People sometimes use the terms ‘Blockchain’ and ‘Distributed Ledger’ interchangeably. This post aims to analyze the features of each.
Distributed Ledger Technology
A distributed ledger is a database that is spread across several nodes or computing devices. Each node replicates and saves an identical copy of the ledger. Each participant node of the network updates itself independently.
The groundbreaking feature of distributed ledger technology is that the ledger is not maintained by any central authority. Updates to the ledger are independently constructed and recorded by each node. The nodes then vote on these updates to ensure that the majority agrees with the conclusion reached. This voting and agreement on one copy of the ledger is called consensus, and is conducted automatically by a consensus algorithm. Once consensus has been reached, the distributed ledger updates itself and the latest, agreed-upon version of the ledger is saved on each node separately.
Distributed ledger technologies drastically reduce the cost of trust. The architectures and structures of distributed ledgers can help us mitigate our dependence on banks, governments, lawyers, notaries and regulatory compliance officers. R3’s Corda is an example of a distributed ledger.
Distributed ledgers present a new paradigm for how information is collected and communicated, and are poised to revolutionize the way individuals, enterprises and governments transact.
Blockchains are one form of distributed ledger technology. Not all distributed ledgers employ a chain of blocks to provide a secure and valid distributed consensus.
A blockchain is distributed across and managed by peer-to-peer networks. Since it is a distributed ledger, it can exist without a centralized authority or server managing it, and its data quality can be maintained by database replication and computational trust.
However, the structure of the blockchain makes it distinct from other kinds of distributed ledgers. Data on a blockchain is grouped together and organized in blocks. The blocks are then linked to one another and secured using cryptography.
A blockchain is essentially a continuously growing list of records. Its append-only structure only allows data to be added to the database: altering or deleting previously entered data on earlier blocks is impossible. Blockchain technology is therefore well-suited for recording events, managing records, processing transactions, tracing assets, and voting.
Cryptocurrencies, such as Bitcoin, pioneered blockchain technology. Bitcoin’s big rally in late 2017, and the ensuing media frenzy, brought cryptocurrencies into the mainstream public imagination. Governments, businesses, economists and enthusiasts are now considering ways to apply blockchain technology to other uses.
Every blockchain is a distributed ledger, but not every distributed ledger is a blockchain. Each of these concepts requires decentralization and consensus among nodes. However, the blockchain organizes data in blocks, and updates the entries using an append-only structure. Distributed ledgers broadly, and blockchains specifically, are conceptual breakthroughs in managing information and can be expected to find application in every economic sector.