What is distributed ledger technology?

September 7, 2018 Matt Vermeulen

Distributed Ledger Technology (DLT) and blockchain are technologies with incredible implications for trade and commerce. While both offer fundamental ways for companies to continually grow with global trade and commerce, it’s still hard for many to grasp the underlying definition of these two new technologies. It seems like everyone involved has their own favorite analogy to understand the technology, so it’s our turn to give it a crack.

The easy part

Your first task: separate each word to ground yourself before we even get to historical context. Individually, each word is obvious and almost redundant to define. How else do you define distributed beyond “distributed?” I guess we could say “parceled out?” And, as you know, a ledger is just a record of accounts containing debits and credits. And let’s not even bother with technology. So that was easy! At the very basic level, a distributed ledger is a record of accounts distributed out amongst many stakeholders.

Historically speaking

Beyond that of course, we should get into the history of it. If you’re involved with trade and the supply chain, you know that the complexity of tracking multiple systems gives rise to intermediaries who have historically tracked and profited from their job of keeping all those systems flowing. And on top of that, all of those systems have been siloed and centralized. That leads to trust issues: what happens if one bad actor is in control of those ledgers? What chain reaction happens if the information wasn’t recorded correctly? What happens when one or two entities get control of all that information? According to Abadi and Brunnermeier, a ledger should record all information correctly, be cost-efficient, and be fully decentralized to avoid these problems. The reality is far from ideal.

The nascent promise

And that’s where the tantalizing promise of distributed ledger technology enters the scene. By distributing the information over multiple stakeholders, you eliminate the temptation of centralized power, make it open to fact-checking, and eliminate the cost of the intermediaries who traditionally tracked the systems. So that leads us to a very natural question: how does the technology distribute the records?

A distributed ledger is kept and updated by all the computers hooked into the network, so the ledger is kept communally. And because they’re distributed throughout all those computers, no one has consolidated control of the records. So if you put your laptop in the oven to dry off after you spilled your water on it, and your unsuspecting roommate sets the oven to 450º to cook a pizza, well, if the records were on your now-smoldering computer, it’s ok, because the other computers pick up the slack.

Don’t ever change

And if someone wants to just willy-nilly change the data? They can’t. They first have to get everyone on the network to agree to the changes they want to make to the ledger—this process is called a consensus algorithm. The whole community can agree to the change, or a contingent of the community can agree to create an entirely different ledger, called a ‘fork.’ And while there’s a healthy debate around both consensus algorithms and forking, the upshot is that the original information cannot be changed without community consent.

Blockchain-ed melody

But wait a minute, you might say, where does blockchain fit into this? Isn’t blockchain synonymous with a distributed ledger? Each block is a record, chained together with other blocks. These blockchains act as a way to validate those transactions in the ledger. And since the blocks are each verified, so too is the whole ledger. But a blockchain is just one way of implementing a distributed ledger, just as a hashgraph is another way. It just happens to have the most hype.

It might help to think of it in terms of making decisions with the people in your life. When you engage in any decision-making process with someone, you work off a set of shared assumptions.

For example, imagine buying a car. If you say to your partner “we should buy this car because it’s safe,” your shared assumption about buying a car is that safety is your number one criteria. Without that shared assumption, you won’t come to a decision on the car you want to buy. In a sense, the assumption facilitates understanding. In turn, the blockchain is a kind of shared and verified assumption that can facilitate future collaboration and transactions.

Connecting the blocks

Working together, this technology has the opportunity to bring shared trust and savings in commerce and trade. It has implications for small and medium-sized business financing, collaboration between multiple entities on transactions, and savings all along the supply chain.

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About the Author

Matt Vermeulen

Matt Vermeulen writes about B2B commerce for Tradeshift. Whether he's writing about Accounts Payable best practices or debunking AI myths, Matt enjoys making complex topics easy to understand and fun to read.

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