The term distributed ledger technology describes a technique used to document certain transactions. In contrast to the classic approach, in which a ledger is usually managed by only one entity, any number of copies of the ledger are maintained by different parties in a decentralized manner. Appropriate measures will be taken to ensure that new transactions to be added are adopted in all copies of the ledger and that there is an agreement (consensus) on the current state of the ledger.
Even though a distributed ledger could in principle be implemented differently, this technology has only become practicable through the use of networked computers. There is also talk of decentralised account books or transaction databases. The technology is considered groundbreaking for the management of data on the Internet without proprietary platforms.
Distributed ledger techniques differ in the way the networked computers reach an agreement (consensus protocols), such as proof of work as in Bitcoin, proof of stake as in Ethereum’s Casper. There are public and private distributed ledger techniques; with the public ones, anyone can participate in the network and view the data, but not with private ones.
Technology Behind Distributed Ledger
Blockchain, one of the foundations of cryptocurrencies, is one of the most well-known distributed ledger techniques; therefore, blockchain technology is often used as a synonym for distributed ledger techniques.
Within distributed ledger technology, there are different architectures that differ primarily in how transactions are validated and stored. Some well-known architectures include blockchain, block directed acyclic graphs (blockDAG), and transaction-based directed acyclic graphs (TDAG).
There are different, concrete implementations (“DLT design”) for each of these architectures, for example, Bitcoin and Ethereum are implementations of the blockchain. These implementations can be differentiated based on certain properties (“DLT properties”). Certain characteristics (“DLT characteristics”) can also be defined for these properties. For example, the availability and confidentiality of an implementation are important for the security of an implementation.
In addition to the well-known applications in the field of cryptocurrencies, distributed ledger techniques are also increasingly being used in the financial industry, open science, healthcare, logistics, and utilities industries. A distributed ledger can manage various data, such as the balance of a Bitcoin address, the state of a “smart contract“, or the origin of a diamond.