The term Distributed Ledger Technology (DLT) is a database architecture that allows owners of digital assets to transfer and document them from peer to peer. Each transfer in a DLT is stored as a record in a distributed ledger (database), this database is stored in all nodes of a network.
In contrast to the classical approach, where a ledger is usually managed by only one instance, here any number of identical copies of the ledger are stored in a decentralized manner by different parties. Appropriate measures are taken to ensure that new transactions are added to all copies of the cash journal and that there is consensus on the current status of the cash journal.
There is also talk of decentrally managed account books or transaction databases. The technique is considered pioneering for the management of data on the Internet without having to resort to an ownership platform.
Distributed ledger techniques differ in the way networked computers come to an agreement (consensus protocols), such as by “proof of work,” by “proof of stake,” and other methods or combinations.
A DLT can have two types of ledgers:
Permissionless ledger: a ledger distributed among nodes that can be executed by anyone without permission. A permissionless ledger allows anyone to contribute data to the ledger, and for everyone who is in possession of the ledger to have identical copies. Nodesata to the ledger an maintain the integrity of the cashbook by reaching consensus on its state. A permissionless ledger can be used as an immutable global record for transfers.
Permissioned ledger: a ledger that is distributed only to nodes that are pre-selected by a central authority such as a bank or government.
What is the main problem that DLT solves?
Problem: When data is stored in owner-managed databases, it is difficult to share that data with others without the possibility of it being modified or lost in other databases.
Solution: Distributed Ledger Technology is able to create a single truth which can be trusted by all participants. When someone adds data to such a DL, anyone with an Internet connection can access it by connecting to a node on the network.
The main features and advantages are:
The network is not controlled by any central authority, all network participants have equal rights, therefore the network cannot be shut down by a single actor. In addition, in a decentralized network there is no single point of failure in the technical system, the failure of which would result in the failure of the entire system, which also increases security against potential attackers.
A decentralized network is more secure against manipulation, there are own validation and authorization mechanisms across the entire network. Forgery-proof mathematical hash procedures make the data trustworthy. Integrity is ensured as thousands of nodes validate each transaction.
Once transactions have been made, they cannot be changed or reversed. With DLT, there is only one “source of truth.” Any unauthorized change in the network is directly disclosed, so you can be absolutely sure of the veracity of the transactions.
Trust, which was formerly provided as a service by intermediaries (banks, merchants, etc.), can now be provided technically. Since the 2008 financial crisis, trust in the traditional institutions of the economy, the financial market, and even the state has declined significantly. With DLT, two people or companies who don’t know each other can do business with each other without having to trust the other, and without an intermediary. This saves time (no contracts, etc.) and money (no intermediary commissions).
Double spending problem is solved
One of the main benefits of decentralized technologies is that the double spending problem is solved. Explanation: since digital money is just a computer file, it is easy to counterfeit by simply copying and pasting. Without DLT, banks keep track of everyone’s money in their accounts, so no one can “double spend” or spend the same money twice. DLT solves this problem differently and more efficiently than banks: it makes all transactions and accounts public, so it is immediately obvious if money is used twice.
Any user can track all transactions, it is a completely transparent system. Note: there are also so-called “privacy” solutions.
Transactions take much less time than transactions that require some kind of middleman (bank).