Distributed Ledger Technology and Blockchain aren’t same – Here’s all you need to know
The cryptocurrency boom is well and truly upon us. Everybody and their dog is talking about Bitcoin, Ethereum, Blockchain and possible investment opportunities. Sometimes, the term “distributed ledger technologies” gets thrown here and there. We are, in every sense of the word, overwhelmed with the sheer amount of stuff going on around us.
Now, for all us simpletons out there, whenever we hear the words DLT and blockchain, we instantly perceive them to be one and the same thing. Essentially, for all intents and purposes, when one uses these terms interchangeably, one isn’t wrong. For instance, if you say bitcoin is powered by DLT system instead of blockchain, your fundamentals are correct. But, at the technical level, there is a difference between distributed ledger technology and blockchain. Here, we attempt to make that difference clear to you.
What powers DLT and Blockchain?
There are a few basic concepts that one may need to understand in order to get a good grasp of how DLT works, and also to understand the difference between distributed ledger technology and blockchain. These concepts include hashing, Merkle trees, protocols and the like.
Let us get started on these, one by one.
In layman language, hashing is the process of assigning a specific code to a certain piece of data. The data can be anywhere from strings to numbers. According to set criteria, the code called a hash of the data, is calculated. These set criteria are known as the hash function. A simple hash function would be
Which returns the remainder of division of a by 10 as its hash value.
Sure, this is an immensely easy to crack hash, therefore, more complex hashes are used for practical purposes.
Hashing is put to use in DLT and blockchain, the difference between distributed ledger technology and blockchain being negligible at least in this regard, as the data is linked to each other using a cryptographic hash of itself. For instance, in blockchain, a block of data stores hashes of the transactions taking place, and a hash of the previous block, which helps it link to the other data.
One of the most secure hashing algorithms is the SHA256 algorithm, which is actually used in the bitcoin systems.
Continuing from the point of hashing, merkle tree or a hash tree is a special data structure, where all leaf nodes contain hashes to a particular data, and all non-leaf nodes contain hashes to their leaf nodes. Hence, the name hash tree.
Merkle tree is put to use in DLT and Blockchain as each individual piece of data actually contains a merkle root, which is a hash of all the hashes contained inside the block or record. Thus the merkle root can be used to classify collective data and in turn validate the block.
PoS and PoW
Proof of Stake and Proof of Work are two validating methods used to verify the integrity of data stored in DLTs and blockchains. Both work on separate algorithms and have different procedures.
The proof of stake method takes into consideration the wealth or age of the current user who is wishing to validate the transactions, wealth here referring to the number of transactions already verified (coins earned in the case of bitcoin), and age referring to time on the network. Along with this, it also considers a random factor and sums both the factors up to determine which node will verify the transaction next. This method has the underlying problem of already rich nodes getting more number of transactions, and the relatively poorer nodes having less chances of being able to participate.
Proof of work is based on any number of nodes verifying a certain transaction by solving complex mathematical problems. Whichever node solves the problem first, relays the solution to all the nodes. If a consensus is reached, the node which solved the problem gets the right to add a block in the chain and start a transaction in its name.
These were a few fundamentals one should be knowing in order to understand DLT, blockchain and the difference between distributed ledger technology and blockchain better.
But what really is the difference between distributed ledger technology and blockchain? Don’t worry, we have it all here.
Distributed Ledger Technologies
Distributed Ledger Technologies, are essentially the tech to transform the ledgers in the various industries across the globe. To understand Distributed Ledger Technologies, let’s go back to the stone age and start by understanding what ledgers are, and how DLTs are crucial for their disruption.
LEDGERS – FOUNDATION OF ACCOUNTING
Ledgers have been around ever since the stone age. From clays and stones to papyrus and paper, Ledgers have sure come a long way to make the process of accounting more efficient and streamlined. The most notable transformation was witnessed, regarding ledgers, in the 80-90s, when COMPUTERISATION (not digitization, honestly!) happened.
We say Computerization, and not digitization because other than the logistics of papers from one place to another, not much had changed. Paper-made entities were, and still are the backbone of economies around the world to a large extent. These paper-made entities include money, seals, notary documents, certificates, bills and much more.
However, the advent of Cryptography and advanced algorithms have enabled the ledgers to go distributed and decentralized.
