This blog article will be an overview of an exciting technology called Distributed Ledger. What is exactly a ledger and what are components and concept behind this technology with great disruptive potential is to be discovered in the text below. Read on to find out more.
What is Distributed Ledger?
Ledger is a record of all transactions and states of some assets. The assets can be financial, legal, physical or electronic. There are several types of ledgers and almost every institution has it individual ledger. Banks have their ledgers of bank accounts and transactions; stores have their ledgers of goods and sales transactions.
Distributed ledger is a shared database held and updated independently by each participant in an extensive network. Records are not governed by a central authority but are instead independently constructed and maintained by every participant. Every single participant on the network processes every transaction, coming to its conclusions and then voting on those findings to come to a consensus. Once there is consensus, the distributed ledger has been updated and all participants maintain their own identical copy of the ledger. Any changes to the ledger are reflected in all copies in minutes, or in some cases, seconds.
Components and concepts behind Distributed Ledger technology
Institutions, companies and citizens are all equal participants, with their copy of the ledger and public/private keys used in creating transactions and communication. Model of Distributed Ledger network can be seen in the following diagram (see Figure 1.).
Every transaction of data needs to be verified before it is added to the ledger. That process is done by verifiers (miners) that receive mining rewards or they have a vested interest in accessing and exchanging data on that network. The verifying process happens via either competitive, voting or luck-based methods dependant on the consensus protocol.
Consensus protocols are mechanisms that define how all users within Distributed Ledger agree on the validity of the underlying data.
There are several consensus protocols currently in use:
- Proof of Work
- Uses computational power to validate new transactions of data
- Proof of Stake
- Validators voting on valid blocks while posting collateral in order to be able to participate in the validation process
- Proof of Stake relies on proving the user is invested in the underlying token of value of the network being verified
- Ripple protocol
- The list of validators that are trusted not to collude to defraud is called Unique Node List (UNL). All participants then vote on valid transactions to be included in the ledger. Transactions that meet the 80% threshold of “yes” votes are included in the following last closed ledger state.
- Proof of elapsed time
- Whoever in the network has the next soonest cryptographically signed timestamp produced by hardware (CPU) will be the one to decide which transaction will be a part of the legder
- This consensus method is more energy efficient compared to Proof of Work and therefore more adapted to IoT devices
Distributed Ledger technology relies on the use of asymmetric cryptography to sign messages and encrypt data through the use of a private/public key pair. Key sizes depend on the implementation of the ledger and could vary. Cryptography is also involved in some of the consensus protocols (e.g. Proof of Work) and is the primary vehicle in achieving consensus.
Smart Contracts are self-executing contractual states, stored on the distributed ledger, which nobody controls and therefore everyone can trust. An important feature of a smart contract is the ability to reduce risk through non-discriminatory execution. The lack of a central authority can enable such contracts to service markets with higher efficiency.
Types of distributed ledgers by access and modification authorisation
- Access and modifications to ledgers can be made in principle by anyone
- The advantage of a permissionless ledger is that, as it gains adoption, it becomes highly decentralised and redundant, becoming very difficult to shut down
- Permissioned ledgers allow the owner, or owners, of the data to enforce rules on who is and is not allowed to use the system
Security of database records and network
Existing methods of data management, especially of personal data, typically involve substantial legacy IT systems located within a single institution with networking and messaging systems to communicate with the outside world, which adds cost and complexity. Highly centralized systems present a high-cost single point of failure. They may be vulnerable to cyber-attack, and the data is often out of sync, out of date or simply inaccurate.
In contrast, distributed ledgers are inherently harder to attack because instead of a single database, there are multiple shared copies of the same database, so a cyber-attack would have to attack all the copies simultaneously to be successful. The technology is also resistant to unauthorized change or malicious tampering, in that the participants in the network will immediately spot a change to one part of the ledger. Also, the methods by which information is secured and updated mean that participants can share data and be confident that all copies of the ledger at any one time match each other.
As Distributed Ledger technology is still in development stage and a lot of challenges arise during development and acceptance. The main challenge is to have a complete understanding of particular Distributed Ledger implementation because there is always a possibility that unknown vulnerabilities exist which could leave security gaps in the network and provide means to cyber attacks which could result in potential loss of participants assets.
Distributed Ledger use cases
Distributed Ledger technology has the potential to help governments to collect taxes, deliver benefits, issue passports, record land registries, assure the supply chain of goods and ensure the integrity of government records and services.
Peer to Peer payments and lending
- By eliminating the intermediaries, Distributed Ledger can enable cheaper cross-border remittances and therefore enhance the spending power of recipients.
- Existing electronic voting systems are centralized by design, meaning there is a single supplier that controls the code base, the database, and the system outputs and supplies the monitoring tools at the same time. The Distributed Ledger works as a secure transaction database, to log votes and audit vote results in a trustworthy way.
Proof of authorship and ownership
- In order to express the authorship of any document (paper, photos or audio/video recording) something called proof of existence may be used. Time stamping data in an unalterable state while maintaining confidentiality is perfect for many fields, especially legal and artistic applications. This simple method allows anyone to store a hash of any document into the distributed ledger, thus proving it existed at the time when a particular part was created.
Distributed Ledgers are enormous catalysts for change that affect governance. It could improve transparency and check corruption in governments worldwide. In fact, Estonia has become notable for its e-government system, which was established in 1997. It is enabled by a chip-embedded ID card that gives the nation’s citizens access to over 1,000 e-government services, such as filing taxes and voting, almost instantly and via just one website.
Implementations of Distributed Ledger technology
Today there are hundreds of implementations of Distributed Ledger technology, only a few of the most interesting and well known will be presented.
Blockchain is one form of Distributed Ledger design. Most widely known implementation of Blockchain concept is Bitcoin cryptocurrency. Bitcoin allows an unbound number of participants and that creates a challenge where a large number of participants need a way to establish a trust between them. That problem is solved with "Proof of Work" consensus, the algorithm that is used to create blocks of transactions. Each new block in the Blockchain is the result of competition by miners to provide a valid set of transactions in a block, miners that successfully submit the next block receive a specific amount of bitcoins (12.5 bitcoins at the moment of writing this article) as a reward for their efforts.
Ethereum supports distributed computing functionality featuring smart contract execution. Smart contract code and its execution is open for review by all parties. Ethereum has its own cryptocurrency called Ether used as a form of payment made by the clients of the platform to the machines in the Ethereum network which are executing the requested operations. Whereas Bitcoin blocks contain transaction messages, Ethereum blocks contain messages representing computational steps of the execution of a smart contract.
Hyperledgeris focused on developing a standard for Distributed Ledger that will allow separate ledgers to communicate with one another without needing bespoke APIs. Hyperledger refers to this particular standard as Fabric and intends for smart contracts to be writeable on this platform in any standard programming language. The key driver of Hyperledger’s modular approach is to allow business participants to determine the consensus protocol to use, following their business needs.
Technology disruptive potential
Distributed Ledger technology is involved in potentially revolutionary innovations in many related areas: virtual currencies, distributed open and transparent record keeping, non-hierarchical networked systems, cryptography, and software engineering. Distributed ledgers have the potential to be radically disruptive. Their processing capability is real time, near tamper-proof and increasingly low-cost. They can be applied to a wide range of industries and services, such as financial services, real estate, healthcare and identity management. They can underpin other software and hardware-based innovations such as smart contracts and the Internet of Things. Furthermore, their underlying philosophy of distributed consensus, open source, transparency and community could be highly disruptive to many of these sectors.