Contrary to traditional centralized ledgers that are backed by a single entity, distributed ledgers (DLT) have no central authority and allow multiple participants to store and update the same database at the same time. DLT is more reliable, and there’s no risk of a single failure.
DLTs allow for the creation of smart contract which are transactions that execute themselves and can be programmed to verify or implement agreements. The technology offers transparency since each participant can see the same transaction data.
DLTs can be a fantastic alternative to central authorities, however they still require a lot of computing power in order to run their consensus algorithms and conduct transactions. To help offset the cost the majority of DLTs encourage active participation by offering virtual cryptocurrency.
Blockchain is a type of DLT, however there are many others. For instance Directed Acyclic Graph (DAG) network has a different structure for data than a blockchain, and uses a gossip protocol to communicate transactions between nodes. Transactions are added to the DAG in chronological order, and then verified by a combination of virtual vote, a hashing algorithm and other protocols.
Distributed ledgers are an effective tool, but it’s important to understand what they’re not. While they improve transparency, accountability and security, they’re not a substitute for central databases. Organisations have for a long time gathered data in multiple locations on paper or in siloed software, merging it into a centralized database only once or twice. DLT allows the data to be instantly shared with participants while maintaining identical copies in their devices or nodes. This helps avoid costly and time consuming reconciliations and mistakes.