The Difference Between Blockchains & Distributed Ledger Technology
Many are familiar with the idea of blockchain technology. It came into prominence first as crypto Bitcoins starting in 2009 and then was popularized by many other cryptocurrencies thereafter. Blockchains are a form of distributed ledger technology.
Distributed Ledger Technology
Distributed ledger technology (DLT) is a general term, which describes software and online technology that distributes information as a record of ledger transactions to all that use it. The dissemination of the ledger information happens automatically on a peer-to-peer (P2P) network basis. DLT information may be shared either publicly or on a private basis among authorized users.
What are the differences between using a distributed ledger technology network when compared to a centralized database?
DLT works with a decentralized ledger that does not require centralized administration. Examples of systems that currently use centralized databases are banks, governmental programs, and stock markets. In these systems, the administrators have complete authority and control over the centralized database.
The main distinction between DLT and centralized database systems is that when using DLT the records of the ledger entries are determined by consensus among the DLT users.
A DLT database is spread across many network nodes that have identical copies of the confirmed ledger information. Every network node updates independently. All the copies of the ledger must remain in agreement by following the majority consensus.
The way DLT works is that information, which is independently stored on one node, is communicated to other nodes by a consensus algorithm. All the nodes agree on the accuracy of the ledger. Once a consensus is reached, the latest version of the updated ledger is then transmitted to all other nodes for independent storage. There are many copies of the same ledger distributed across the system.
With DLT, no central authority manages the ledger. Therefore, it is much more difficult to change or corrupt the information, since the ledger is shared by all the users and not stored in a centralized place where it can be “hacked” and manipulated.
Blockchain technology is a type of DLT. However, not all DLT uses blockchains. The difference is whether the information is stored as a chain of linked blocks or stored in a different configuration by using alternative algorithms.
Even though blockchain technology (BT) is a form of DLT, the configuration of a blockchain system is based on storing data in blocks that are linked together and encrypted for security.
How can this technology become more scalable? What are the downsides?
A blockchain system creates a continuously growing record of blocks that go back to the very first block created. Once a block is created and accepted by network consensus, it can never be changed or deleted. This permanent blockchain ledger record is very useful; however, the disadvantage is that it continues to grow larger over time.
This ever-growing ledger becomes burdensome in terms of increased computational needs, reduced transaction speeds, and requirements for larger data storage capacities of the ledger on the P2P network nodes. For this reason, other innovative approaches for DLT systems are becoming popular. These newer systems do not rely solely on blockchains in the system design. They may use blockchains partially and some DLT systems do not use blockchains at all.
Types of Blockchains and Distributed Ledger Systems
Bitcoin runs on open source software code. When it was released in 2009, the source code became available to any software developers who wanted to make a new version, called a “fork,” as a derivative of the original blockchain software. This caused many new cryptocurrencies to come into existence.
Here are some of the popular cryptocurrencies, blockchain platforms, and DLT systems with an explanation of their differences:
How do BT cryptocurrencies work?
The ledgers for cryptocurrency transactions are maintained over public P2P networks. Any web user can participate in these systems without needing permission. Any computer on the network can become a node and join the consensus-generating process by validating transactions.
It is possible for any global user to add transactions to the system by following the system protocols. If the transactions are valid; they are included in a blockchain. The transactions are transparent.
For most of these systems, anyone can read the transaction information using a public block-explorer software tool to read the blocks. The information that can be read does not reveal the users only the recorded transactions between private encryption keys.
How is it possible to save money and time using this new technology?
Using public networks has no infrastructure costs for the system administrators. Cryptocurrency coins are mined in some systems; however, the miners pay for the computer servers and electricity needed to do this work and receive cryptocurrency coins in payment for their efforts.
In this way, the costs of creating the system and maintaining it are shared among its users. For decentralized cryptocurrency applications, this design dramatically reduces the expense of creating the system to process the transactions, when compared to centralized administration.
With some cryptocurrency systems, the transactions costs are lower (may even be free) and can substitute for more costly ways to achieve the same thing by using other methods. A comparison that is often made is the cost of creating an international bank wire or money transfer using traditional systems. The cost of using traditional systems is higher than a digital transfer of cryptocurrency. Some of the newer cryptocurrency offerings are “frictionless.” This means that they do not have any transaction fees.
Popular BT Cryptocurrencies
BT-based cryptocurrencies include Bitcoin, Bitcoin Cash, Litecoin, Ethereum, Zcash, Dash, Ripple, Monero, Neo, Cardano, EOS, NANO, and many others.
