Distributed Ledger Technology

Also known as DLT, distributed ledger technology describes a database that is used to record transactions across a network of devices, usually computers or servers.

Let’s break the term down. “Distributed” refers to how the nodes (or computers or servers) of the network are designed architecturally, and where they are located geographically.

Geographically distributed networks are used by many traditional companies today, where they have offices across the country which are still connected to the same network. Architecturally distributed networks simply give control to each node on the network, so if one were to go down, the protocols running on the network could be routed to other nodes on the network.

A node acts as a backup to the other nodes on the network.

“Ledger” in this context, and traditionally, simply refers to a centralized database that is used to store financial records, such as a company’s financials, liabilities, revenues, owner’s equity, and other financial information.

All of the nodes on this type of network would sync back their data, or make changes to data, in a central place.

Imagine the wheel of a bike – the nodes or spokes on the bike all come together in the center of the wheel, at the hub. All the data is accessed and stored at the hub.

Now, combine the two ideas and you have a ledger that is distributed across many devices, instead of one device, in many different locations, possibly around the world. Even if one of those locations disappears, or a computer or server goes down, the ledger is still intact, still secure, and the data stored within the ledger can still be processed, validated, and authenticated to.

If a centralized node hosting a ledger were to go offline, none of the nodes would know what data the other nodes are holding, or whether that data was changed. And now imagine that information contains financial transactions, such as buying and selling goods. How would a business determine if something was paid for? How would a customer know if they have any money in their account? If the central authority in charge of managing that information can’t be reached, the entire network is now worthless.

Centralized networks are also more prone to cyberattacks, as hackers only need to focus on a single copy of the data, instead of having to attack all copies of the data stored across the network nodes.

A blockchain is an example of a distributed ledger technology. A blockchain incorporates cryptography, secret keys, and digital signatures with a ledger running across a distributed network to create a network and ledger that are more trustworthy, secure, transparent, and traceable.

Related Terms

Full Node

A type of node that participates in a blockchain network, performing some function for the network, like securing the network or validating transaction data. A full node stores a complete copy of the blockchain data. Information about every block and the recorded transactions within each block is available in the full copy of the blockchain.

Node

Any device that participates in a blockchain network. Normally, nodes are computers or servers that provide some function to the network they’re connected to. A node’s role is dictated by the protocol of the network.

Soft Fork

In relation to blockchain technology, a soft fork involves introducing changes to a blockchain’s underlining protocol or software that are minor in nature. These software updates can take the form of new blockchain functionality, upgrades to network performance, enhancements that correct security issues, or even changes to the consensus rules that govern how blocks are created and validated on a blockchain. Forks are necessary for providing decentralized blockchains a way to make changes to the blockchain since there isn’t a central authority governing all aspects of blockchain development and evolution.

Blockchain

Blockchain networks are at the heart of cryptocurrencies. A blockchain is a database, or digital ledger, made up of a series of interconnected blocks containing transaction data created on the network over some period of time. Each block in a blockchain also contains a unique identifier unlike any other block in the chain called a hash. Think of the hash as a fingerprint identifying that block for all other blocks. Distributed ledger technology (DLT) is another name frequently used in relation to blockchains.

Bitcoin (BTC)

Bitcoin (BTC) is most well known as a digital decentralized cryptocurrency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer Bitcoin network without the need for intermediaries, such as payment gateways or banks or routing services. Think of bitcoin as Internet money, that you can send and receive directly, to and from anyone, and you can use it to pay for stuff.