Distributed Ledger Technology (DLT) uses a peer-to-peer network of computer nodes to verify the authenticity of transactions and interactions as they appear on a shared ledger. Blockchain is a type of DLT that is disintermediating all kinds of record-keeping away from centralised institutions and towards global networks of cryptographically secured computers. Blockchain networks protect the integrity of their shared ledgers without the need for centralised data storage or administration.
Active nodes construct new blocks of transactions on a blockchain’s distributed ledger with cryptographic keys and signatures. Then the nodes use a consensus algorithm to vote on which copy is correct. Once consensus on a single block’s validity is established by a subset of all active nodes on the blockchain network, all other active nodes update themselves with the new, correct copy of ledger. Each set of transactions gets bundled into a block of data that one can think of as a newly forged link in a steel chain.
A distributed ledger may be either “permissionless,” where anyone can run nodes and vote, or “permissioned,” where only approved entities can run nodes and vote.
Permissionless DLT is used to create a public blockchain that anyone can read, maintained by public nodes that anyone can set up and run. Bitcoin runs on a public blockchain. Permissionless distributed ledgers are often mineable through Proof of Work, with miners claiming ownership of new coins by using their nodes to contribute to the network’s operation.
Bitcoin is a single-use permissionless public blockchain used for value storage and transfer. Ethereum is a multi-use permissionless public blockchain used for value storage and transfer, and also for writing smart contracts that execute using if-then statements.
Ripple is a permissioned blockchain where the creators determine who may act as transaction validators. Corda DLT is a consortium of more than 70 of world’s largest financial institutions sharing a distributed ledger on a permissioned blockchain via a need-to-know set of protocols. Enterprise blockchains don’t need so much computational power going into consensus, so transaction speed and volume can scale up much faster than they do on a public blockchain.
Distributed ledger technology has the potential to displace a large part of our current banking system made up of clearinghouses set in place to prevent double spending. We don’t really know what’s being done with our money when it’s sitting in a bank, or when it’s being moved to another bank, and therefore we don’t control our money all the time. Our accounts can be frozen or a bank might fail. DLT seeks to decentralize accounting ledgers across networks of computers secured by consensus algorithms, thus removing middleman that often hold money in limbo. With DLT, no one else has access to those funds, so no one can freeze, misplace, or misspend the funds.