Are blockchain and distributed ledger technology the same? No. This is a common misconception that many people have. In this article, we explore what blockchain is and it’s differences and similarities to distributed ledger technology.
We are living in a digital age of sound bites and buzzwords. An age where even complex technological solutions are reduced to five words or less. As a result, we are witnessing a rise in cunning businesses attempting to piggyback the so-called crypto boom. Some are even doing this by rebranding with ‘blockchain’ in their name.
Predictably, using buzzwords such as blockchain technology to attract investment will only deliver short-term gains. Ironically such actions are responsible for the branding issues of this tech. Leading to one of the reasons why many are wary of blockchain. Meanwhile, emerging trends suggest that distributed ledger is providing value and tangible results without the hype.
Blockchain has hit the headlines on an almost daily basis alongside the rise of Bitcoin and other cryptocurrencies. However, distributed ledgers have not received the same level of focus. Words such as distributed ledger technology and blockchain in the same sentence often leave people with more questions than answers. This is before you even bring Bitcoin into the mix to further muddy the waters.
People often think of blockchain technology and distributed ledger technology as the same. It’s easy to see why many would think along those lines. Now it is time to scratch beneath the surface and see the truth behind the buzzwords. Although these terms have become entwined over the past few years, it is essential to distinguish the two from one another.
Despite confusing acronyms such as DLT in financial and Fintech circles, the good news is that this technology is relatively easy to understand. A distributed ledger is a database that exists across several locations or among multiple participants. By contrast, most companies currently use a centralised database that lives in a fixed location. A centralised database essentially has a single point of failure. However, a distributed ledger is decentralized to eliminate the need for a central authority or intermediary to process, validate or authenticate transactions. Enterprises use distributed ledger technology to process, validate or authenticate transactions or other types of data exchanges. Typically, these records are only ever stored in the ledger when the consensus has been reached by the parties involved.
All files in the distributed ledger are then timestamped and given a unique cryptographic signature. All of the participants on the distributed ledger can view all of the records in question. The technology provides a verifiable and auditable history of all information stored on that particular dataset.
Think of blockchain and distributed ledger in the same way you might think of Kleenex and facial tissues. The former is a type of the latter, but it has become so popular that it becomes ingrained in people’s minds as what the product is.
A blockchain is essentially a shared database filled with entries that must be confirmed and encrypted. An easy way to understand is to think of it as a highly secure and verified Office 365 document. Each document entry dependent on a logical relationship to all its predecessors. The name blockchain refers to the “blocks” that get added to the chain of transaction records. To facilitate this, the technology uses cryptographic signatures called a hash.
The most important difference to remember is that blockchain is just one type of distributed ledger. Although blockchain is a sequence of blocks, distributed ledgers do not require such a chain. Furthermore, distributed ledgers do not need proof of work and offer – theoretically – better scaling options.
Removing the intermediary party from the equation is what makes the concept of distributed ledger technology so appealing. Unlike blockchain, a distributed ledger does not necessarily need to have a data structure in blocks. A distributed ledger is merely a type of database spread across multiple sites, regions, or participants.
On the surface, distributed ledger sounds exactly how you probably envision a blockchain. However, all blockchains are distributed ledgers, but remember that not all distributed ledgers are blockchains. Whereas a blockchain represents a type of distributed ledger, it is also merely a subset of them.
A distributed ledger gives control of all its information and transactions to the users and promotes transparency. They can minimise transaction time to minutes and are processed 24/7 saving businesses billions. The technology also facilitates increased back-office efficiency and automation.
Distributed ledgers such as blockchain are exceedingly useful for financial transactions. They cut down on operational inefficiencies (which ultimately saves money). Greater security is also provided due to their decentralized nature, as well as the fact that the ledgers are immutable.
Alternatively, blockchain technology offers a way to securely and efficiently create a tamper-proof log of sensitive activity. This includes anything from international money transfers to shareholder records. Financial processes are radically upgraded to offer companies a secure, digital alternative to processes run by a clearinghouse. Altogether avoiding these often bureaucratic, time-consuming, paper-heavy, and expensive processes.
When you write data to a blockchain, it gets etched on the network. When you have a series of transactions over time, you gain an accurate and immutable audit trail. This is very useful for financial audits. Having data stored in a place where no single entity owns or controls it, and no one can change what’s already written, gives you benefits similar to double-entry book-keeping. Ultimately, this means that there are fewer chances of errors or fraud.
In short, blockchain is a specific type of distributed ledger. It is designed to record transactions or digital interactions and bring much-needed transparency, efficiency, and added security to businesses. But these two technologies are not the same; blockchain is just the tip of the proverbial iceberg.
The next time you sit through a sales pitch that begins with the words, ‘blockchain is the future,’ maybe you should ask about distributed ledger. This could help you see just how well the self-proclaimed guru or sales representative knows their subject.