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What is a distributed ledger

    A distributed ledger (also called shared ledger or distributed ledger technology or DLT) is a databaseDatabase A set of data stored in a structured way. shared and consensually synchronized across multiple sites, institutions, or geographic locations, accessible by multiple people. A distributed ledger is the exact opposite of a centralized ledger, which is a database administered and controlled by a single entity, such as a corporation, government agency, or financial institution.

    Characteristics of a distributed ledger

    In general, a distributed ledger requires a peer-to-peer (P2PP2P P2P stands for Peer to Peer. A peer-to-peer network allows users to exchange data without intermediaries.) computer networkNetwork The set of computers connected to each other, called nodes, on which the blockchain of a specific cryptocurrency is based. and consensus algorithms so that the ledger is reliably replicated across distributed computer nodesNode Device connected to a blockchain, which makes up the network. (servers, clients, etc.). All registry information is stored securely and accurately using encryption and can be accessed using cryptographic keys and signatures. Once stored, the information becomes an immutable database, governed by network rules.

    Advantages of distributed ledgers

    While centralized ledgers are subject to cyberattacks, distributed ledgers are inherently more difficult to attack because all distributed copies must be attacked simultaneously for an attack to be successful. In distributed ledgers, entries are recorded in the database without third-party intervention. Once data has been recorded in distributed ledgers, it can no longer be modified by anyone. Distributed ledgers provide real-time access to transactionTransaction Exchange of value, property, or data between two parties. data, allowing all parties to view the same information at the same time. This feature ensures transparency and eliminates the need for intermediaries, such as banks or lawyers, to verify transactionsTransaction Exchange of value, property, or data between two parties..

    Disvantages of distributed ledgers

    Distributed ledgers can struggle with scalability. In fact, as the number of participants and transactions increases, processing times and usage costs also increase. Some types of distributed ledgers require a significant amount of electricity to maintain the network and process transactions and this has a significant negative environmental impact. Distributed ledger technology is more complex than more traditional accounting solutions. Distributed ledger technology is still relatively new and still remains risky due to lack of regulation.

    Types of distributed ledgers

    In the context of cryptocurrencies, distributed ledger technologies can be categorized in terms of their data structures, consensus algorithms, permissions, and whether they are mined.

    Data structures

    Distributed ledger technologies can have different data structures, which determine how data is stored and organized on the ledger. The most common data structures are:

    • Blockchain: A blockchain is a chain of blocksBlock A set of encrypted transactions that, in sequence with other blocks, constitutes a blockchain., each containing a list of transactions and a cryptographic hashHash The cryptographic function that identifies blocks in the blockchain. of the previous blockBlock A set of encrypted transactions that, in sequence with other blocks, constitutes a blockchain.. This allows for a tamper-proof and secure record of transactions.
    • Directed acyclic graph (DAG): A DAG is a graph with no cycles, where each nodeNode Device connected to a blockchain, which makes up the network. can have multiple outgoing edges. This makes it more efficient for adding new transactions to the ledger.
    • Hashgraph: Hashgraph is a consensus algorithmAlgorithm A procedure applied to solve a given problem. that combines the strengths of blockchain and DAG technology. It is more efficient and scalable than blockchain, and it does not require mining.
    Consensus algorithms

    Distributed ledger technologies rely on consensus algorithms to ensure that all participants in the network agree on the state of the ledger. The most common consensus algorithms are:

    • Proof of work (PoW): PoW is a resource-intensive consensus algorithm that requires miners to solve complex mathematical problems to verify transactions. This makes it secure against Sybil attacks, but it can be slow and energy-intensive.
    • Proof of stake (PoS): PoS is a more energy-efficient consensus algorithm that relies on nodes to stake their own coins to validate transactions. This makes it more accessible to participate in the network.
    • Proof of authority (PoA): PoA is a consensus algorithm that selects a small number of trusted nodes to validate transactions. This makes it more scalable than PoS, but it can be more centralized.
    Permissions

    Distributed ledger technologies can also be categorized based on whether they are permissioned or permissionless.