That’s what Distributed Ledger Technologies are:
To begin with, Distributed Ledger is essentially a database available to the large number of participants in that network. Each participant is called a node, in those large networks. But wait, What’s so special in it?
The distribution, and flow of information and data.
In the distributed ledgers, the records are held and distributed independently across all the nodes in a decentralized manner, unlike the conventional methods where the records have to be communicated through a central authority.
Every single node over the network processes each and every transaction and makes conclusions. This is followed by followed by voting on these conclusions in order to achieve a consensus. Following this, the distributed ledger is updated and all the nodes are made to maintain a copy of the ledger.
Over to Blockchain!
Blockchain is a specific type of distributed ledger technology. Many people believe blockchain and DLT to be the same, but simply put, there lies a difference between distributed ledger technology and blockchain. When the continuously growing database is stored as blocks and linked to each other via cryptography, the result is what we call a blockchain. Note that all blockchains are DLTs, but not all DLTs are blockchains. This is, on a basic level, the difference between distributed ledger technology and blockchain.
It was invented by either an individual or a group of people under the pseudonym Satoshi Nakamoto in 2008, for its use in the cryptocurrency Bitcoin, developed by the same entity next year in 2009.
The system is still very new in the technical world. However, blockchain presents promise and potential like no other technology. The reason that blockchain is so hyped as of now is that it serves as a measure of transparency like no other. It removes the need for a third party, a controlling or governing body to watch over the transactions or activities taking place in the database or network.
Due to the nature of the network operations, wherein every node on the network has a copy of each transaction taking place on the network, blockchain allows for the validity of transactions at any time, and prevents any corruption and/or redundancy in the network. Real life examples include the Bitcoin, which is powered by a blockchain system only. Not only cryptocurrencies, blockchain has many other real-world applications as well, which will be discussed in due time.
Blockchain and DLT. They’re the same, aren’t they?
To make it short and crisp, no, they aren’t the same thing. There exists a fundamental distinction, a difference between distributed ledger technology and blockchain. Blockchain, as mentioned before, is a specific type of DLT. The difference lies in the fact that data is stored and added to the network in form of blocks, which are then connected to each other using cryptography and hash techniques, thus forming a chain of blocks, hence the name blockchain. It possesses all the qualities of a DLT, most notably decentralization, node verification and transparency, and reduces duplication and corruption across the network.
The sequence of blocks in a blockchain is what constitutes the difference between Distributed Ledger Technology and blockchain. No such chaining is required in a generic DLT system, and it is this feature of a blockchain that enables it to be used as more than just a simple data structure. Proof-of-work and chaining are not necessary in a DLT, whereas in a blockchain, it forms a major part of the working of the system.
Some implementations can make use of both generic DLT and blockchain, but this may not be necessarily true for every project focusing on either of them.
Types of blockchain systems
Depending on the use and project type, different types of blockchain systems can be put into use.
Public blockchain systems are basically protocols which operate on proof-of-work consensus algorithms. This means that every transaction taking place on the network must be verified by a node on the network, which then passes on the proof to all other nodes. Only when a consensus is reached and the proof is accepted by all the nodes, is the transaction validated. Public systems are open source and not regulated by any third party. Anyone can participate and run a node on their own device, and be a part of the network. Anyone can read any transaction taking place on the system, although the transactions are anonymous to protect privacy.
Examples of this include bitcoin, litecoin, and other models, which benefit from the fact that decentralization costs are drastically reduced due to no need for maintaining central servers.
This type of a system is more restricted than a private blockchain. Write permissions are limited to the owning company or individual of the blockchain and read permissions may be given to a specific set of people, who validate the transactions internally. They have certain security disadvantages over public ones, as the public blockchains are secured by numerous incentive mechanisms and algorithms, due to the large computing power available to public blockchains.
Examples of this include multichain and MONAX, which have implemented this tech to reduce transaction costs and do away with the traditional file handling systems.
Federated blockchains run under the leadership of a specific group or federation. Normal individuals are not allowed to participate in the transactions and verification processes. They have a scalability advantage to them, though. Consortium blockchains are mainly used in the banking fields, this may include a bunch of companies or organizations which operate a node each and validate the transactions taking place on the network.
Examples of these systems are R3, Corda and EWF.
