Distributed Ledger Technology (DLT): Basics for beginners

What distributed ledger technology (DLT) is, how it works, what applications there are, and the biggest differences to blockchain.

Distributed ledger technology, or DLT for short, describes a data structure that extends over several computers and is geographically distributed over many locations.

The best-known form of application of DLT is the blockchain. This is a data structure that stores a permanent history of transactions. Blockchain is the technology that stands behind Bitcoin and Co. and is known to an ever wider public due to the increasing popularity of cryptocurrencies.

In this article, we answer the following questions:

  • What does distributed ledger technology mean?
  • What is the difference between DLT and blockchain?
  • What are the characteristics of DLT?

What does Distributed Ledger Technology (DLT) mean?

Distributed ledger technology means “distributed register technology” or “distributed ledger”.

So-called “blockchains” are formed as part of DLT. These are decentralized databases that contain chronological sequences of data blocks. These data blocks, in turn, comprise one or more transactions that are linked or chained using cryptographic methods.

In this sense, DLT can be understood as a kind of organizational concept in which there is an electronic data structure for registering relevant data and a protocol or register that defines how this data is exchanged and compared.

Difference between Distributed Ledger Technology and Blockchain

Below are the differences between distributed ledger technology and blockchain.

Blockchain is a subset of DLT.

While the blockchain describes a data structure that stores a permanent history of transactions, DLT describes a data structure that extends over several computers and locations.

Therefore, the term blockchain refers to a subset of the comprehensive DLT. Here a data structure with an unchangeable, decentralized transaction archive, which consists of a chain of encrypted data blocks, is saved as a complete copy on the computers of all blockchain or network participants. The data blocks are joined and linked with one another with the aid of an algorithm.

The blockchain is used via electronic user nodes (“nodes”), although participation in the network is possible if the participant has the respective (public or private) key.

In this context, verifying the transactions in the blockchain is important. The rules of the protocol determine this. These rules stipulate how the network participants agree on a certain sequence of data on the blockchain (“consensus”).

The best known are the consensus mechanisms "Proof of Work" and "Proof of Stake":

  • Proof of Work (PoW): PoW means that every node can check whether a blockchain complies with the rules. To do this, arithmetic operations have to be carried out in order to find a result with certain properties. The result must come from an algorithm known to all nodes. PoW is called “mining” in Bitcoin.
  • Proof of Stake (PoS): The PoS consensus mechanism is mainly used for private blockchains. Here, the nodes involved must prove that they have special rights to participate in the network. The creation of a new block is related to the value share of the node in the network.

Properties of a distributed ledger technology (DLT)

The easiest way to describe DLT is through the characteristics associated with the technology. In addition to the decentralized property of the register, following Sunyaev (2020), seven important properties can be named, which are described below.

Community and network

DLT connects a group of individuals with a common interest in using DLT applications.

This group of individuals can be called a network. The information is shared, stored, and handled redundantly in this network. At the same time, this corresponds to the characteristic of decentralization.

Flexibility

The degree of technological freedom to individually adapt or change a DLT application is very high.

The architecture of a blockchain can be adapted to the user’s requirements. In particular, the degrees of publicity and access can be changed (see section permissioned vs. unpermissioned or public vs. private DLT).

Regulation and Legislation

Authorities have the opportunity to determine measures to enforce compliance with DLT systems with the help of regulatory framework conditions.

From a legal perspective, it must be taken into account that long-term and unchangeable data storage creates central challenges in practice. On the one hand, the validity of the data must be ensured prior to entry, as subsequent deletion is no longer possible. On the other hand, there are also conflicts with European data protection due to the fact that personal data cannot be deleted.

The legal challenges were examined in detail in the Federal Ministry of Transport and Digital Infrastructure study.

Distributed ledger transparency

A DLT is transparent. The participants in a network can obtain comprehensive information about the activities and properties of other participants in the network.

This is ensured by providing the shared, standard, and public view of the network’s transactions.