    • Permissioned ledgers: Permissioned ledgers are only accessible to authorized participants, such as members of a specific organization or consortium. This makes them more secure for sensitive data.
    • Permissionless ledgers: Permissionless ledgers are open to anyone to participate. This makes them more transparent and accessible, but it can also make them more vulnerable to attacks.
    Mining

    Some distributed ledger technology, such as Bitcoin and Ethereum, require miners to verify transactions and add new blocks to the ledger. This process is called mining. Miners are rewarded with newly minted coins for their work. Other distributed ledger technology, such as Hashgraph, do not require mining. Instead, they use a more efficient consensus algorithm that does not require significant computational resources. The choice of distributed ledger technology depends on the specific requirements of the application. For example, if security and transparency are critical, a permissionless ledger with a strong consensus algorithm would be a good choice. If scalability and energy efficiency are important, a DAG or PoS ledger might be a better option.

    Applications of distributed ledgers

    Distributed ledgers are often associated with applications such as cryptocurrency and smart contracts, but they have the potential to be used across a wide range of industries. Let’s see some examples.

    Banks and financial institutions
    • International money transfers: DLT can be used to facilitate secure and efficient international money transfers, reducing transaction costs and improving speed.
    • Issuing and management of financial instruments: DLT can be used to issue and manage a wide range of financial instruments, including securities, derivatives, and loans.
    • Credit risk management: DLT can be used to improve the efficiency and effectiveness of credit risk management, reducing the risk of fraud and defaults.
    • Anti-money laundering and regulatory compliance: DLT can be used to automate and streamline anti-money laundering (AML) and regulatory compliance processes, reducing the burden on financial institutions.

    Trade Financing
    • Guarantee of commercial transactions: DLT can be used to guarantee the authenticity and integrity of commercial transactions, reducing the risk of disputes and fraud.
    • Product documentation and tracking: DLT can be used to track and trace products throughout the supply chain, ensuring their authenticity and preventing counterfeiting.
    • Reduction of transaction costs: DLT can streamline trade finance processes, reducing costs and improving efficiency.
    • Facilitation of access to commercial credit: DLT can facilitate access to commercial credit for businesses, especially those in underserved markets.

    Insurance
    • Verification of authenticity of documents: DLT can be used to verify the authenticity of insurance claims, reducing fraud and improving claim processing efficiency.
    • Claims management: DLT can be used to automate claims management processes, reducing administrative overhead and improving customer satisfaction.
    • Fraud identification and prevention: DLT can be used to identify and prevent fraudulent insurance claims, reducing losses for insurers and policyholders.
    • Automation of administrative processes: DLT can automate a wide range of administrative processes in the insurance industry, from underwriting to policy issuance to claims settlement.

    Real Estate
    • Registration and transfer of real estate ownership: DLT can be used to securely and efficiently register and transfer ownership of real estate, reducing the risk of fraud and errors.
    • Management of real estate contracts and titles: DLT can be used to manage real estate contracts and titles, ensuring their authenticity and preventing forgeries.
    • Identification and reduction of legal risks: DLT can be used to identify and reduce legal risks associated with real estate transactions, such as title disputes and liens.
    • Transparency of real estate transactions: DLT can improve the transparency of real estate transactions, making them more accessible and auditable.
    Artists, Media & Advertising
    • Licensing of digital works: DLT can be used to license digital works, ensuring that artists and creators receive proper compensation for their work.
    • Copyright identification and tracking: DLT can be used to identify and track copyright infringement, protecting artists and creators from unauthorized use of their work.
    • Monetization of digital content: DLT can be used to monetize digital content, making it easier for artists and creators to earn money from their work.
    • Distribution and management of digital rights: DLT can be used to distribute and manage digital rights, ensuring that artists and creators control the distribution and use of their work.

    Detecting counterfeits
    • Identification of counterfeit products: DLT can be used to identify counterfeit products, reducing the risk of consumers purchasing fake or substandard goods.
    • Supply chain tracking: DLT can be used to track products throughout the supply chain, ensuring their authenticity and preventing counterfeiting at the source.
    • Prevention of fraud and piracy: DLT can be used to prevent fraud and piracy, protecting consumers and businesses from financial losses and reputational damage.
    • Protection of brand reputation: DLT can help protect brand reputation by ensuring that consumers only purchase genuine products.

