Distributed ledger technology is a technology that makes it possible to store multiple copies of the same ledger as exact mirrors of each other. This means that any action taken on one ledger is automatically replicated across all other ledgers, almost in real time.
What is a distributed ledger?
A ledger is simply a place where transactions are recorded. Ledgers are often associated with financial transactions. In principle, however, they can be used for any purpose. For example, ledgers are increasingly being used to keep track of environmentally sensitive goods. If all legitimately sourced goods are recorded on a ledger, then illegal goods can be easily identified.
Ledgers have been used since ancient times. When computers were first invented, organizations simply moved their paper-based ledger system to a digital format. Distributed ledgers are a big step forward from this. They have all the functionality of traditional ledgers, plus the ability to synchronize transactions automatically across ledgers held in different locations.
Distributed ledger vs centralized ledger
Distributed ledgers operate independently of a central authority. This makes them faster and more flexible than traditional centralized ledgers. The fact that transactions are automatically mirrored across all ledgers means that information is shared with minimum delay.
What's more, each distributed ledger goes through its own verification process for each transaction. This means that if a transaction is entered in error, there is a very high chance of that error being caught quickly.
Even if the error is missed by the automated verification process, the fact that multiple human eyes will look at it acts as an effective secondary check.
With traditional centralized ledgers, by contrast, a central authority controls transaction entry. Transactions may be (and often are) copied into other ledgers, sometimes very quickly. They are not, however, subject to any additional verification.
In short, therefore, distributed ledgers undertake security checks on a per-ledger basis whereas centralized ledgers only undertake one round of security checks. This means that distributed ledgers are much more resource-intensive, but also much more secure.
Distributed ledger technology vs blockchain
Distributed ledger technology uses the technology that underpins blockchain. It is the technology that underpins the cryptocurrency, bitcoin. Digital ledger technology can, however, be used in many other contexts – blockchain is now being increasingly used separately from bitcoin.
What makes blockchain special is that transactions are packaged into blocks that are chained together. As the number of transactions increases, so does the number of blocks, and hence the length of the chain.
This approach gives blockchain a very high level of security. Unfortunately, it also makes it particularly resource-intensive. This means it is relatively slow compared to other forms of distributed ledger technology.
Unless the speed of blockchain can be substantially improved, its commercial uses will likely be limited to situations where security is the primary consideration.
Distributed ledger technology and security
The same security considerations apply to distributed ledger technology as apply to regular ledgers. In particular, sensitive data needs to be kept encrypted at all times and across all ledgers.
The fact that a distributed ledger automatically mirrors transactions across the other distributed ledgers means the backup process is very robust. This is crucial to protecting against threats such as ransomware, which are becoming increasingly prevalent.
Distributed ledger technology and data privacy
It can be a challenge to run distributed ledger technology in a way that ensures data privacy. The challenge is that maintaining data privacy requires all data to have an owner. This is a standard requirement for compliance programs across the world.
A data owner is not, technically, the same as a central authority for a ledger. The central authority for a ledger, however, is often the obvious choice to be a data owner.
Blockchain raises additional challenges in that it continually adds data to transactions, but never deletes old data. At some point, the initial transactional data will become obsolete and, per data privacy standards, it will need to be deleted. Blockchain, however, will be unable to do so.
How we can help
If you’re interested in finding out more about distributed ledger technology (DST), then get in touch with the financial experts at GoCardless. Find out how GoCardless can help you with Ad hoc payments or recurring payments.