Traditional ledgers are known to be the foundation of accounting. Likewise, distributed ledgers perform a similar work on a digital systems. These digital systems record the transaction of assets, which includes transactions and their details, recorded at multiple locations at the same time. A distributed ledger is free from administration functionality or any central data storage like traditional ledgers.
In a distributed ledger, nodes process and validate every item and create a record of it. This is the reason that it can be used for storing both types of data, static (like registry) and dynamic (like transactions). Distributed ledgers brought a revolution to record keeping by changing the way information is gathered and communicated.
Origin of Ledgers
In the late 20th century, traditional ledgers were computerized and paper-form accounts started diminishing. However, a central authority was always required to validate the transactions recorded in the ledgers and their authenticity, especially in banks.
The onset of 21st century enabled a huge advancement in record keeping with the help of cryptography, stronger computing power and new advanced algorithms, which made distributed ledger a more sustainable version of traditional record keeping.
Blockchain and Distributed Ledger
Distributed Ledgers use independent computers for recording, sharing and synchronizing transactions. These computers are known as nodes. Blockchain is a type of distributed ledger. Blockchain and distributed ledgers, together are the building blocks of ‘internet of value’ that transfer value or record of ownership, peer-to-peer without any centralized coordinating entity.
The new systems like Bitcoin and Ethereum, based on Distributed Ledger Technology (often abbreviated as DLT), function without a trusted authority. These platforms maintain a distributed database in a decentralized manner using cryptographic signatures and consensus based validation procedures. Then, transactions happen in a peer-to-peer fashion and broadcasted to participants who validate them in form of blocks. These blocks are separate in terms of information stored, but are connected to each other. This type of DLT is usually referred to as blockchain technology.
Blockchain bundles all the transactions into blocks, chains them together and broadcasts them to the nodes. Every single node on the network processes these transactions and give conclusions and then voting on these conclusions is done. Once there is consensus, the distributed ledger is updated and all the nodes maintain a copy of their own ledger, thus maintaining the dexterity of the system. The blockchain version of DLT has successfully powered Bitcoin.
Features of Distributed Ledger
- It speeds up every transaction by removing the need for a middleman and ultimately reduces the cost of transactions, as well.
- It is much more secure, as each node holds records, A record store in distributed ledger cannot be changed.
- It is a transparent way of handling records, as all the data are shared and witnessed across a network, thus making cyber attack very unlikely.
- In addition to financial transactions, digital ledgers can be potentially used in multiple areas but not limited to business dealings and government transactions.
- Distributed ledgers can also be used for tax collection, social benefits distribution, property deed transfers and even for voting.
- Digital ledgers will soon be used for tracking intellectual property rights, ownership of arts, commodities, film, music, and many other stuff.
Distributed ledger and blockchain are together in practice. These technologies will not only bring digital trust, but will also form the contractual backbone of a decentralized digital era.