DLT refers specifically to the technological infrastructure and protocols that

enable the simultaneous access, validation and updating of records that

characterize distributed ledgers. It works on a computer network spread over
multiple entities, locations or nodes.

In a distributed ledger, each node processes and verifies every item, thereby
generating a record of each item and creating a consensus on its veracity. A
distributed ledger can be used to record static data, such as a registry, and
dynamic data, such as financial transactions. Blockchain is a well-known
example of a distributed ledger technology.

DLT's
main difference from traditional centralized ledgers is that a copy of the ledger is distributed
to each node on the network, and every node can view, modify and verify the ledger, which
helps ensure trust and transparency.

Interest in distributed ledger technology grew significantly in the decade after

the 2009 launch of Bitcoin, a cryptocurrency powered by blockchain
technology that was the first to demonstrate that the technology not only
worked, but could scale and remain secure.

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From that time onward, organizations across industries experimented with

DLT and how it could be used in enterprise processes. The financial services,
healthcare and pharmaceutical sectors were early leaders and supply chain
management a common application.

It's important to note that the concept of a distributed ledger is not new.
Organizations have long gathered and stored data in multiple locations either
on paper or in siloed software, bringing the data together in a centralized
database only periodically. A company, for example, might have different bits
of data held by each of its divisions, with divisions contributing that data to a
centralized ledger only when required. Similarly, multiple organizations
working together typically hold their own data and contribute it to a central
ledger controlled by an authorized party only when requested or required.

The great advancement of DLT is its ability to minimize or eliminate the often
time-consuming and error-prone processes needed to reconcile the different
contributions to the ledger, as well as ensure that everyone has access to the
current version and its accuracy can be trusted.

How do distributed ledgers work?

DLT works based on principles of decentralization. Unlike traditional
centralized databases, DLT operates on a peer-to-peer (P2P) network, where
multiple nodes store, validate and update the ledger simultaneously. This
eliminates the need for a central authority and reduces the risk of a single
point of failure.

The process begins with the replication of digital data across the network of
nodes. Each node maintains an identical copy of the ledger and independently
processes new update transactions. To ensure consensus, all participating
nodes employ a consensus algorithm that determines the correct version of
the ledger. Once a consensus is reached, the updated ledger is propagated to
all nodes, ensuring synchronization and accuracy.

DLT uses cryptography to securely store data and cryptographic signatures

and keys to allow access only to authorized users. The technology also
creates an immutable database, which means information, once stored,
cannot be deleted and any updates are permanently recorded for posterity.

This architecture represents a significant change in how information is

gathered and communicated by moving record-keeping from a single,
authoritative location to a decentralized system in which all relevant entities
can view and modify the ledger. As a result, all other entities can see who is
using and modifying the ledger. This transparency of DLT provides a high
level of trust among the participants and practically eliminates the chance of
fraudulent activities occurring in the ledger.
As such, DLT removes the need for entities using the ledger to rely on a
trusted central authority that controls the ledger or an outside, third-party
provider to perform that role and act as a check against manipulation.

Origins of ledgers
Ledgers, which are essentially a record of transactions and similar data, have
existed for millennia in paper form. They became digitized with the rise of
computers in the late 20th century, although computerized ledgers generally
mirrored what once existed on paper.

Ledgers historically have required a central authority to validate the

authenticity of the transactions recorded in them. For example, banks need to
verify the financial transactions that they process.

Now, 21st-century technology has enabled the next step in record-keeping

with cryptography, advanced algorithms, and stronger and near-ubiquitous
computational power, making the distributed ledger an increasingly viable
form of record-keeping.

This advance comes at a time when such technology is greatly

needed. Economic activity has always involved multiple participants, and
commerce has almost always crossed multiple jurisdictions and borders. But
modern business networks involve an even broader number of participants in
more regions, and they have more need to record data for their own uses, as
well as satisfy the demands of other participants in their networks. This has
stressed conventional ledgers, making them costly to maintain and more
vulnerable to errors, computer hacks, manipulation and tampering.

What industries use distributed ledger technology?

The application of DLT spans numerous industries and is revolutionizing
several existing processes. The most popular uses of DLT include the
following.
Banking and finance
The banking and finance industry has been at the forefront of adopting
distributed ledger technology. One notable use case is the implementation
of smart contracts in trade finance. Smart contracts facilitate the seamless
execution and settlement of trade transactions, reducing inefficiencies and
eliminating the need for intermediaries. Additionally, DLT enables faster cross-
border payments, enhances Know Your Customer processes and provides
secure digital identity solutions.

