A distributed ledger is a network of autonomous computers spread around the world that record, share, and synchronize a database of transactions. Each user of the distributed ledger becomes a witness to, for example, a bitcoin transaction made over the blockchain, making it impossible for people with malicious intentions to make any alterations to the data.
You can compare how a distributed ledger works to posters of wanted criminals in the old days of the Wild West. These posters were sent out to all sheriffs’ offices across the U.S., so lawmen knew who to watch out for. If a criminal gets caught, the updated information is resent to all sheriffs so they would no longer look for someone who is no longer on the list. Well, that’s pretty much how distributed ledgers work.
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How Did Distributed Ledgers Come About?
It all started with a white paper on the blockchain entitled “Bitcoin: A Peer-to-Peer (P2P) Electronic Cash System,” released by Satoshi Nakamoto in 2008. He actively worked on the source code with several bitcoin enthusiasts until 2010. At that time, he transferred bitcoin-related domains, his network key, and source code repository to other bitcoin developers then vanished without a trace.
Nobody really knows for sure if Nakamoto is a real person or a group of people. Still, he is the 15th wealthiest person in the world, with an estimated net worth of US$73 billion (using the exchange rate US$750,000 to 1.1 million BTC).
In 2014, an Ethereum white paper was published by Vitalik Buterin, making adjustments to Nakamoto’s blockchain concept to make it more inclusive and marketable. The paper also improved the technology’s speed since the original blockchain protocol was very slow and energy-intensive.
Since then, several people and institutions have made innovations to the improved blockchain technology, paving the way for distributed ledger technologies (DLTs). As such, the origin of the distributed ledger was never forgotten. A monument in honor of Nakamoto was unveiled in Hungary around September 2021.
What Are the Categories of Distributed Ledgers?
Over the years, different varieties of blockchain technology have been developed. Let’s differentiate the most common ones—public and private distributed ledgers and permissioned and permissionless distributed ledgers.
Private versus Public Distributed Ledgers, What’s the Difference?
In a private distributed ledger, the operator has sole control over entries. They can edit, delete, or override any entry on the ledger. Also, the operator decides who can access the distributed ledger, which often requires member verification. If you think about it, blockchains built on private distributed ledgers are not entirely decentralized and suitable for companies developing internal applications. Ripple is an example of a private blockchain.
On the other hand, public distributed ledgers are open to everyone who wants to access them, making them completely decentralized. Network contributors can read, write, and validate entries. An example of a blockchain built on a public distributed ledger is Ethereum.
How about Permissioned and Permissionless Distributed Ledgers?
Permissioned distributed ledgers allow only selected participants within the network, while permissionless ones are open to anyone. These definitions may sound similar to private and public distributed ledgers, but they are not synonymous. Permissioned does not exclusively refer to private blockchains, and permissionless does not necessarily translate to public blockchains.
There are public-permissioned ledgers that combine the best of both worlds—the permissioning of private ledgers and the decentralized nature of public ledgers. Anyone can participate in a public-permissioned network after proper identity verification. They are then assigned permissions that allow them to perform only specific activities. Network operation and governance still depend on the participants, making public-permissioned ledgers completely decentralized.
Why Are Distributed Ledger Technologies Useful?
The immutability or resilience to alteration of a distributed ledger is one of the main reasons why it is useful for creating smart contracts. Whether they are private, public, permissioned, or permissionless networks, this inherent feature allows a distributed ledger to serve many practical applications.
What Are the Real-World Applications of Distributed Ledgers?
Here are four use cases of distributed ledgers:
1. Charitable Institutions
The World Food Programme (WFP) uses a distributed ledger as a means to track and secure its cash transfers related to funding its food aid for Syrian refugees. The blockchain-based system allows the institution to streamline transactions while reducing the possibility of fraud and mishandling of data. Since the organization does not have to rely on banks, it was able to reduce transaction costs by as much as 98%.
2. Utility Providers
Distributed ledgers are also used in the energy sector, particularly by environmentally conscious consumers. As more and more people turn to renewable energy sources, such as solar panels and wind farms, many are considering distributed ledgers for marketplaces where they can trade excess energy with others. With the help of smart contracts, the energy marketplace allows proactive consumers or prosumers to settle transactions and trade energy seamlessly.
3. Trade and Finance Sector
Distributed ledger technology has also found a place in the trade and finance industry. One notable example of this is a trade transaction between Japan and Australia, which used IBM’s Hyperledger Fabric platform to carry out faster delivery of trade documents. Since the materials were digitized, data creation and transmission can proceed in much less time. Both parties also benefited from the transparency of the transaction. Companies in the sector can apply the same technology to execute trade faster and more securely.
Smart contracts are also useful in some aspects of the legal industry. Distributed ledgers’ immutability will play a significant role in this sector. For example, both parties’ lawyers can’t make changes to contracts drawn without letting the other know. When signed, both parties can’t deny nor tamper with smart contracts.
These are just four of the potential applications of distributed ledgers. As shown, stakeholders can gain much from using distributed ledgers, such as speedier transactions, because there’s no need for intermediaries or central authorities. Distributed ledgers also reduce transaction costs. And since they are immutable, users also enjoy enhanced security and transparency.
A distributed ledger is an application of blockchain technology that users can further perfect to become a vital means of facilitating transactions across industries.