Read on to discover what distributed ledger technology is, how it works, and the key benefits and challenges facing DLT in the near future.
Distributed ledger technology (DLT) is a digital system that allows multiple parties to share and update a common database in a decentralised way, without relying on a trusted third party.
DLT is a broader category of technologies of which the most well-known and widespread is blockchain. It’s been used to create a plethora of decentralised systems and assets, of which cryptocurrencies are the most recognised.
This technology is arguably one of the most innovative recent developments in the digital space. We believe it has the potential to transform the way we do business and interact with one another, creating self-reinforcing positive impact across all societies.
How Do DLTs Work?
Fundamentally, DLT is a type of database that records, stores, and distributes data in a decentralised, secure, verifiable, and reliable way - usually without the oversight of a trusted third party.
Most notably, DLTs solve the Byzantine generals problem for a network, ensuring all participants can agree on the state of the network (e.g., who owns what, on a purely monetary system like Bitcoin) without having to trust that a third party will be honest and accurate in keeping records and validating transactions.
Even though the underlying mechanics may vary between different technologies, broadly speaking DLT relies on cryptographic algorithms to ensure that accounts and transactions are secure, and that data is accessible to all members of a network.
Types of DLT
There are different types of DLTs based both on the base technology, and on the openness of the system. These distinctions aren’t mutually exclusive, nor are they the end-all-be-all in this ever-evolving field.
Base Technology
Blockchain is the first and perhaps the best-known DLT technology, potentially even predating the Bitcoin whitepaper by over a decade - but it’s not the only one.
Research has been strong since the concept was popularised by Bitcoin, and other solutions began to sprout to solve some of the same problems that blockchain tackles - ultimately, trust.
The main types of distributed ledger technology today are:
- Blockchain: the OG in DLT, blockchain uses a time-stamped and cryptographically-secured chain of blocks to record and track transactions.
- Directed Acyclical Graph (DAG), uses a directed acyclic graph (DAG) structure to record and track transactions. Unlike blockchain, DAGs do not use blocks to store transactions.
- Hashgraphs are a newer technology that aims to overcome some of the limitations of blockchain and DAGs. Hashgraphs use a unique consensus algorithm that allows for purportedly faster and more efficient transactions.
Blockchains, DAGs, and Hashgraphs are all types of distributed ledger technology, but they have different architectures and functionality.
DAGs and Hashgraph claim to offer efficiencies in comparison with their older sibling, blockchain. However, DLT technology is still in the relatively early stages of development, and it's unclear which one will ultimately prove to be more useful in the long run.
When it comes to the openness and underlying ethos, there are two broad categories of distributed ledger technology: public and private.
Public DLT
Public DLT, also known as permissionless DLT, is a category of protocol that allows anyone to participate in the network without the need for permission by a controller/owner.
Digital currencies, such as Bitcoin and Ethereum, are usually built on permissionless protocols.
In terms of control, public DLTs fall more on the decentralised end of the spectrum, meaning that they're not controlled by a central authority by design, and are maintained by a network of nodes.
Private DLT
Private (also known as permissioned) DLTs is a type of system that is only accessible to authorised parties. This kind of DLT is typically used for enterprise applications, such as supply chain management, digital identity, and financial services.
Private DLTs are centralised by design, meaning that they’re controlled by one or more entities, who have full control over who gets to participate in the network, and under which roles.
The choice of which one to use depends greatly on the specific needs of the application, and on the level of decentralisation, scalability, and security required.
Whatever the design choice or tech stack, the biggest impact DLT potentially has is on the trust.
DLT and Trust
It’s hard to overstate how big an impact DLT can have on trust, particularly so for open, permissionless DLTs - be it trust amongst people, trust in institutions, and even trust in societal processes like voting.
This is a result of the emerging features of the technology, and in the principal design choices it makes when it comes to achieving these results.
Here’s an overview of the main features of DLT and the benefits of each one in boosting trust and creating positive change:
- decentralisation: not being controlled by any central authority makes it more secure and tamper-resistant, as there is no single point of failure to be compromised (or corrupted).
- immutability: once a transaction is timestamped, hashed, and recorded on the ledger/system it cannot be altered or deleted. This makes it more trustworthy and reliable.
- anonymity: DLT provides a degree of anonymity (or pseudonymity), as users interact with the system via anonymous addresses, making it harder in many cases to track and trace the users.
- transparency: transactions are recorded on a public ledger, accessible by anyone. How transparent a system is depends on design choices.
- improved auditability: usually even the most privacy-oriented networks allow for easy verification and auditability of a DLT system, increasing trust in the accuracy and completeness of the transactions.
- increased security: advanced cryptographic techniques make interactions with the network extremely secure, making it difficult for hackers or malicious actors to hijack or compromise users (at least from a technical perspective).
All of these features work together to boost trust in a DLT system by providing a more secure, transparent, and tamper-proof system that is resistant to fraud and external manipulation.
We believe that the effect of this increase in trust across our societies can potentially lead to better relationships between people and much improved systems.
DLT Use Cases
Distributed ledger technology can be applied in most systems that rely on a trusted third party for trust.
The first and most obvious use was a money system, which is not coincidentally still the most popular use of the technology.
Other strong cases for DLT include finance, banking, supply chains, healthcare, governance and voting, just to name a few.
We’re continuously looking out for, and documenting, the most successful case studies, as well as exploring exciting new use cases of DLT as one of the pillars of our work at the Exponential Science Foundation.
Key challenges with DLT
Despite all this potential, there are still a few key challenges that future iterations of DLT must overcome in order to achieve their full potential.
The most fundamental technical challenge, which as of yet no single project/protocol has managed to solve, is the blockchain trilemma.
This term, coined by Ethereum creator Vitalik Buterin, refers to the key design choices that all blockchains have to make in three areas: security, scalability, and decentralisation.
Buterin posits that, at least by our current standards, you must sacrifice at least one in order to maximise the other two, and that you can’t have all three at once.
So far, the trilemma has seemed to accurately describe the issues facing most DLT networks that are publicly known.
It’s not certain when the blockchain trilemma will be solved, or even if it will ever be. However,
On top of technical, protocol-level issues, there are incredibly complex problems ahead for specific, sensitive applications (such as finance, banking, healthcare, defence, and other sensitive areas).
The design, implementation, and enforcement of laws and regulations around DLT is already one of the most challenging issues for the development of the technology.
Finally, there’s adoption, which is both dependent on, and also driving the solving of, all other challenges.
Making the technology useful to the humans who will rely on it, and getting the majority on board, is the ultimate challenge.
Future of Distributed Ledger Technology
The future of DLT looks bright, both for good and bad reasons.
The bad first: we’re untrustworthy by nature. Whether we as a species will ever overcome our trust issues is unclear. We don’t seem to be getting much more trusting (if anything, we seem to be less trusting and deserving of trust).
At the same time, our systems are exponentially more complex, global, and interconnected - relying on a massive network of collaboration that uses trust as cement.
In such a context, the need for tools that help us collaborate and to trust that others will stay honest looks like a safe bet for the foreseeable future.
Nobody can predict the future, least of all scientists. That said, here at the Exponential Science Foundation, we’re committed to our mission of making emerging technology, such as DLT, a part of whatever future we build.
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