While blockchain use cases continue to garner hype from the wider public, Distributed Ledger Technology has been flying under the radar for over a decade. Yet, despite being frequently overlooked, DLT has an exceptional track record of providing a lot of value and tangible results across a wide array of industries.
For better or worse, we currently find ourselves in the digital age of soundbites and buzzwords where even the most intricate technological breakthroughs are routinely watered down to a mere word or two.
Blockchain is a fantastic example of this contemporary phenomenon. Already making a case as the most disruptive technology of the 21st century, only a select few truly understand how blockchains operate. Yet, nearly everyone has heard about this tech and is aware of the revolutionary promise it holds.
Such a cursory treatment of a ground-breaking technology did not only take its toll on blockchains, though
To make matters even more unfair, a lot of people will tell you that blockchain and DLT are two different terms used to describe the exact same technology. However, in reality, this is hardly the case. The text below will help you understand precisely what sets blockchains and Distributed Ledger Technology apart, as well as hopefully shine some light on the widely underappreciated impact of DLT-powered systems.
A Full-Blown Technology of Its Own
While financial and Fintech circles have their own interpretations of the DLT acronym which are fairly complex to grasp, the DLT ledger definition is relatively easy to understand even without a solid IT background. It’s an umbrella term used to describe systems that store, distribute and facilitate exchanges of data in a specific fashion.
As the name suggests, Distributed Ledger Technology systems are completely decentralized in the way they handle, store, process, validate and authenticate data. Instead of relying on a centralized server, the responsibilities are spread across a wide network of different computers.
Typically, records are only stored in a DLT-powered ledger book when the consensus has been reached among all the decentralized participants of the network. Once all of them agree on the validity of an action, files in the distributed ledger are time-stamped and given a unique cryptographic signature for safety purposes.
Most of you familiar with distributed ledgers will notice that these characteristics are nearly identical to the way blockchains function. However, while blockchains always operate without the aid of a centralized entity keeping tabs on what’s going on, DLT systems can still function even if there is a central authority tasked with managing the network to some extent.
This means that DLT gets the best of both worlds as it harnesses the pros of decentralization yet network owners are not obliged to give up all of their control. As such, enterprises often opt to adopt Distributed Ledger Technology to process, validate or authenticate all sorts of data exchanges. Similarly to blockchain, this can be done either privately or publicly, depending on the structure, purpose and functioning of the network’s use case.
Furthermore, while it can be interpreted as a foundational base for forming a blockchain, DLT does not have to construct a chain of blocks while storing information.
This makes standard DLT networks considerably less rigid than full-blown blockchains, giving them an edge in certain business scenarios. Google’s recent partnership with Digital Asset is a good example of a company testing DLT systems and seeing what they offer when compared to pure blockchain solutions. Volkswagen’s collaboration with IOTA was also an experiment in DLT, even though there were some initial misunderstandings about whether the automotive giant was actually trying to implement a pure blockchain or not.
Blockchain, the Poster Child of Disruptive Technology, Is Only a Variant
While it managed to build up a reputation as an independent technology, blockchain is just a specific type of a DLT system. Interestingly, blockchain was the first fully functional take on the Distributed Ledger Technology as we know it today, which is another likely culprit that made some people think blockchain and DLT ledger definitions are the same.
However, in reality, DLT is a parent technology of the blockchain, while blockchain is an advanced version of the distributed ledger. So, while every blockchain is by definition a distributed ledger, not every distributed ledger has to be a blockchain.
A blockchain functions as a digital ledger book of records maintained by a decentralized system in which the validity of all records is guaranteed by the network itself. However, unlike the case is with other DLT systems, blockchains package data into cryptographic hash-linked blocks in a sequential chain. These records are immutable and can be used to document an unbiased history of nearly any product or service you can think of.
Just like other DLT systems, blockchains use a consensus system to determine how data gets added to the ledger. But the manner of organizing data in blocks, and updating the entries using an append-only structure is what separates blockchain from other DLT systems.
As we’ve established the intertwined relationship between blockchain and DLT-powered systems, it’s now hopefully clear that trying to learn blockchain infrastructures should actually start by getting acquainted with how DLT systems work. They are, after all, the root of all blockchain tech both in technical and conceptual terms.
Let’s lay down the key technical aspects of blockchain that may not necessarily exist amidst other distributed ledgers:
- The unique block structure
Structure-wise, blockchain consists of nothing but blocks of stored data. This form of collecting information is at the very core of blockchain’s immutability and overall resiliency to hacking attempts. Data can only be added on the very end of the chain, and access to the information contained within blocks can not be achieved without the knowledge of a unique private key.
