What is distributed ledger technology? – End Tech

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Distributed Ledger Technology (DLT) is an umbrella term for a variety of network platforms in which data is stored in a shared ledger that is distributed across network nodes, rather than being stored by a single central authority. One of the best known examples of DLT is Blockchain, which provides the technical infrastructure for the Bitcoin cryptocurrency. The high profile of Blockchain in the field of finance, and increasingly in other sectors as well, means that the terms Blockchain and DLT are often used synonymously.

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The basic principle of a DLT can be understood with reference to the diagram above, which shows a network of peer-to-peer computing nodes that can communicate with each other directly. Each node has a copy of a digital ledger that stores the details of the transactions entered by the various nodes. When a new transaction takes place, a node commits that transaction to the ledger; the transaction is then validated by the other nodes in the network using one of several different consensus mechanisms. Once an agreement is reached, each of the nodes updates its copy of the ledger to include the transaction.

Each newly validated transaction is linked to one or more previous entries in the ledger to form a sequence of linked transactions. This is typically achieved by using a cryptographic hash function with each transaction block referencing a previous block by including a hash of that previous block within its header. The name “Blockchain” itself is derived from the way transaction blocks are linked in a chain; Other types of DLT have also been proposed in which the chain structure is replaced by a different type of structure to link transactions, such as a distributed acyclic graph (DAG). The serial linking of transactions in this way, coupled with the absence of a single centralized authority responsible for maintaining the ledger, means that the data stored in the ledger is very difficult to manipulate. Any modification of the data in a previous block will have a collateral effect in that the data of the subsequent blocks will also have to be modified, something that can only be done with the consent of the majority of the nodes in the network.

A particularly important development in the field of DLTs has been the introduction of smart contracts, which came to the fore with the emergence of the Ethereum blockchain. A smart contract is a piece of computer code that can be used to automate the execution of transactions on the blockchain, once certain criteria are met. For example, a smart contract could be used to record the transfer of a physical asset from one party to another, when an agreed amount of funds has been transferred from the transferee’s account to the transferor’s account.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought according to your specific circumstances.

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