Distributed Ledger Technology, the basis of the Bitcoin Blockchain

This is the second in a series of articles intended to describe blockchain (the data storage underpinnings of Bitcoin) from the ground up. Too many articles are using terms inaccurately or presuming prior knowledge on your part. We intend to rectify this with just a bit of your patience. Our first article distinguished between Bitcoin and blockchain and clarified some common misconceptions.

Blockchain is one example of a distributed ledger technology (DLT). Let’s start by thoroughly understanding DLT.

The place to start is with a brief history of ledgers, which were invented by medieval firms (traders, bankers) to track their company’s assets, liabilities, and net worth. These ledgers were private and specific to each company. When an importer in Antwerp purchased a consignment of spices from an exporter in London, both firms recorded the transaction in their private ledgers. If a bank in Brussels financed the trade, its own private ledger further described the transaction. None of these firms had any visibility into the others’ ledgers.

A distributed ledger is an altogether different creature. A product of the computer network age, a distributed ledger is shared among multiple entities (nodes). Here is the difference: each node sees the same exact ledger. When one node updates its copy of the ledger, the transaction is sent over the network to all of the other nodes, who make the same update. There is much more to the story: how consensus is achieved, how nodes are permitted access and roles, how business logic is performed, how we disintermediate trust, and the use of cryptocurrencies. But these are all details of specific DLT implementations such as the Bitcoin blockchain, the Ethereum blockchain, or the IOTA DAG implementation. (These details will be the subject of future articles).

Unlike a traditional database, a distributed ledger contains a running record of all transactions since its inception. This makes it ideal for regulatory compliance or verifying the provenance of a product (e.g., that your tuna fish was harvested sustainably or that your sparkling gems are not blood diamonds).

There are several basic DLT topologies. A public shared ledger is open to all on the internet. A good example is the Bitcoin blockchain. Anyone can become a node, create transactions, and participate in transaction validation. No identify management is required.

A private shared ledger is open only to a strictly known subset of nodes. These may be specific members of a financial network or supply chain. Identity management is a prime requirement. A private DLT may span entities or it could be made up of different departments within the same organization.

The Federal Reserve Bank is interested in distributed ledgers to improve the payment, clearing, and settlement process (PCS). DLT has the potential to improve settlement times, reduce expenses, and generally remove frictions and inefficiencies in the financial system. Ripple, a company whose service is based on DLT, now offers global payment services. “Ripple connects banks, payment providers, digital asset exchanges and corporates via RippleNet to provide one frictionless experience to send money globally.”

IBM is currently working with Walmart and others to implement DLT-based Supply Chain Management (SCM). Based on Blockchain, it “enables equal visibility of activities and reveals where an asset is at any point in time, who owns it and what condition it’s in.”

Customers of Brooklyn Microgrid are using DLT-enabled smart power meters to buy and sell locally generated power. “Residents with solar panels can sell excess energy back to their neighbors, in a peer-to-peer transaction which takes advantage of blockchain.”

This stuff is real. There are still many challenges to overcome such as scalability and performance. But there is a substantial amount of research and development going on with significant investment from government, academia, and industry.

In future articles, we will explore specific implementations, such as the Bitcoin blockchain, and describe them in greater depth. In the meantime, enjoy the ride. You are seeing something truly historic.