Distributed Ledger Technology (DLT)

Before introducing blockchains, it is essential we become familiar with the concept of Distributed Ledger Technology (DLT) because a blockchain is a particular type of DLT.

A DLT is used to solve the fundamental problem that digital systems exist for i.e., handling information. So, a Distributed Ledger Technology (DLT) is a trusted system where information can be read and exchanged through transactions.

It is not a novel technology in the Information Technology world, but the difference is in the way a DLT administrates the process of storing, delivering, and modifying the information.

Data centralization

Traditionally, the problem of information handling was solved years and years ago by databases. The first databases were thought of as centralized systems, where all data is stored and maintained in one place by one organization or company.

Centralized databases are still used by small organizations and have their advantages, but when things become bigger and the amount of data and transactions increases, keeping all things in the same place is rarely a good idea.

There are two main reasons:

• Performance: A single point of access for data could easily become a bottleneck if multiple users are trying to access data at the same time.

• Availability: Failures of the database mean data is no longer accessible to anyone.

Data distribution

The natural evolution of this kind of system was a distributed database. This kind of database can be designed and realized in a lot of different ways. However, the distinctive feature behind its conception is that data is maintained and accessible across different places (nodes) in a network. 

Some mechanisms and protocols ensure that data remains up-to-date and consistent across the nodes. Users can connect to any node in the network and deal with the same data. So, data is physically distributed but, from the users’ perspective, the data source is unique.

Distributed databases ensure better performance and more resilience to failures because the load is divided across the nodes—-so, if one node fails, the user has the option to connect to another node.

However, distributed databases have to deal with problems such as:

• Data synchronization: Manipulation of data requires time to propagate to all nodes.

• Data consistency: When data is distributed, consistency is not easy to preserve. (E.g., sometimes the data in different nodes does not match.)

Data decentralization

Typically, traditional distributed databases are owned by a central trusted authority (i.e., one or more organizations with a common objective) administrating the key functions of synchronizing and maintaining consistency.

A DLT has several nodes as distributed databases, but, by contrast, it is designed to successfully work without the need for a central authority. 

Nodes of a DLT can be located in different sites and countries and can belong to different institutions, companies, organizations, or governments. Participants do not need to trust each other because no one has the power to tamper with the information stored in the system.

This is accomplished with:

• Supporting network infrastructure: Each node is connected to other nodes (peers) in a P2PA peer-to-peer (P2P) network is a type of network where each computer is a node, or participant, and can both send and receive data. All computers on a P2P network are considered equal and every computer can act as a client or a server. This type of network is decentralized, meaning there is no single, central server, and all of the computers on the network are connected directly to one another. (peer-to-peer) network, without the need for central coordination. No node is more important than another and is in charge of maintaining the network.

• Consensus algorithm: A set of protocols and rules so that nodes can reach an agreement about changes in data.

Each node has an identical copy of the data that can be changed only through a transaction. When a transaction is submitted to a node:

• It is broadcasted to the network.

• The nodes process and validate it independently.

• The nodes use the consensus algorithm to agree on changes to the data.

• When a consensus is reached all nodes update their copy of the ledger.

As mentioned before, a blockchain is a type of DLT where transactions are grouped in blocks. The nodes of a blockchain do not validate a transaction one at a time but as a block. Blocks are linked together to form a chain—hence the name "blockchain."