Supply chain management

Supply chain management is one of the key use cases of DLT. Distributed
ledgers help organizations track and verify the movement of goods, ensuring
authenticity and preventing fraud. This technology enables real-time visibility
into supply chain operations, reduces paperwork and minimizes inefficiencies.
For example, a distributed ledger solution can be used to track the
provenance of goods, ensuring ethical sourcing and enhancing consumer
trust.

Healthcare
DLT is being used to improve patient data management, streamline processes
and enhance security. With DLT, medical records can be securely stored and
shared, ensuring data privacy and integrity. Additionally, smart contracts can
automate insurance claims, reducing administrative burdens and improving
efficiency. DLT also enables secure and transparent clinical trials, ensuring
the integrity of data and enhancing trust in the research process.

Real estate
DLT has the potential to improve the real estate industry by simplifying
property transactions, reducing paperwork and enhancing security. With the
implementation of smart contracts, property transfers can be automated,
ensuring accurate and tamper-proof records of ownership. Blockchain
platforms built on distributed ledgers can provide transparent and auditable
property registries, reducing the risk of fraud and disputes and removing the
need of costly intermediaries. Furthermore, DLT can enable fractional
ownership of real estate, unlocking new investment opportunities and
increasing liquidity in the market.

Other industries
DLT also has applications in various other industries. For example, in the
energy sector, DLT can facilitate P2P energy trading and enable decentralized
renewable energy systems. In the entertainment industry, DLT can
revolutionize royalty management and ensure fair compensation for artists.
Moreover, DLT has applications in voting systems, intellectual property rights
management, gaming and much more.

Examples of distributed ledger technology

Various types of distributed ledger technology are currently in use, including
the following:

 Blockchain. Blockchain, which bundles transactions into blocks that

are chained together and then broadcasts them to the nodes in the
network, is the best-known type of DLT. It powers Bitcoin and other
cryptocurrencies.

 Tangle. Tangle, another type of DLT, is geared toward internet of

things (IoT) ecosystems. The Eclipse Foundation and IOTA
Foundation created the Tangle EE Working Group. Tangle has been
described as a "permissionless, feeless, scalable distributed ledger,
designed to support trustworthy data and value transfer between
humans and machines."

Other well-known distributed ledger technologies include

Corda, Ethereum and Hyperledger Fabric.
Why DLT is important
Distributed ledger technology can bring drastic improvements to record-
keeping by changing some of the fundamentals of how organizations collect
and share the data that goes into their ledgers. To understand this, consider
both paper-based and conventional electronic ledgers that require all
additions and changes to go through a centralized point of control.

In such a system, organizations must commit significant labor and computing

resources to maintain centralized control. Moreover, centralized control
means ledgers aren't always complete or up to date. The process is also
prone to mistakes and manipulation, as every location that contributes data to
the ledger could become a source of fraud or errors.

Additionally, none of the other participants contributing data to the central

ledger can efficiently verify the accuracy of data coming from the other
contributors. Distributed ledger technology, however, enables real-time data
sharing, which means the ledger is always up to date. It also enables
transparency, as each participating node can witness those changes. DLT is
also more secure by nature because it eliminates the single point of failure
and single target for hackers and manipulation that exists with centralized
ledgers.

Distributed ledger technology has the potential to speed transactions because

it removes the need to go through a central authority or middleman. Similarly,
DLT could reduce the cost of transactions. However, running the highly
decentralized verification process and distributing copies of the ledger take
substantial computing resources, which has been shown to hurt the
performance of DLT in certain networking environments compared to
centralized ledgers.

Distributed ledger benefits

Much of the early interest in distributed ledger technology has centered on its
application in financial transactions. That's understandable, considering that
Bitcoin cryptocurrency gained worldwide use, while simultaneously proving
that DLT can indeed work. Banks and other financial institutions became early
innovators in DLT.

However, DLT proponents say digital ledgers can be used in other

industries besides financial services. Government agencies are exploring how
to use the technology to record transactions such as real estate title transfers.
Healthcare organizations are piloting DLT to facilitate a more efficient way to
update patient records. Many businesses are testing DLT for maintaining
supply chain data. And the legal profession is looking at how it can use DLT to
process and execute legal documents.

Additionally, experts see the technology as enabling individuals to get better

control of their personal information by enabling them to selectively share
parts of their records when needed and restricting access or limiting the time
information is available to other entities. Proponents also say that digital
ledgers can help better track intellectual property rights and ownership for art,
commodities, music, film and more.

Although DLT adoption is in its early stages, the technology has already
shown its ability in many cases to bring benefits to users, including the
following:

 Increased visibility into and transparency of data contributed to the

ledger.

 Lower operational costs thanks to the elimination of a central

authority.

 Faster transaction speeds because there's no lag in updates to

ledgers.
  Greatly reduced risks of fraudulent activity, tampering and
manipulation.

 Increased reliability and resiliency because there's no longer a

central system that creates the potential for a single point of failure.