A standard DLT network is simply a database decentrally spread across different nodes and servers. Safer than standard forms of storing data, sure, but it has far lower security levels than what’s provided by a pure blockchain system.
- Power-hungry consensus protocols
Another clear distinction between blockchain and Distributed Ledger Technology can be found in the power-hungry consensus algorithms. Rigorous proof of work mechanisms are the beating heart of any blockchain system as the only way to add data to it is that all nodes within the network give their approval of the action. This, naturally, drains a lot of power, giving blockchains a notorious reputation for high power consumption.
Other distributed ledger systems do not necessarily need this kind of a total consensus as they can be programmed to check validity via other, more confined methods. While this lowers the security bar, less complex methods of achieving network-wide consensus make DLT systems comparatively less power-consuming than most blockchains, as well as considerably quicker.
- Immutable sequences of data
As stated earlier, blockchain systems store data exclusively by adding pieces of information to the very end of the chain. This means that all blocks are organized in a particular sequence, one that can’t be changed without ripping the entire system apart.
Distributed ledgers, however, do not require a specific sequence of data in order to work and network owners have the freedom to organize the inner workings of the system in different ways. In that sense, most DLT networks function more akin to traditional data storages than pure blockchains.
On the other hand, we have Distributed Ledger Technology which come with their own set of advantages. While packing a less revolutionary punch, DLT solutions are usually faced with much less friction as they do not bring such radical shifts in the way a business operates.
Distributed Ledger Technology has two key advantages going for it when compared to blockchains: higher levels of privacy and better scalability. The former makes DLT particularly useful additions to the global technological arsenal as there’s a surplus of specific cases in which harnessing a truly public blockchain may not make a whole lot of sense.
Better scalability is a common reason why some businesses opt for a DLT network instead of going with a full-blown blockchain. As DLT systems can stay largely centralized in terms of control, they can process hundreds of transactions per second, while most adoptions of blockchain struggle to top the seven transactions per second mark despite consuming vast quantities of electricity.
So, even if they don’t offer as much decentralization and transparency as blockchain, better privacy and scalability (as well as operational efficiency) are the main reasons why DLT systems will manage to carve their own place in the business world.
Why Both Blockchain and DLT Ledger Should Not Fly Under Your Radar
While there are some clear distinctions between the two technologies, it’s fair to say that blockchain and DLT systems bring a lot of similar benefits to the table. As such, their futures will continue to be profoundly intertwined as businesses will constantly have to weigh which kind of decentralized systems make the most sense for their particular requirements.
Use cases are, of course, a huge factor when it comes to the blockchain vs Distributed Ledger Technology debate. Of course, a lot of blockchain use cases are widely covered as the majority of the hype surrounding distributed ledgers boils down to contemplating how blockchains can disrupt certain industries (blockchain supply chains and blockchain healthcare come to mind almost immediately). Deployment of DLT systems, on the other hand, has only recently started to catch on, but early signs are very promising.
It’s worth mentioning that, no matter which version of it you opt to deploy, every distributed variant of a digital ledger book will provide the following benefits to your company:
- Transparency – This is a huge issue across many industries, particularly those belonging to the banking and finance sector. All distributed ledgers provide an incredible level of transparency, allowing businesses both better internal communication and improved relationships with their clients.
- Speed – While most distributed ledgers treat speed as an afterthought, most can handle transactions faster than any traditional database. The speed with which operations occur within the crypto sector is a great indicator of what distributed ledger systems can do in terms of transactional speed.
- Cost-effectiveness – As distributed ledgers drastically cut down on both operational problems and human errors, their positive effects on the short and long-term bottom lines are widely recorded.
- Security – Tough security checks are among the main advantages of all types of distributed ledgers. Even the most simplistic networks offer security levels light years ahead of any traditional safety protocols charged with protecting streams of data.
Both blockchains and DLT networks come hand in hand with all of these game-changing advantages – all a business owner needs to do is evaluate whether their particular needs and pain points align better with one technology or the other. This, however, may not be as simple as it sounds, which is precisely why this lengthy guide was pieced together.
While Interconnected, Blockchain and DLT are Not Interchangeable Terms
As both blockchain and DLT continue to evolve in their separate directions, we’re bound to see an abundance of interesting projects that test, tune and tamper with different versions of distributed ledger networks. While both hold a lot of promise, it remains to be seen which technology will ultimately leave a bigger mark on the way our world operates.
Nevertheless, as DLT and blockchain became so entwined over the last decade, it is essential that we clearly define the gap between the two technologies. After all, distinguishing between them will be how we ensure that we’re getting the absolute most out of both of these technological marvels.