What is DLT, Types of DLT and why does it matter to payment leaders?

For a very long time, humans have been keeping records of transactions in different forms. Earlier everything was done on pen and paper, but since computers became widely available, humans started using computer programs to keep track of transactions made in a shop or company. In recent times, the technique of storing transactions and other kinds of data has seen a revolution. Now instead of storing ledgers in a single computer system or server, we have started using a network of interconnected computers to store ledgers, and we are calling this revolutionary technology as “Distributed Ledger Technology” or DLT in short.

In the following lines, we will try to cover everything that you need to know about DLT platform.

What is DLT?

The full form of DLT is Distributed Ledger Technology. It is a technology where the data is stored, accessed and validated in a distributed decentralized network.

The primary difference between ‘Distributed Ledger Technology’ and traditional ledger technology is that, in Distributed Ledger Technology the data is not owned or governed by central authority (e.g. an organization) even though tons or thousands computers can stay connected to the same network. In contrast, in Distributed Ledger Technology, the data is stored and maintained across a computer network.

How does DLT work

DLT has completely transformed the way we used to store and access ledgers in the past. To fully understand the working principle of DLT, we’ll need to know some basic terminology associated with it.

Decentralization:

Decentralization is a concept where the access of an entity is given to a network of people or system. In a decentralized network, no single authority or organization can have control of an entity.

Distributed Ledger Technology is an implementation of the concept of decentralization which means the “ledger” is not the property of a single authority.

Benefits of Decentralization

Decentralizing things or systems has several benefits of their own. As the data is available to everyone on the network, the entire thing becomes a lot more transparent.

In a centralized system, if the computers or servers where the data is stored are attacked, all the data can be lost. But, in a decentralized system, even if a few systems run into any problems, the data is not damaged because a copy of it is present everywhere else.

Underlying mechanism of DLT

Every DLT uses their own protocol by which it validates any transaction, some of these mechanisms are PoW, PoS, DAG

PoW (Proof of work)

Computers with high performing GPUs and other special hardware solve complex math problems to decrypt a key which can be used to validate a transaction. But one downside of PoW is that this process is very much power consuming as several computers work simultaneously to validate a transaction.

PoS (Proof of Stale):

The Proof of Stake mechanism uses the state of participants to validate transactions.

Hashing:

One of the most important parts of cryptography is hashing. It is the process of generating a completely random and unique string of text by a computer program that is generated whenever a transaction is initiated.

Working of DLT

Whenever an user on the network initiates a transaction, the translation is first authenticated by using cryptography.

Cryptography

DLT uses cryptographical security to ensure the integrity of the system and also for transactions. For example:

Public keys are used for user identification purposes.
Private keys are used to approve a transaction.

If the authentication is successful, the transaction gets propagated through multiple computers on the network (called node) and is broadcasted thus.
If it's a Blockchain DLT, PoW and PoS is used to create a block on the blockchain network. If it's a DAG DLT, the past transactions will be validated to validate the current transaction.
Once the verification of the transaction is successful, the transaction is then added to the DLT as a block for blockchain based DLT and as a graph in DAG based DLT.
Once a block is added to the blockchain network or a graph is updated on a DAG network, the new ledger is then synced with all the nodes on the network. This process happens every time where the ledger is updated and this is how computers keep up the latest ledger.

Purpose of using DLT

Decentralization: As DLT runs a decentralized network, there is no need for a central party to intervene.
Transparency: The working process of a Distributed Ledger Technology is more transparent; that is to say anybody on the DLT network is able to view the transaction history right from the very beginning of the network. And thus DLT technology is more trustworthy than other ledger technologies.
Security: As mentioned earlier, DLT is superior in terms of data safety. Every “full” node on a DLT network contains a copy of the entire ledger. If anyhow a node goes offline or the data is manipulated, the other node on the network takes care of that.

Types of DLT

Although there are several implementations of DLT, Blockchain and DAG are the most widely used ones.

Blockchain:

In simple words, Blockchain refers to a chain of blocks where each block contains a unique hash calculated using specialized hardware before the blocks are uploaded on the network. A group of transactions forms a block which is uploaded on the Blockchain network.

The most popular digital currencies like Bitcoin, Ethereum used Blockchain to keep track of the transactions made using those.

DAG:

In Directed Acyclic Graph or DAG, the data are stored in a web-like graph. Whenever a transaction happens, the graph is updated. In DAG, it uses the transactions that have already taken place to verify an ongoing transaction.

Compared to Blockchain, DAGs are faster and the transaction execution time is also much less.

Hybrid DLT:

In hybrid DLTs, the data or the ledger can be kept both public and privately, depending on the sensitivity of the data. This is particularly useful when an organization wants to implement DLT in their system.

Problems with DLT:

Though DLT has brought revolution to how we keep ledger, it doesn’t come without any problems.

Firstly, Distributed Ledger Technology can cause problems if there is an overflow of users. As the number of computers handling the transaction is limited and so is their capacity, so when a lot of users try to transact at the same time, the DLT network gets congested and a transaction takes much more time to happen.
The availability of public ledger to every node on a Distributed Ledger Technology network is like a double edged sword. Though it provides transparency, it also interferes with the privacy of the users using the network, particularly for financial transactions.
Last but not the least, running a DLT network requires a lot of computers with specialized hardware to run across the globe at the same time. This approach is not quite energy efficient, especially the mining process in blockchain consumes too much energy. This is not cost efficient as well as harmful for the environment.

Conclusion:

Despite its problems, DLT is a groundbreaking idea that will pave the way of digital ledgers in the future. Though a lot of things take place under the hood, a normal user doesn’t need to be aware of the underlying mechanism due to the convenience the system offers. DLT makes the complete transaction process so transparent that any service that needs to be trustworthy can implement this technology in their system.

FAQs

What’s the difference between a Distributed Ledger Technology and a traditional ledger or database?

A traditional database or ledger stores its information in one or more computers on which a single authority has control whereas in the case of a Distributed Ledger Technology, the data is stored to access a distributed systems of computers.

Is it possible to change or alter the data in a Distributed Ledger Technology?

It is extremely difficult to alter or change any data that has already been a part of a DLT. If somebody tries to modify any data from their node, the other computers in the network will simply discard the change because of the majority of systems having the previous data. However, under certain conditions, the data already available in DLT can be updated.

Can DLTs be used for international transactions?

Yes, Distributed Ledger Technology can be used to make transactions from one country to another. In fact, making international transactions, such as sending money or funds from one country to another country is one of the best use cases of a Distributed Ledger Technology network. There are already some platforms that are specialized to do the aforementioned job.

What are DAOs in DLT networks?

DAO, which is an acronym for Decentralized Autonomous Organisation, is a “self-governing” technology that runs on the blockchain network. DAO uses smart contracts to run and based on the smart contracts, DAO makes different decisions.