If you are new to cryptocurrency, it is likely you will want to become familiar with the term distributed ledger. Sometimes dubbed DLT, standing for distributed ledger technology, it is this system that makes the online currency work.
A distributed ledger, just like it sounds, is a method of recording transactions that are not centralized in its storage. Instead, the recorded transactions are viewed by many, scattered across the globe. But is this system working? And what are its benefits?
Distributed Ledger Technology
DLT is the software or network created in order for the world of crypto to exist. It is typically referred to as a blockchain. As the name implies, the blockchain is a series of datasets (or blocks) linked (or chained) together.
These blocks contain the data required to keep the transactions recorded. The blockchain has three main goals:
- Keep the ledger transparent
- Maintain data integrity
- Ensure there is a distribution
But, what is a ledger? Just like in the real-world, tactile existence, the ledger is a record of transactions. Way back in the day, you may recall, there was an actual book kept by (wait for this far-fetched definition) an actual bookkeeper.
These accountants, or even a team of financial experts depending on the size of the operation, would manually keep records of financial transactions in a hardcopy book. From there, technology advanced to allow for the use of databases and computers.
Enter dizzying columns and endless rows of data all entered into Excel. Blocks of numbers will haunt my nightmares for years to come, I am sure. However, the new kid on the block is crypto. And crypto relies on a ledger maintained on a blockchain (or its DLT).
Blockchain technology may be easy to define, but not as easy to understand. Blocks are created in order to store data. These blocks are publicly accessed. To allow for total transparency, anyone can see the ledger.
However, who may use (or “mine”) the blocks vary, depending on the type of blockchain technology the system has in place. There are two main styles of blockchain technology:
- Proof of Work
- Proof of Stake
Proof of Work
Simply stated, the Proof of Work (or POW) blockchain relies on miners solving complex calculations, puzzles, or duties in order to create a new block. These miners may charge what is called a gas fee (or money to cover transactional costs, effort, and energy usage) in order to get the job done.
These miners foot the bill for the actual energy (i.e. electricity) used, and work for payment. Once the computation is solved, a new block is formed, and that data allows for crypto to be created.
Proof of Stake
In the proof of stake system, those wishing to become miners enter a sort of lottery to be chosen at random to mine. By posting tokens as collateral, or “staking,” users of the network are able to rather purchase chances to be permitted to add to the ledger.
By winning a mining chance, the person (or persons, sometimes called a pool) is rewarded with crypto (the new block). It is more of a gamble, but instead of working, a POS blockchain relies on users posting funds and no effort to continue.
Similarities in POW and POS Blockchains
While both POW and POS distributed ledgers have a goal of creating new blocks in the blockchain networks, they go about it in totally different ways.
However, both focus on verifying transactions. While neither style of blockchain wants there to be any single authority or entity “in charge,” both models agree that there is, in fact, a need to validate cryptocurrency transactions.
When handling the finances of so many, it is crucial for the transactions to be recorded, be accurate, be validated, and be available.
A Solution for Financial Transactions
Overall, the distributed ledger aims to solve all of those goals in one system. But what precisely is the distributed ledger, what are the distributed ledger benefits, and what are the distributed ledger drawbacks?
Some of the answers in the saga that is distributed ledger technology have not been completely written. But one thing is for sure, they are a vast world with many points to analyze. So, let’s dive in, shall we?
When it comes to cryptocurrency, a DLT is a tech with which things are kept securely. The distributed ledgers, in these cases, take the form of a blockchain. All users of the blockchain are given access to the distributed ledger, which means no single entity is neither in charge of nor overseeing the transactions individually. Instead, the group is equally charged with this monitoring.
A major goal of the entire crypto concept is to ensure that no one single power oversees the system. While there is an exchange of funds (buying, selling, or trading crypto), there is not any banks or governmental entity in control. No single person can oversee the blockchain networks.
This concept is largely designed to keep the system both transparent and distributed. It is structured in a peer-to-peer network of distributed ledgers, which is not kept on one singular, central server, but instead is scattered across its many users’ devices.
