Ledgers have always been at the forefront of every economic transaction, recording payments, contracts, deals, etc. However, computers have provided us with better ledger maintenance and record-keeping over the last few decades.
Today, this information and data are moving toward being fast, secure, and decentralized. That’s where distributed ledgers come in.
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What Are Distributed Ledgers?
Distributed ledgers are databases spread across multiple computers, institutions, nodes, or countries that various people can access worldwide.
Before we get more into distributed ledgers, keep in mind these key points:
- Distributed ledgers use decentralized technology. Every node maintains the ledger and updates it whenever a data change happens.
- This update process takes place independently at every node.
- Even the slightest update or change to a distributed ledger is available to every participant within seconds.
- Every participant manages these decentralized databases.
- Every node used in a distributed ledger has equal authority status.
With distributed ledger technology, no central servers or authorities manage the database — the ledgers are entirely transparent. In addition, it counters the weakness of having a single ledger rule everything; there’s no single authoritative copy, and the rules don’t change sporadically.
These attributes make the entire system transparent and more of a decentralized authority.
Throughout this process, every node and contributor to the ledger will verify transactions through either voting or various consensus algorithms. For example, Bitcoin uses the consensus algorithm called “Proof of Work.”
Crypto doesn’t have to be confusing. From Bitcoin to meme coins, learn how they all work here.
Categories and Types of Distributed Ledgers
There are three categories of distributed ledgers:
- Permissionless distributed ledgers: With these ledgers, no central authority is designated to validate transactions. Instead, each node is collectively responsible for validation. Permissionless distributed ledgers, like Bitcoin’s Proof of Work mechanism, are typically used for cryptocurrency.
- Permissioned distributed ledgers: Nodes that work with permissioned distributed ledgers must get permission from a central authority to either access or make changes in the network — typically through identity verification.
- Hybrid distributed ledgers: Hybrid ledgers combine permissionless and permissioned rules to benefit from their security.
Related: Blockchain Applications Outside of Cryptocurrencies
Common types of distributed ledgers include:
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- Blockchain: In blockchain-distributed ledgers, transactions get stored in chains of blocks. Each block then produces a unique hash that proves transactions are valid. Every node receives a copy of the ledger, making it extremely transparent.
- Hashgraph: In this type of ledger, there’s a different consensus mechanism: Virtual voting. With hashgraph distributed ledgers, the nodes don’t have to validate every transaction on the network.
- Tempo: Unlike other distributed ledgers, Tempo makes partitions of the ledger (called sharding) and orders transactions on the order of events instead of on the timestamp.
- Directed Acyclic Graphs: This ledger uses a different data structure to bring more consensus. The validation of transactions requires majority support from the network’s nodes, and each one must provide proof of transactions and verify the two previous transactions to confirm.
- Holochain: Holochain is a more decentralized version of blockchain. It’s a type of distributed ledger that proposes each node to run on its own chain; miners and nodes have more freedom to operate autonomously.
Applications of Distributed Ledgers
Now, let’s explore some common applications of distributed ledgers:
Banking
Transferring money in the banking sector can be time-consuming and expensive. In addition, sending money overseas is complex due to hidden fees, exchange rates, etc.
Here, distributed ledgers can help provide a decentralized and secure network to help reduce the costs, complexity, and time required to transfer money. Decentralized networks can eliminate the need for a third party, making the system more efficient overall.
Cybersecurity
Today, cybersecurity is a significant threat to businesses, individuals, and governments. So, it’s crucial to find an effective way to secure our privacy and data against unauthorized access.
With distributed ledgers, all information and data are securely encrypted and authorized by cryptographic algorithms to keep it safe, providing a secure, transparent environment and ensuring that the data cannot be tampered with by any entity.
Supply Chain Management
The supply chain is a complex structure, and it’s challenging to trace where faults happen. Distributed ledger technology can help supply chain managers see where mistakes or faults happen by easily tracing everything from start to finish.
This data gets added to the distributed ledger, which is permanent, validated, and unalterable. This transparency of information enables them to trace activity from the beginning to the end of the distributed ledger.
Related: How Blockchain Tech Can Revolutionize Supply Chain Management
Healthcare
Distributed ledgers help eliminate a central authority, ensuring rapid access to secure data; they help store healthcare data in a way that no one can make unauthorized changes.
If someone tries to make changes, everyone in the system will know immediately. Distributed ledgers can also help trace false insurance claims because of their decentralized nature.
Governance
Government systems can also use distributed ledgers to make it transparent among citizens. In addition, many governments use blockchain technology for their governance systems because of its robustness.
They also use it as a voting system — traditional voting has many flaws and is subject to false voting and other illegal activities. However, online voting systems come with additional security, making it easier to identify fake votes.
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The Benefits of Distributed Ledgers
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Distributed ledgers offer many benefits, including:
- Security: Every record of every transaction gets encrypted securely. Once it’s validated, no one can make changes — this process is permanent.
- Decentralization: Every network member and node owns a copy of the distributed ledger, guaranteeing transparency. This system gives control of data and information to each user.
- Anonymity: Every distributed ledger participant is anonymous.
- Immutable: No validated transaction can ever get changed — they are irreversible.
- Transparency: Distributed ledgers offer high levels of transparency that are required by sectors like finance, banking, healthcare, etc.