Performance

The performance of the DLT describes the fulfillment of a specific task within a DTL application measured in terms of its accuracy, completeness, cost, and speed.

Particularly in connection with cryptocurrencies, aspects such as transaction fees and scalability play an important role.

Distributed ledger and security

DLT is characterized by confidentiality, integrity, and the ability to save data in a distributed register.

In this context, privacy is also an important property that is ensured through the use of pseudonyms and cryptography. At the same time, the property rights are clearly documented. Once an asset is stored on the blockchain, ownership is immutable unless the owner confirms the transfer. The review of the property rights is also possible at any time by each participant.

The design of the database in the entire network cannot be changed and is therefore tamper-proof. Once a transaction has been added to the network, it can no longer be changed.

Usability

DLT has high usability so that users can realize their own application goals effectively, efficiently, and according to their needs.

At the same time, DLT is scalable. So the system has the ability to handle a growing number of transactions continuously.

Distributed ledger: Public, Private, Permissioned and Unpermissioned

DLT applications limited admission (Engl. Permissioned) or license-free (Engl. Unpermissioned) or public (Engl. Public) or private (Engl. Private) be.

The different DLT versions are described below:

Permissioned vs. Unpermissioned DLT

The distinction between permissioned vs. unpermissioned distributed ledger is about the restrictions on participation and the distribution of roles within the network.

Unpermissioned DLT applications are open to everyone, and there are no restrictions.

An example of this is the blockchain of the Bitcoin network. In contrast, access to permissioned DLT applications is regulated. Participants in permissioned ledgers usually have to register and meet certain network access requirements. An example of this is R3’s leading financial DLT Corda .

They are assigned different roles. The group of participants can be open or limited. This in turn describes the manifestation of public vs. private DLT.

The difference between permissioned vs. unpermissioned DLT influences the choice of the consensus mechanism. Proof-of-work mechanisms are predominantly used for unpermissioned ledgers. In the case of permissioned ledgers, on the other hand, the proof-of-stake consensus mechanism is used.

Public vs. private DLT

There are no access restrictions for public or public DLT applications and any participant who wants to participate can do so. A single piece of software is required to communicate with the network. The network participants can control the transactions themselves directly. Examples of public blockchains are Bitcoin and Ethereum.

Private blockchains are only accessible to a pre-defined, limited group of participants.

The transactions are not controlled directly by the participants but indirectly via an intermediary. This intermediary also serves as the central legitimation point that controls the entire system. Therefore, the intermediary acts as the organizer, operator, and platform operator of the private blockchain.

Possible uses of DLT

One of the main advantages of DLT in practice is that there are no intermediaries. The decentralized network ensures the integrity of the data and processes. Any utilization of digital content is therefore prevented.

Therefore, an application is obvious wherever a direct transaction between network participants should be possible and is desired without the dependency of a third entity. At the same time, those applications are interesting in which the immutability of data is of great importance.

Specific application examples would be the following:

  • In the financial sector, financial service providers are often faced with the challenge of making audit processes efficient. Such labor-intensive processes could be made more efficient by the DLT.
  • Within international or global supply chains, DLT can offer the possibility of making the supply chain transparent and traceable. Important information can be stored in the blockchain in an automated and tamper-proof manner.
  • In the public sector, DLT offers the option of automatically checking and saving the validity of certain documents. This makes it possible for two independent parties to view the document’s current status at the same time.

Further general application possibilities and advantages result from the fact that DLT guarantees a neutral platform, provides digital identities, and can therefore store digital documents in a forgery-proof manner. It is also possible to document information in a forgery-proof manner. In general, implementing services without a service provider or an intermediary is conceivable.

Conclusion on Distributed Ledger Technology (DLT)

DLT is a promising technology that is currently mainly used in the field of cryptocurrencies. However, applications in finance, open science, healthcare, and logistics are increasingly being explored. It remains to be seen which other application scenarios will arise in the future.

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