expect a lot to happen in a short space of time.

Blockchain enters the picture here.

The technology is already in use, and, even in these early stages, appears to be working efficiently as a digital solution for the exchange of goods and services.

Government regulations should ensure criminal activities are not exploiting the networks.

What we would most like to see from distributed ledger technology is an adequate replacement for third-party enforcers. Cut out the middleman, and you cut down on costs together with eliminating the abuse of power and unjust commercial profiteering.

Red tape will be slashed and discarded in the digital bins as well.

No doubt governments and banks will maintain capricious bureaucracy within their regulatory laws, but essentially the paradigm shift swings towards a financial system that is more transparent and fair for the general public.

If you would like to find out more about the Distributed Ledger Technology and its most common applications, read our guide to  The Ways Blockchain Technology Will Change The World.

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Megan is a self-taught blockchain enthusiast. She enjoys combining finance with technology, from a less-techy perspective. BiteMyCoin is her most recent project underneath the umbrella of an international digital marketing agency ANCHOVY.