 Significantly higher levels of security.

Challenges of distributed ledger technology
While DLT has several benefits, it also comes with certain challenges. Some
of the most important challenges are the following.

Scalability
DLT systems often face scalability issues as the number of participants and
transactions increases. Traditional blockchains have limitations in terms of
transaction throughput and confirmation times. However, advancements in
technology and the exploration of alternative consensus mechanisms, such
as directed acyclic graph (DAG), are addressing these scalability challenges.

Interoperability
Interoperability between different distributed ledger systems is crucial for
seamless data exchange and collaboration. However, achieving
interoperability remains a complex task due to the lack of standardized
protocols and compatibility issues between different DLT platforms. Efforts are
underway to develop interoperability solutions and bridge the gap between
different networks.

Regulatory and legal frameworks

The regulatory landscape surrounding DLT is still evolving. As DLT disrupts
existing systems and introduces new paradigms, regulatory frameworks must
adapt in order to ensure consumer protection, privacy and security.

User education and adoption

DLT technologies are relatively new and complex, requiring a certain level of
technical knowledge and expertise to fully comprehend and exploit their
potential. User education and awareness are crucial for widespread adoption
of DLT, and its complexity can sometimes prevent adoption.

Blockchain and DLT: How they relate and differ

The terms distributed ledger technology and blockchain are often used
together -- and, sometimes, even interchangeably. They are not the same,
however.

Most simply put: Blockchain is a type of DLT, but not all distributed ledger
technology uses blockchain technology. This confusion is understandable,
given how interest in the technologies jumped after the advent of Bitcoin and
how interchangeable the technologies can be in actual use.

Both are used to create decentralized ledgers using cryptography and

immutable records that include timestamps. And both are considered nearly
unhackable. DLT and blockchain can also be public, making them open for
anyone to use, as is the case for Bitcoin, or they can be permissioned
(private) and thus restricted to authorized users who agree to certain
standards of use.

Now, here's the big difference: Blockchain employs blocks of data that are
chained together to create the distributed ledger, just as the name describes.
But DLT also includes technologies that use other design principles to create
a distributed ledger. To be considered DLT, the technology need not structure
its data in blocks.
in is one of the most popular usages of DLT and works by creating blocks that store and
verify transactions.
Distributed ledger technology consensus mechanisms
Consensus mechanisms play a critical role in ensuring the integrity and
security of distributed ledger technology. These mechanisms determine how
transactions are approved and added to the ledger. Some of the most
common consensus mechanisms are the following.

Proof of work
Proof of work (PoW) is the consensus mechanism that underpins the Bitcoin
blockchain. In PoW, miners compete to solve complex mathematical problems
to validate transactions and create new blocks. This process requires
significant computational power, making it resource-intensive and energy-
consuming. However, PoW ensures the security and immutability of the
blockchain network.

Proof of stake
Proof of stake (PoS) is an alternative consensus mechanism that aims to
address the energy consumption and scalability issues associated with PoW.
In PoS, validators are chosen to validate transactions based on the number of
tokens they hold and are willing to stake as collateral. This mechanism
reduces the need for extensive computational power and rewards participants
based on their stake in the network. Ethereum is the largest PoS
cryptocurrency.

Directed acyclic graph

DAG is a nonlinear data structure that is gaining popularity as a consensus
mechanism in distributed ledger technology. Instead of relying on blocks and
chains, like traditional blockchains, DAG organizes transactions in a graphlike
structure. This enables faster transactions, increased scalability and improved
efficiency. Examples of DAG-based cryptocurrencies include IOTA and
Hedera Hashgraph.
 Proof of
work and proof of stake are two of the most popular consensus mechanisms for DLT.
The future of distributed ledger technology
Whether distributed ledger technology such as blockchain will revolutionize
how governments, institutions and industries work is an open question.
Experts in this area promote DLT as an important technology that could not
only drastically improve existing processes, but could spur innovative new
applications. Moreover, they see DLT as part of the "internet of value," where
transactions occur in real time across global networks. Indeed, digital ledger
technology only exists because the internet that enables it is so pervasive.

However, experts generally believe that adoption of DLT will follow the typical
technology curve, with a few leaders out in front, then fast followers and,
finally, the laggards. They also note that organizations face challenges in
implementing, scaling and operationalizing DLT. To that end, enterprise
executives, entrepreneurs and visionaries are now faced with the challenge of
establishing the networks of entities that together can take advantage of DLT
to radically change how they share and keep records and innovating where
DLT can enable entirely new processes and business models.

Blockchain is one of the most popular uses of distributed ledger technology

DLT. Learn how to plan the best blockchain deployment with our ultimate
enterprise guide.
This was last updated in September 2023

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