Benefits of a Distributed Ledger
There are many bullets one can list in the “pros” column of the distributed ledger technology side. Some of those benefits include:
- Efficient and accurate transactions are made quickly.
- The system is powered by its users.
- No central authority oversees the blockchain.
- DLTs offer a high level of integrity and security.
- DLT is a the core of a simplistic ecosystem.
- It is durable, traceable, and long-lasting.
- Ledger technologies lower the cost of business.
To better understand these benefits, we will break each one down and define how it helps in terms of cryptocurrency and the creation, use, and future of distributed ledger technology.
1. Transactions Are Made Efficiently
Without the need for duplicated efforts, the recording of transactions on distributed ledgers can be done at any time. There is no “powers-that-be” or man behind the curtain. Without such red tape, the system may go on with smoother efficiency.
Accuracy is often ensured by the many eyes using the system. Checks and balances are in place, with programs designed to only allow clear and accurate data to be stored. Distributed ledgers, by their very nature, allow all eyes to see the data at any given time.
Simultaneously copied to each user’s copy of the ledger, each transaction recorded is available to all at the same time. Once verified, the blockchain allows the ledger to be immediately distributed. Once that has been accomplished, no change can be made to the accepted new block.
2. A System Powered By Its Users
Instead of costly brick-and-mortar offices, many businesses have converted into an online world. If a world pandemic didn’t force folks to go digital, the lower cost of business certainly attracted many to this way of life.
With DLT, the literal power required to keep the peer-to-peer network is, in fact, fueled by the peers. In other words, the costs of operation are covered by the users of the blockchain. No central server exists, thusly there is no building housing such, no entity overseeing it, and no need for that office to be powered with electricity, not to mention other costly utilities.
Instead, power costs fall onto the users. This may not be a benefit as a user but certainly distributes far more than the ledger. It distributes cost, making massive expenses less painful when shared by the masses.
3. No Central Authority
The main benefit of a distributed ledger is to meet the goal to have no single authority charged with overseeing cryptocurrency. This allows for the goals of transparency to be met, as all users have the same “power” to keep an eye on the ledger.
Without a single bookkeeper, or for that matter team of accountants some business models rely upon, costs are kept down, redundancy is eliminated, and the red tape of authority is eliminated.
4. Integrity and Security
Once transactions are entered and distributed onto the ledger, they cannot be altered. This makes the DLT a key to the integrity of the crypto ecosystem. Due to the consensus system, simultaneously updating all users on the blockchain at once, there is added security, too.
Since the process required to store the information on a data block is so robust, it is also all the more secure. While users are able to record transactions, no one is able to make changes once verification has been made.
5. A Simple Ecosystem
If you are just entering the cryptocurrency exchange market, it may not seem like a simple system to you. However, what distributed ledger technology allows for is the simplification of many steps into far fewer steps.
Various processes are condensed into a compact and user-friendly interface, making the system overall more approachable to the masses. Those of all skill levels can understand and even master the ecosystem with minimal training.
Consider the inner workings of a major corporation and its accounting firm. Firstly, you are likely looking at an entire team of accountants, working around the clock to keep the business properly functioning on its financial platforms.
There are payments received, accounts payable, payrolls, utility bills, taxes … the list goes on and on. There are many facets to the financial world, and cryptocurrency is no different. However, instead of relying on the financial sector and its teams of accountants, crypto relies on the distributed ledger to create a far more simple form of an ecosystem.
6. Traceable and Long-Lasting
Traceability may be an obvious point when you are working on the Internet. Nearly everything comes with a trail. Ironically dubbed a paper trail in the tactile “real” world, keeping a ledger is at its very core a system to trace back the record of transactions.
Each block in the blockchain contains a hash ID, a time stamp, and transactional data. And, while crypto operates under a concept revolving around no central authority, it instead relies on the eyes of many to keep everyone honest. Having multiple entities involved in the chain is actually a plus for a blockchain network.
