Distributed ledger – definition and meaning
A distributed ledger or shared ledger is a consensus of shared, synchronized, and replicated digital data. This data exists across multiple sites, institutions or countries. With shared ledgers, there is no centralized data storage or central administrator.
A distributed ledger, in the world of cryptocurrencies, for example, is a database that each node in a large network updates independently.
With cryptocurrencies, the distribution is unique, because there is no central authority that communicates records to various nodes. Instead, each node constructs and holds the ledger independently.
In other words, each node on the network processes each transaction. Each node comes to its own conclusions. The node then votes on its conclusions to make sure the majority agree.
With this type of technology, transactions effectively have public witnesses, which makes it virtually impossible to hack or attack.
The distributed ledger can only update when there is this consensus. According to coindesk.com: “This architecture allows for a new dexterity as a system of record that goes beyond being a simple database.”
A node, in this context, is a computer that has a copy of the blockchain. The computer is also working to maintain it.
‘Miners‘ are in charge of the blocks and attaching them to the blockchain. Miners receive a reward in the form of units of cryptocurrency for their work.
We call this whole process, i.e., the validation of cryptocurrency transactions, cryptocurrency mining.
Distributed ledger – the blockchain
With distributed ledger technology, it is necessary to have a peer-to-peer network and consensus algorithms. They are necessary to make sure that there is replication across nodes. A peer-to-peer network has no central server with lots of clients; all the computers are both servers and clients.
One type of shared ledger design is the blockchain system. These systems can be either private or public.
However, not all shared ledgers must employ a chain of blocks to achieve effective distributed consensus. The blockchain is just one type of data structure that we refer to as a distributed ledger.
Each block contains a cryptographic hash of the block that precedes it, i.e., a timestamp plus transaction data.
Blockchains store smart contracts, i.e., lines of computer code. The code allows the contract to be fully-automatic.
In other words smart contracts are totally self-executing. There is not need for intermediaries such as lawyers.
Distributed ledger – secure and efficient
All the data on a shared ledger is secure. The system stores the data using cryptography, which nobody can access without the right keys and cryptographic signatures. Cryptography is the creation and deciphering of codes.
As soon as the data goes into storage, it becomes an unalterable database. Everything functions according to the rules of the network.
Unlike central ledgers, distributed ledgers are extremely difficult to cyber-attack. To successfully cyber-attack a shared ledger, your onslaught must hit all the distributed copies simultaneously.
Also, no single party with malicious intent can alter the contents of the records.
Secure thanks to encryption
Distributed ledgers are secure thanks to encryption. They are also fast and decentralized. They have great potential to revolutionize how companies, institutions, and governments work.
The technology could transform the issuance of passports and licenses, the collection of taxes, and voting procedures.
Financial institutions are already embracing distributed ledger technology. Diamond and precious assets companies and supply chains of many commodities are also adopting the technology.
In February 2018, Microsoft announced that it planned on using distributed ledger technology to store and manage identities.
However, the technology is still in its infant stage. Who knows how it will eventually evolve and what it will look like in a few decades’ time?
Video – Distributed Ledger
This Complexity Labs video explains what distributed ledgers are.