Distributed Ledger Technology (DLT): Definition and How It Works

Feb 11, 2023

What Is Distributed Ledger Technology (DLT)?

Distributed Ledger Technology (DLT) is the technological infrastructure and protocols that allow simultaneous access, validation, and record updating across a networked database.

DLT is the technology blockchains are created from. It received more attention from the media and public once it became known that Bitcoin was created using it. DLT is now a buzzword in technology, given its potential uses in industries, enterprises, and governments.

Simply put, a distributed ledger is a database that does not need a third party to ensure recorded transactions are valid and honest. Many users have different access levels to the database. Changes to data are recorded automatically and cannot be changed by a user without permission to do so. In some distributed ledgers, no one can make changes; in others, changes can be made, but they are tracked, and the user that made the changes is known.

DLT allows users to view any changes and who made them, reduces the need to audit data, ensures data is reliable, and only provides access to those that need it.

History of Distributed Ledgers

Distributed computing is not new—businesses and governments have been using the concept for several decades. In the 1990s, it became possible for multiple computers and users in different locations to solve problems and return the solutions to a central location.

Advances in data science, computing, software, hardware, and other technologies have made ledgers much more capable. Improved connectivity through intranet and internet protocols allowed for much more data to be collected, analyzed, and used. However, because there can now be many users with access to data, it is necessary to have someone verify the changes.

Computer and data scientists developed programs that reduced the need for auditing data. These programs used automation and data encryption techniques to verify database transactions or changes in a database's state. This is called consensus—the act of automated majority agreement on transaction validity, where a transaction is simply a change made to a database's state.

Distributed ledgers evolved into scalable and programmable platforms, as seen in Ethereum and IBM's HyperLedger Fabric, where solutions can be created to use a database, or ledger, for everything from tokenizing physical assets to streamlining manufacturing and other business processes.

How Distributed Ledger Technology Works

Because they are decentralized, private, and encrypted, distributed ledgers are less prone to cybercrime, as all the copies stored across the network needs to be attacked simultaneously for the attack to be successful. Additionally, the peer-to-peer sharing and updating of records make the whole process much faster, more effective, and cheaper.

Every device on a distributed ledger network stores a copy of the ledger. These devices are called nodes—a network can have any number of nodes. Any changes to the ledger, such as moving data from one block to another, are recorded across all nodes. Because each node has a copy of the ledger, each one publishes its version with the latest transactions.

If the network reaches a consensus about the validity of the latest ledger, the transactions are finalized, encrypted, and used as a basis for the following transactions. This is how blockchains develop—each block contains encrypted information about the proceeding block, which makes them impossible to change.

Types of Distributed Ledger Technology

Distributed ledgers are created for many different purposes, but one of the most used ways is as a platform for others to scale and use. One of the more well-known distributed ledgers is IBM's Hyperledger Fabric. It is a modular and scalable DLT platform that several businesses have used to create solutions that span many industries. Here are some of the industries these solutions have been created for:

  • Aviation
  • Brand protection
  • Education
  • Healthcare
  • Insurance
  • Logistics
  • Manufacturing
  • Transportation
  • Utilities
  • Supply chains can benefit greatly from DLT. Many factors make them inefficient, inaccurate, and susceptible to corruption or losses. Fujitsu, a global data and information technology company, has designed distributed ledger technology to enhance supply chain transparency and fraud prevention by securing and tracking data.

    Fujitsu's Rice Exchange was created to trade rice, ensuring data regarding sources, prices, insurance, shipping, and settlement are recorded on the ledger. Anyone involved can look at any data and find accurate information regarding the entire process because it cannot be changed. All data is entered and secured automatically by the platform—it will eventually provide tracking information for rice shipping containers as it is shipped to its final destination.

    Distributed Ledgers vs. Blockchain

    There are several key factors that distinuish blockchain from distributed ledgers. Here are a few of the most notable ones.

    Distributed Ledgers
    • Data can be chained, but doesn't use "blocks"
    • Can be encrypted
    • Private and permissioned, but can be permissionless
    • Can be immutable
    • Data is stored in chained "blocks"
    • Always encrypted
    • Generally public and permissionless, but some are permissioned
    • Always immutable

    What Is Distributed Ledger Technology Used For?

    Distributed ledger technology is used to securely store data so that it is unaltered, transparent, synchronized, and accurate.

    Is DLT and Blockchain the Same?

    Blockchain evolved from distributed ledger technology. They share some similarities, but they are not the same.

    Is DLT Better Than Blockchain?

    Each has a different purpose. For example, blockchain is designed to be public and permissionless, while DLT is intended for private uses and can be permissioned or permissionless.

    The Bottom Line

    Distributed ledger technology is a platform that uses ledgers stored on separate, connected devices in a network to ensure data accuracy and security. Blockchains evolved from distributed ledgers to address growing concerns that too many third parties are involved in too many transactions.

    Distributed ledger technology is becoming necessary in modern businesses and enterprises that need to ensure accuracy in financial reporting, manage supply chains, prevent fraud, and identify inefficiencies. It has many more use cases in business activities that are time-consuming and costly.

    Source: https://www.investopedia.com/terms/d/distributed-ledger-technology-dlt.asp#toc-distributed-ledgers-vs-blockchain