Some might argue that private and federated/consortium blockchains cannot be really considered as blockchains. The general consensus is that they will be equivalent to the Intranet of old, but it remains to be seen how it pans out.
Where is blockchain used currently?
Currently, blockchain is mainly being utilized in the financial sector. Companies and individuals alike are starting to recognize the power that blockchain affords them, and are beginning to open up to the use of this technology. Banks and economies are a little hesitant due to its decentralized nature, but even they are open to developing systems based on blockchain albeit controlled by a central organization. Arguably, it can be said that it was bitcoin which made blockchain famous, which made blockchain the word on everyone’s lips.
Bitcoin and other currencies utilize the blockchain systems to record transactions and validate them over the network using the proof-of-work concept. The blockchain system used by bitcoin has been in the news mainly due to it being public and permissionless. Anyone can start running a node on their own device, start verifying transactions and be rewarded with bitcoin. This works because of a coordination framework and contracts for all participants, despite not being regulated by a central body.
Okay, but can there be any other implementations of it?
Blockchain has shown promise that no other technology has. Therefore, it is obvious that people have started working and taking advantage of this revolutionary system. Some implementations include-
Blockchain as a service
Many big software giants have tied up with other companies to create their own blockchains, which they offer to their users. This does away with the need for creation of separate blockchains for the end users and hardware investments.
Here, we decide the plan and approach for solving a problem first, then we move on to building a solution which incorporates the blockchain within it. Hyperledger is such an example.
APIs and overlays
Here blockchain is used as an ownership asset infrastructure, and applications are built with a specific focus on chains of proof, ownership etc with an included trust component.
Unlike the development platforms, here blockchain tools are required first of all to work with. A setup and assembly of a working blockchain is required, which provides a good amount of experience in building decentralized applications.
This sector has seen a quick rise in the past year or so, mainly in the financial sector. They are based on blockchain capabilities, sometimes not even being fully blockchain based, but DLT-based.
Therefore, from all this information, we can conclude that blockchain is a tech that shows potential, and can be put to use in various industries and sectors. Ultimately, the specifics of the tech being used depending on the requirements of the industry, it depends on what they want. Thus the best available technology should be used to create tailor-made solutions for each sector, and blockchain can definitely be put to use in a large number of these.
So, this was all there is to know about DLTs, blockchains and the difference between Difference Ledger Technology and blockchain.
To put it into simple words, DLT is a system of storing data in a decentralized manner, where all nodes on a network have information about everything happening on the network. The difference between Difference Ledger Technology and blockchain is that blockchain is just a specific type of a DLT, wherein the data is stored in the form of blocks, which are chained together using cryptographic hashes, in order to form a chained, linked database known as blockchain.
The X-factors of blockchain systems are that they can add logic at the transaction level itself, meaning they can implement constraints and contracts for transactions to take place, as is the case with ethereum, where smart contracts are the basis of transactions. This logic feature is the essential difference between distributed ledger technology and blockchain.
All the different types and feature sets of DLTs enable us to use different ideas of DLT in our projects, as per the need of the project. Thus, whatever technology is seen best for the job can be used to make the project a successful one.
DLT is a tech that is receiving backing from huge world bodies, such as the World Bank, which believes that it can be a huge bonus in the financial sector. The World Bank has been in contact with major players in the industry and admits that DLT and blockchain-based applications could be a thing of the future. Waiting for DLT to mature into something big could be a mistake, as was the case with the internet, the incentive needs to be taken by shareholders to shape it into what they want DLT and blockchain to become, thus ultimately playing their part in enhancing a world-beating technology.
Eventually, blockchain and DLT could find their way into each aspect of our lives, such is the vibe given off by this exciting piece of tech. With the difference between Difference Ledger Technology and blockchain now clearer, potential innovators can look into this field further.
What about our blockchain capabilities?
We at sodio.tech believe that blockchain and DLT systems must be shaped into what we want them to become, that too without delay. We understand the difference between distributed ledger technology and blockchain, and are willing to work towards enhancing the blockchain sector. Thus, we have a developer team of 20+ blockchain developers who are extremely skilled in every aspect of the blockchain, and can give you personalized solutions to all your blockchain needs.
Our previous projects include operating models design, advisory on system architecture and full-scale systems integration, among other development projects.
With loads of experience and a talented team, sodio.tech is sure to fulfill all your blockchain requirements.
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