The term “distributed ledger” refers to a database kept and updated independently by all the concerned participants, in a broad spectrum of the network. The distribution is unique and consensually pooled and coordinated among a vast network, which is connected to various sites, financial institutions, and countries. There isn’t any central authority to transfer or communicate the records to multiple nodes, but everybody involved in the transaction independently develops and holds the records. Also, there isn’t any centralized data storage system.
The transaction partners at each point of the network (node) have access to the information that is available/shared on that network and can also have a mirror copy of the records. This process allows the participant to have a copy of the transaction, which reflects like a public copy that can eventually stop, or make it difficult to carry out, any form of possible cyber-attack. It makes the transaction very transparent because it has a peer-to-peer network system, which ensures the replication is carried out simultaneously across the nodes involved in the operation with the help of a consensus algorithm. This process lets the changes that are created in the ledger be distributed to all nodes immediately. The blockchain is one of the leading distributed ledger systems, which is used in Bitcoin cryptocurrency.
The new consensus algorithm allows every individual node on the network to process their transaction and reach their conclusion. As part of the process, the rest of the participants agree to the conclusion (hence the “consensus”). So, when every participant agrees to the conclusion, as part of the consensus, the algorithm allows the ledger changes/updates. All nodes will have the mirror copy of the updates, which shall be identical ledger and generated by the respective node. Here, with the distributed ledger system, we have a new sleight of hand to keep the database unlike an ordinary computer database storage.
The introduction of the distributed ledger changed the way of secure transactions. It has multi-dimensional capabilities, with little to no flaws, and allows changes to be made to the ledger only if there is a consensus. The consensus algorithm opened the door to unprecedented possibilities and offers a new version of security features in the digital transactions.
History of ledgers
Ledgers, which are the foundation of accounting, existed in the ancient days as well. Earlier, it was written on stone and papyrus until the invention of paper. When computers came in, it was digitalized by manual entry. The early days of ledgers mimicked the account of the paper-based transactions. Although digitalization came into existence, it was applied more to the logistics of paper works rather than creating something new. Paper-based institutions formed the backbone of our society, be it signatures, money, bookkeeping, certificates or bills. That is why distributed ledgers are considered a breakthrough, as they have the capabilities to take things beyond paper-based ledgers.
Get to know distributed ledgers
From the olden days, ledgers have been the core of economic transactions to make payments, move properties, and record contracts, among other transactions. These days, computers take up the job of keeping records and provide great convenience and speed over the traditional way of doing things. These days, with so much technological advancement happening around us, information stored in computers is fast, decentralized, and cryptographically secure. A distributed ledger uses a decentralized platform to maintain the data, and there is no central authority to check for any manipulation.
It uses state-of-the-art cryptology to secure the information and can be accessed only through cryptographic signatures. Once you store the data, it becomes obscure and governed by the rules set for the specific network.
When it comes to centralized ledgers, they are prone to cyber-attacks, but with distributed ledgers, it is difficult to attack. If anybody wants to perform a hacking, all the distributed copies need to be attacked simultaneously. Records in distributed ledgers are resistant to changes by a single party as well.
Benefits of distributed ledgers
Distributed ledgers have several advantages over the current digital database. It cuts down the number of intermediaries and speeds up the digital transaction times. Another advantage is that distributed ledgers can significantly reduce transaction costs and error rates. For example, currently, banks have to pre-fund to settle multiple accounts, but with a distributed ledger, transactions will be resolved immediately and liquidity rates are reduced as well. Foreign exchange costs will also decrease because of increased transparency, and the foreign exchange margins will increase price-based competition. Faster settlement times, lower collateral requirements, excellent transparency, improved contractual term performance, and better capital optimization, etc., are some of the benefits that capital markets can reap by using a distributed ledger. However, like any other technology, blockchain also has several challenges like privacy, scalability, latency, security, and implementation.
What is blockchain technology?
The blockchain technology was an ingenious invention that allows digital information to distribute among many people without allowing to copy. The importance of blockchain comes when several people can make entries into a record. It controls how those people can interact with and update the information. If you want a practical and simple example of how blockchain works, then check out Wikipedia. Wikipedia functions with the help of blockchain technology; no single person controls the information on Wikipedia. Wikipedia uses the client-server model. In Wikipedia, a centralized server is used to store all the data, and a user who has permission can only change the stored information on the server. Whenever a new user enters the Wikipedia page, they get access to the updated version of the entry. The entire control of the database lies with the administrators alone.
How does blockchain technology work?
In blockchain, everything you perform is in the form of a digital record. Each transaction has a digital document, and each record can be traced back to a single person. The record has a signature that can be validated, sorted, and shared. This allows organizations to run their businesses efficiently. With blockchain technology, there is a tamper-proof and permanent way to make a record of the process between two parties. With innovations happening in the blockchain, it will impact the areas of organizations and society.
The future of distributed ledger technology
Today, distributed ledger technology is being used by many companies, including Microsoft. It uses the technology for trade finance; however, the business giant is expected to utilize the technology to its fullest in the future. IBM has teamed up with a Canadian bank on developing digital identification solutions that are based on distributed ledger technology. The standardization, interoperability, and regularization of distributed ledger technology must be sorted out. Once this has been accomplished, the possibilities of the technology are endless. Through the association of distributed ledger technology and internet features, the world is going to witness exciting development in the coming years. Predictive analytics, the internet activities, advanced analytics, distributed ledger technology, artificial intelligence, and many more profound technologies are the focus area of the millennium.
Distributor ledger technology is powerful enough to revolutionize the way government and corporations work. The technology can help the government with tax collection, passport issuance, voting procedures, and more. The technology has already been making a major impact in the area of finance, entertainment, art, supply chains, and various other areas, especially in cryptocurrency.