The longevity of distributed ledger technology is clear. While it has only been in existence for a handful of years, the blockchain is built to last. Many will tell you, once it is on the Internet, it is there forever. In this case, it is a good thing. When it comes to those photos of your college days, perhaps not.
Love it or hate it, the digital component of the distributed ledger provides for permanency only the web can provide.
7. A Lower Cost of Business
As previously mentioned, without the typical overhead costs, and the distribution of expenses, the cost of doing business overall is lowered by the use of a distributed ledger. Unlike a centralized ledger, typically stored on one massive server, the distributed ledger is not relying on one location, one place, one building, or one authoritative figure overseeing its use.
All of these factors lower the cost of doing business when using distributed ledgers instead of centralized ledgers.
The Negatives of a Distributed Ledger
While some may argue that blockchain technologies are the future, the way of the world, and technological infrastructure that will change the universe, there are, of course, cons to them too. Distributed ledgers are not a perfect science.
Some of the negatives when dealing with a distributed ledger include the fact that it is an immutable database. In other words, once verified and added as a new block, the data in the blockchain cannot be altered.
Others also feel that a lack of central authority, while a goal of crypto overall, means there is not as strong of a sense of stability, that no one entity is checking for legalities. Is anyone ensuring that all rules are being followed?
Another con (also viewed as a pro by some) is the anonymity of a blockchain’s users. When handling digital assets, it concerns some that nameless and faceless miners are handling the data exchanges. Those working in risk management would be quick to tell you leaving such business transactions to a peer-to-peer network can be concerning to say the least.
Lastly, there is a drawback with ledger technology when it comes to its proven track record. Having been in existence for so little time, the entire world is still learning about its uses, especially when it comes to cryptocurrency. Distributed ledger technology has certainly created some believers along the way, and some businesses even will swear by its affordability, accuracy, and dependability.
But without years of data to track, nor a lawbook of established cases, the distributed ledger technology still has a ways to go for some. It has to put more time in to prove itself to many.
No One Knows What the Future Holds
At the end of the day, no one has a completely clear picture of the future. Clearly, the use of distributed ledger technology is used across multiple businesses and multiple sites. Entire infrastructures are reliant on its business processes, transactions records, and the entire system of information stored on the blockchain.
The past few years have seen a major boost in the use of blockchains across several industries. And, as it stands, the technology is still really in its early stages. But, when it comes to distributed ledgers, there is clearly a dedicated following behind its use.
Distributed ledger technology truly has all the room in the world to grow. And while its lack of history concerns some, its ability to change the future attracts many. No matter the pros and cons, one thing is for sure: there are many users on the world wide web in favor of distributed ledgers. Many more are likely to come.
Do Benefits Outweigh Drawbacks
While distributed ledger technology is still in its infancy, many ask the question: will the benefits outweigh the problems connected to the distributed ledger and its methodology?
Ledger technology is not completely proven. Blockchain technology keeps the crypto exchange system humming, but will it always? Is crypto itself even the wave of the future, here to stay for the long haul.
Again, ultimately, these facts remain to be proven, but the future does look bright. When it comes to any technology, there is a massive benefit of being a world still open to and able to discover new solutions.
Distributed ledger technology, like most tech, is a world that remains to be “finished.” The story is not over. Chapters remain to be written, and those that will shape these paragraphs are possibly just now learning about its existence.
A distributed ledger certainly has its benefits already. Distributed ledgers are being used every day in major markets such as Bitcoin and Ethereum. Blockchain technology is clearly here for the present. But will the distributed ledger reach the future?
While it has many plusses, there are some minuses that must be addressed before distributed ledgers are a permanent feature. Like any tech, kinks in the distributed ledger technology need to be worked out to sell some. Others will not be convinced until the distributed ledger proves itself with years of a positive track record.
Ledger technology may have some ways to go, but it clearly also has the funding, experts, and focus enough across the industry to make it last. The distributed ledger is likely here to stay, at least for the short term. Its advances in the coming years will determine if they are here to stay.