The use of the original Bitcoin blockchain technology that started in 2009 expanded to create many cryptocurrencies.
Bitcoin Cash, released in 2017, is a derivative of the original Bitcoin. Bitcoin Cash increased the size of the blockchain from 1MB to 8MB to improve computer processing speed.
Litecoin improved on Bitcoin by offering faster transaction confirmation rates.
Ethereum is both a cryptocurrency and a blockchain platform used by developers for smart contracts that run within the Ethereum application. Ethereum can be used to decentralize, secure, and trade almost anything.
Zcash added another layer of encryption to increase the security and privacy of its users by shielding the encryption keys of the sender, the recipient, and the amount of each transaction.
Dash offers more anonymity than Bitcoin by using a decentralized master-code network, which makes transactions nearly impossible to trace.
Ripple was designed to make international transactions easier and uses less computational power because it does not require mining of coins for the network to operate.
Monero uses ring signatures for making transactions more private. Ring signatures are a group of digital signatures, which are used for each transaction, with only one being the real one and the others serving as decoys.
Neo is the largest cryptocurrency to come out of China. It is backed by the Chinese government. It supports many computer programming languages that include Go, Java, C++, and others.
Cardano focuses on international transactions and reduced processing times for global payments from days down to seconds.
EOS is designed for scalability. There is no mining of EOS coins. Instead, developers earn EOS coins by generating blocks of confirmed transactions.
NANO is a hybrid system that uses individual blockchains for each user. These blockchains become part of a greater directed acyclic graph. Every user creates verifications of their own transactions. This means that the entire network does not need to update the overall massive ledger. The advantages of NANO include the processing of a thousand times more transactions per second than Bitcoin is able to do and having zero transaction fees.
Blockchain platforms that can be used for more than just cryptocurrencies include Ethereum, BigChainBD, Hyperledger Fabric, Hyperledger Cello, Hyperledger Sawtooth Lake, IBM Fabric, Hydrachain, R3 Corda, Multichain, OpenChain, Chain Core, and many others.
These blockchain platforms are designed for either public (permissionless) P2P networks or for use on private (permissioned) networks. Along with the expansion of offerings of cryptocurrencies, it became apparent that blockchain technology could be used for many types of transactions and agreements that represent underlying things of value.
Ethereum became more popular when it expanded its use from being a cryptocurrency to having utility as a blockchain platform. Ethereum is an open-source platform that helps developers create cryptocurrencies and design applications to run “smart contracts.” Smart contracts are secured digital contractual agreements.
BigChainDB is designed to store huge amounts of data with low latency and high-speed transaction processing.
The Linux Foundation supports many versions of hyperledger. Hyperledger Fabric is a modular architecture that runs on one or more networks to provide enterprise solutions. Hyperledger Cello offers developers the tools necessary to create blockchain-as-a-service (BaaS) offerings. Hyperledger Sawtooth Lake is an enterprise solution that supports both permissionless and permissioned systems.
IBM Fabric is the commercially-supported Hyperledger blockchain technology that is open source. Users of this system do not pay for the software; however, they pay for support and implementation.
Multichain is based on Bitcoin and can process multi-currency transactions. Openchain has a design for the issuance and management of digital assets in a scalable way. Chain Core manages digital assets such as currencies, derivatives, gift cards, loyalty points, and securities for permissioned networks.
Private blockchain platforms that require permission to participate are useful to solve certain fraud and security problems as well as to increase efficiency. These incremental changes probably will not change financial institutions dramatically; however, they do improve the functionality of transaction systems.
On the other hand, public blockchain platforms, which do not require permission to use them, have the capability to be very disruptive and fundamentally change the way some financial systems operate.
DLT Systems Not Based Solely on Blockchains
DLT systems include Digital Asset Holdings, Hedera Hashgraph, and systems that use Directed Acyclic Graphs such as IOTA’s Tangle network, peaq, and many others.
These development platforms are distributed ledger systems; however, they do not work with blockchains. They are very effective in financial services and other industry-specific infrastructures.
Digital Asset Holdings builds DLT systems for regulated financial systems that include, banks, custodians, central counterparty clearing houses (CCPs), central securities depositories (CSDs), exchanges, infrastructure providers for the financial markets and the market participants.
Hedera Hashgraph uses a voting algorithm along with a gossip protocol that creates consensus faster than using blockchains. Leemon Baird invented the hashgraph system when he co-founded Swirlds. Swirlds is a permission-based DLT system.
The public version of the Swirlds technology is called Hashgraph Hedera. It can do thousands of transactions per second compared to Bitcoin or Ethereum’s limitation of five to seven transactions per second.
