A Distributed Ledger Technology (DLT) is simply a distributed database with certain unique components: a ledger; a consensus algorithm; and a framework for incentivizing and rewarding network participation.
A DLT has a peer-to-peer computer network and consensus mechanism to ensure that the ledger is successfully copied among dispersed computer nodes (servers, clients, etc.).
Blockchain is a type of DLT and DLT is used as an umbrella term for all these new technologies like blockchain which arrange information and transactions to transmit digital assets in a P2P manner.
Cryptocurrency is without a doubt one of the most significant technological innovations of the past two decades. Blockchain, which serves as the foundation of cryptocurrencies, has received widespread attention for its several capabilities. Blockchain’s P2P (peer-to-peer) way is used by many organizations for the storage of information and transactions.
Over the years, many blockchain-based alternative technologies have emerged for organizing information and transactions to transfer assets. DLT is used as an umbrella term for these new technologies used for arranging information and transactions to transmit digital assets in a P2P manner. Let’s take a detailed look at them.
A Distributed Ledger Technology (DLT) is simply a distributed database with certain unique components: a ledger; a consensus algorithm; and a framework for incentivizing and rewarding network participation. It is handled by several participants and distributed over multiple nodes.
DLT is based on an encoded and distributed database that stores transaction records. It requires a peer-to-peer computer network and consensus mechanism to ensure that the ledger is successfully copied among dispersed computer nodes (servers, clients, etc.).
Instead of requiring a central authority to update and distribute data to all participants, DLTs enable their members to securely validate, execute, and record their own transactions without the need for an intermediary.
DLT uses cryptography for the safe and accurate storage of any information. The same is possible with "keys" and cryptographic signatures. When information is saved, it becomes an immutable database that is subject to network regulations. The blockchain (often linked with cryptocurrency) is the most prevalent type of distributed ledger technology.
Although blockchain and distributed ledger technology are sometimes used interchangeably, there are some differences between the two technologies. As stated previously, blockchain technology is a type of DLT, and DLT is an umbrella term for all these new P2P technologies. However, the concept behind them is quite similar.
Apparently, blockchain is the primary technology of DLT. The introduction of Bitcoin and blockchain is the first significant moment for DLT. Since then, blockchain technology has captured the interest of the corporate sector due to its characteristics of resistance to modification and safe preservation of transaction records. Blockchain technology has the potential to tackle a wide range of issues in the banking and finance sectors.
In this context, blockchain is a more evolved form of Distributed Ledger Technology with several valuable features. In the technological realm, developers have many different DLT options. However, they lack the number of real-world implementations and applications that blockchain possesses.
Blockchain: Transactions are maintained in the form of a chain of blocks. Each block produces a unique hash that may be used as proof of legitimate transactions. The digital data included in the blocks contain the time, date, and transaction details. Furthermore, the blocks in the blockchain contain the sender's information as well as a unique 'digital signature' to ensure anonymity.
Holochain: Some consider Holochain to be the next level of blockchain since it is far more decentralized than blockchain. It is a form of DLT that simply suggests that each node runs on its own chain. As a result, nodes or miners can function independently. It essentially shifts to an agent-centric framework. In this context, agent refers to a computer, node, miner, or another similar device.
Directed Acyclic Graph (DAG): DAG is a more-improved DLT that employs a data structure to organize the data. Validation of transactions in this type of DLT often requires the majority of network node support. Every node in the network must first produce evidence of transactions on the ledger before initiating transactions. To validate their transaction, nodes must check at least two prior transactions on the ledger.
Hashgraph: Records in this type of DLT are kept as a directed acyclic graph. It employs a distinct mechanism, with virtual voting as the consensus mechanism for achieving network consensus. As a result, nodes in the network are not required to validate every transaction. Instead of a consensus mechanism like proof-of-work, it uses virtual voting. Additionally, this allows several transactions with the same timestamp to be stored on the ledger
Tempo or Radix: Tempo offers the benefit of timestamping along with other DLT functions. It employs the sharding approach to split the ledger, after which all events that occur in the network are appropriately ordered. Essentially, transactions are entered into the ledger in the order of their occurrences rather than by timestamp.
Decentralized: In a centralized network, a single point of failure can disrupt the whole network due to errors at the central authority. However, a single point of failure does not affect the performance of distributed networks. Because of the decentralized nature, trust among participating nodes grows.
High Transparency: Because all transaction records are open to everyone, distributed ledgers provide a high level of transparency. The addition of new data must be confirmed by nodes using various consensus processes. If someone attempts to edit or update data in the ledger, it is instantly mirrored across all network nodes, preventing illegitimate transactions.
Lower Transaction Costs: The decentralized structure of validation has the potential to decrease overall processing costs. It reduces transaction costs dramatically by eliminating third-party intermediaries.
Time-efficient: Because this network is decentralized, there is no need for a single authority to validate transactions every time. As a result, the time required to validate each transaction is significantly reduced. In the case of DLT, transactions may be confirmed by network members using various consensus techniques.
Scalable: Because many different forms of consensus methods may be utilized to make distributed ledger technology more dependent, quick, and updated, it is more scalable.
Even though DLTs have many benefits over traditional databases, they need to overcome some challenges for widespread adoption. As DLT is still a nascent technology, it has to address issues such as transaction speed, verification, and data limits. Apart from blockchain, the other DLT variants are still evolving and have flaws of their own.
It is well known that blockchain with proof-of-work consensus has a problem of large energy consumption. Miners on the blockchain network use high GPU and computational power in an effort to validate transactions, consuming significant amounts of computer power.
Furthermore, if government regulation status remains uncertain, distributed ledger technologies and cryptocurrencies face a significant barrier to widespread adoption by existing financial institutions and potential users.
In the middle of the huge focus on cryptocurrencies and blockchain, several other technologies like blockchain have also emerged. Blockchain is advanced and secure in and of itself, however, DLT allows access to more advanced technology. Holochain and hashgraph are believed to be more sophisticated and secure variations of Blockchain DLT.
The future holds many promising possibilities for DLTs, but they still need to reach a level of maturity. The most difficult challenge for DLT is balancing data security, privacy, and transparency. Data security in the face of network scalability and transparency in the face of strict privacy safeguards remain important concerns for DLT.