    Health Services
    • Recording and sharing of electronic medical records: DLT can be used to securely store and share electronic medical records, improving patient care and reducing the risk of medical errors.
    • Management of prescription and distribution of medicines: DLT can be used to manage the prescription and distribution of medicines, ensuring that patients receive the correct medications and that counterfeit drugs are identified and removed from the supply chain.
    • Research and clinical trials: DLT can be used to facilitate research and clinical trials, improving the efficiency and effectiveness of drug development.
    • Identification and prevention of epidemics: DLT can be used to identify and prevent epidemics by tracking the spread of diseases and enabling the rapid deployment of countermeasures.

    Data management of citizens
    • Collection and storage of personal data: DLT can be used to securely collect, store, and manage personal data, ensuring compliance with data protection regulations such as GDPR.
    • Informed consent and consent management: DLT can be used to provide individuals with greater control over their personal data, allowing them to easily and transparently give or revoke consent for its use.
    • Security and protection of personal data: DLT can be used to enhance the security of personal data, making it more difficult for unauthorized access and misuse.
    • Transparency of data processing: DLT can provide greater transparency into how personal data is being collected, stored, and used, allowing individuals to better understand and manage their data privacy.

    Identity Management
    • Digital identity management: DLT can be used to create and manage digital identities, providing individuals with a secure and verifiable way to prove their identity online and offline.
    • Online and offline identity verification: DLT can facilitate secure identity verification both online and offline, enabling businesses and governments to verify individuals’ identities without compromising their privacy.
    • Secure authentication: DLT can be used to implement secure authentication methods, such as biometrics and multi-factor authentication, to protect user accounts from unauthorized access.
    • Identity fraud prevention: DLT can help to prevent identity fraud by creating a tamper-proof and non-replicable record of individuals’ identities.

    Elections
    • Voter registration: DLT can be used to securely register voters and manage their voter registration details, ensuring accurate and reliable voter rolls.
    • Counting and certification of votes: DLT can be used to securely count and certify votes, reducing the risk of errors and fraud.
    • Transparency of the electoral process: DLT can increase the transparency of the electoral process by making it easier to track and audit votes.
    • Prevention of electoral fraud: DLT can help to prevent electoral fraud by creating a secure and tamper-proof record of votes.

    Taxes
    • Transaction monitoring and tracking: DLT can be used to monitor and track transactions, helping to identify and prevent tax evasion.
    • Tax collection and administration: DLT can be used to automate tax collection and administration processes, reducing the administrative burden on taxpayers and tax authorities.
    • Prevention of tax evasion: DLT can help to prevent tax evasion by making it more difficult for taxpayers to hide their income and assetsAsset An economic resource with value that an individual or organization owns, controls, or expects future benefits from. Examples of assets: gold, stocks, cryptocurrencies, etc..
    • Efficient tax administration: DLT can improve the efficiency of tax administration by streamlining tax filing and payment processes.

    NGOs and Non-Profit Organizations
    • Management of donations and funds: DLT can be used to securely manage donations and funds, ensuring transparency and accountability.
    • Financial reporting and transparency: DLT can help NGOs and non-profit organizations to improve their financial reporting and transparency, enhancing trust and credibility.
    • Prevention of corruption: DLT can help to prevent corruption by making it more difficult to misuse funds and engage in fraudulent activities.
    • Development of sustainable projects: DLT can be used to track the progress of sustainable projects and ensure that funding is used effectively

    Internet of ThingsInternet of Things Devices with sensors, processing ability, software and other technologies that connect and exchange data with other devices and systems over the Internet or other communications networks. (IoT)
    • Secure data transfer: DLTs can be used to transfer data securely between IoT devices, even when these devices are in different locations or do not trust each other.
    • Traceability and security: DLTs can be used to trace products and services along the supply chain, ensuring their authenticity and security.
    • Device Management: DLTs can be used to manage IoT devices in a centralized and secure manner.
    • Smart contracts: Smart contracts can be used to automate transactions between IoT devices, without the need for human intermediation.