A DAG system uses a different type of mathematical calculation to create the ledger. The advantage of this approach includes not needing miners to make cryptocoins. Moreover, the users (issuers) are responsible for the verifications of transactions. This is a better design. It is less problematic than having a group of verifiers that are different and separate from the issuers because it removes the potential conflicts of interest from the system.
IOTA is quietly making the utility of their DAG system a priority. This is the next generation of DLT systems. For example, using this approach, micro-payments that may come from the connectivity of networked devices found on the Internet of Things (IoT) are more manageable. The usefulness of this ability alone is extraordinary.
The peaq system is a hybrid of blockchain technology and DAG architecture. This system has no mining. It is adaptable to any application through its methods of tokenization. It is scalable and cost-efficient.
Utility and Recent Advancements
What can we learn from the early steps of DLT and where are we now compared to some years ago?
DLT, BT, and hybrids using DAG (sometimes along with individual blockchains) are making improvements in usefulness, security, transaction processing, and scalability.
Speculation in cryptocurrencies brought worldwide attention to blockchain technology. However, it soon became apparent that even though the cryptocurrencies achieved market valuations in the many billions of dollars, they are not as useful as they could be.
What were and are the largest obstacles to reach a higher level of this technology?
The limitations of BT propelled further developments that reduced the resources needed, in terms of computational power and electricity. Using hashgraphs and DAG to develop new DLT systems is producing very promising results.
There are concerted efforts to set testing standards to measure the scalability of DLT systems, which offers a means to compare one system’s functionality with another one. One industry group making progress in this area is the Hyperledger Performance and Scalability Working Group. Scalability comes from making trade-offs between many factors and then using standards to test the results of innovations.
How will regular people, and not just large organizations, gain from this technology?
The desired features of this technology that provide a secure system of record for individuals include:
1) Digital Identity for Privacy
Ownership of a digital asset comes from ownership of the correct private cryptography key. While the owners of private cryptography key must guard it in a similar way to how they guard physical cash, their private information is protected by the key. To complete a transaction only requires a single private cryptography key for that transaction and not the release of personal information.
To create the authentication needed for a unique real item, a specific digital token is created and then paired with it. These tokens create the connection between the digital information and the real world. Tokens prevent fraud, reduce counterfeiting, protect intellectual property, and are useful for supply chain management.
3) Smart Contracts
Tokens can be used in a smart contract to make it easier, faster, and cheaper to complete common, yet somewhat complex, transactions such as buying a house, investing in stocks, or sending money abroad.
There are many industrial applications for DLT systems. Here are some examples:
Financial institutions, such as banks, spend billions of dollars trying to protect their systems from data breaches. Businesses also have the same risks. Improved security of personal information comes from using DLT. Private, permissioned systems for regulated financial institutions benefit from detailed audit trials automatically created by the DLT systems.
Transactions in a DLT system automatically create a record of who accessed the information and who has authority over the data. This is based on the permissions required for the system and having the correct private encryption key.
Tokenization allows a unique encryption key to be used to represent ownership of an underlying asset, such as a stock certificate. Stock transfers currently go through an archaic transfer system for stock settlement. It takes three days for a buy or a sell order to clear through a Deposit Trust Company (DTC) that handles stock transactions. With a DLT system, which does not compromise security or increase risk, these processes can happen almost instantly instead of taking three days.
Scaleable, tokenized DLT systems allow encryption keys to be paired to any physical item. This is very useful for the protection of intellectual property, tracking of products and supplies, inventory management, quality control, and more.
Government Systems and Public Projects
Governments like to have authorization control over certain transactions through regulatory compliance. Governments have an interest in who owns the encryption keys. A properly designed DLT system manages new encryption key generation, who can possess a key, revocation procedures, and key replacement if one is stolen or lost.
Governments also want to regulate who acts as part of a blockchain network and has an interest in regulating blockchain protocols as they authorize transactions. For these reasons, DLT technology is applicable for building systems that incorporate regulatory compliance.
What is in store for the future?
One strong trend is the expansion of smart contracting that uses DLT to manage complex written agreements, stock transfers, and legal contracts. Business logic is being applied to DLT so that a complex transaction can be coded and then authorized or denied by the DLT network running the code.
There are a variety of new approaches being implemented to make BT and DLT more useful and effective. No one is exactly sure what applications will develop into being the most widely-used standards. There are numerous contenders for big success in a variety of application areas. Many systems are already quite popular. The overriding trend is to evolve away from the limitations of blockchains and to develop more efficient methods for innovative DLT systems.
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