A distributed ledger is a database that exists across several locations or among multiple participants. 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.
The DLT has enabled for the first time in history the secure conduct of economic transactions between two parties at a distance, without the involvement of intermediaries or third parties such as financial institutions and cloud based online financial platforms, in their role of guarantors of reliability. From the combination of large computer processing powers with cryptographic elements, these ledgers contain complete and unchanging information on the transaction history data of any value integrated in these systems, which is periodically agreed upon and updated by all its users.
By contrast, most companies and other state or private entities, currently use a centralized database that resides in a fixed location. A centralized database essentially has a single point of failure, and therefore is prone to cyber-attacks and fraud. In turn, a DLT database is decentralized, thus eliminating the need for a central authority or intermediary to process, validate or authenticate transactions. Enterprises (and in some cases, state authorities) use DLT databases 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 of the participants on the DLT database can fully access the records in question. The technology provides a verifiable and auditable history of all information stored on that particular dataset. Removing the intermediary party from the equation is what makes the concept of DLT appealing.
Differences between DLT and Blockchain
An example of application of DLT can be observed in the Blockchain. A Blockchain is essentially the implementation of DLT through a shared database filled with entries that must be confirmed and encrypted. A block chain is a type of database that takes a number of records and puts them in a block (rather like collating them on to a single sheet of paper). Each block is then 'chained' to the next block, using a cryptographic signature. This allows block chains to be used like a ledger, which can be shared and corroborated by anyone with the appropriate permissions. There are many ways to corroborate the accuracy of a ledger, but they are broadly known as consensus (the term 'mining' is used for a variant of this process in the cryptocurrency Bitcoin).
The real novelty of block chain technology is that it is more than just a database — it can also set rules about a transaction (business logic) that are tied to the transaction itself. This contrasts with conventional databases, in which rules are often set at the entire database level, or in the application, but not in the transaction.
A more approachable way to understand the functioning process of the DLT is to think of it as a highly secure and verified notebook that is accessible to everyone. Everyone can access the pages of this notebook at the same time and each page of this notebook is 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 "hash".
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. Think of Blockchain and DLT in the same way you might think of McDonalds and fast foods. The former is a type of the latter, but it has become so popular that it becomes engrained in people's minds as what the product actually is.
Unlike Blockchain, a DLT does not necessarily need to have a data structure in blocks. A DLT is merely a type of database spread across multiple sites, regions, or participants, the mechanics and rules of which are shaped in accordance with the specific application that would grant the user access to a DLT (i.e. Blockchain, Directed Acyclic Graph, Hashgraph, etc.).
This technology can be inspected by everyone but cannot be controlled by anyone, thus enabling reliable economic transactions that are authenticated by massive user collaboration and generated by the self-interest of each of users and not by public authorities.
In the Second Chapter we will be discussing the legal and regulatory framework of Albania regarding financial markets based on DLT and the main institutions in charge of enforcement of such framework. We will explain in depth which activities are subject to licensing, the conditions for licensing, monitoring and supervisory activities etc.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.