What is distributed ledger technology (DLT)?

As we saw in our previous article, distributed ledger technology works as a kind of decentralized database, which is managed by several participants who are responsible for verifying and approving any changes to information through the database, without the need for a central authority.

A distributed ledger tends to increase user confidence, as it increases transparency in each transaction, minimizing or hindering any type of manipulation or fraud, making it a highly secure system.

Characteristics of distributed ledger technology (DLT)

Distributed ledger technology (DLT) has the following characteristics:

Decentralized system

Distributed ledger technology (DLT) is a decentralized digital system that operates through a network of nodes and is managed by multiple participants who are responsible for verifying and approving any changes to information across the network rather than relying on a central authority.

Consensus protocols

Distributed ledger technology (DLT) is characterized by having consensus protocols, through which all participants must validate transactions within the network through consensus protocols, such as proof of stake (PoS), proof of work (PoW), among others.

Immutable database

Distributed ledger technology (DLT) is characterized by an immutable database that can record transaction information, and once created, it cannot be altered or deleted.

Integrity and transparency

Distributed ledger technology (DLT) is characterized by ensuring integrity and transparency, allowing all network participants to observe transactions and associated information.

High level of traceability

Distributed ledger technology (DLT) is characterized by being a digital system with a high level of traceability, as it can accurately, transparently, and immutably record every transaction within the network. This facilitates data verification and approval, as it provides a history of all events.

Differences with blockchain technology

Due to its characteristics, distributed ledger technology is often confused with blockchain technology. Therefore, we mention their main differences below:

Category level

DLT technology has a “higher” category than Blockchain, since according to its category, we can say that all blockchain networks are DLT technologies, but on the contrary, not all DLTs are blockchain technology.

Applicability

Depending on the industry or sector, one technology may be more applicable than another. For example, a DLT can be adopted or implemented in the banking sector, allowing for simpler operations and lower fees. However, using a DLT does not necessarily require adopting blockchain technology as the primary system. There are other DLT systems that can be used for this purpose, such as Tangle, Hashgraph, DAG, Holochain, Radix, among others.

Place where the information is stored

Distributed ledger technology is a type of database distributed across different participants, sites, and regions. Blockchain’s operation, on the other hand, depends on the constant generation of blocks in which information is stored (these blocks are linked to others, generating a linked and immutable record of information).

Consensus

Blockchain uses specific consensus algorithms such as Proof of Work (PoW), Proof of Stake (PoS), or Proof of Authority (PoA) to validate and aggregate transactions. Distributed ledger technologies, on the other hand, use a variety of consensus algorithms depending on their requirements, allowing for greater flexibility in choosing the right algorithm for each specific case.

Main applications of DLT

Because distributed ledger technology (DLT) provides security, transparency, and decentralization to businesses, it currently has a wide range of applications that enable data and transaction management across a variety of industries.

Among the main applications, the following stand out: security and efficiency in transactions and operations of financial services, smart contracts, management of supply chain, Internet of Things (IoT), energy sector, voting systems, data management, and healthcare providers, among others.

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Cryptographic ledgers gained importance in the financial world with the rise of Bitcoin. Thanks to technological advancement, this type of ledger has become a fundamental component of various businesses, cryptocurrencies, and trading applications.

Crypto Ledger for Business

A cryptographic ledger for businesses is a digital ledger based on blockchain technology that records a company’s transactions. It is a decentralized database located within a wide digital network that records all transactions on multiple computers or locations, allowing each record not to be modified. An example of a cryptographic ledger is the Bitcoin blockchain, which records all cryptocurrency transactions since its creation.

Features of a cryptographic ledger

The main features of a cryptographic ledger are as follows:

Distribution and decentralization

The ledger is distributed among all nodes in the network, each maintaining a complete and synchronized copy of all transactions. This eliminates the need for a “central point of control,” which increases the security level.

It is important to note that cryptographic ledgers do not have a “central authority.” Instead, control is distributed among all nodes in the network, reducing the risk of censorship and manipulation.

Immutability

Once a transaction is recorded in the ledger and included in a validated block, that information cannot be modified or deleted. This is due to cryptographic hash functions (fingerprints) that link each block to the previous one, creating a chain with a high level of security and chronologically ordered.

Security

A high level of security is achieved through advanced cryptography. Each transaction is encrypted and authenticated using public and private keys, ensuring only authorized participants can make and validate transactions.

Consensus

New blocks of transactions are added to the ledger through consensus mechanisms, such as proof of work (PoW) and proof of stake (PoS), among others. These mechanisms ensure that there is consensus in the system and that all copies of the network’s ledger agree on the chain’s current state.

Interoperability

Cryptographic ledgers can interact with other systems and blockchains through common protocols and standards, facilitating integration and cooperation between platforms and systems.

Advantages of a crypto ledger

Cryptographic ledgers offer different advantages for businesses. Below, we mention some windows:

Traceability

A cryptographic ledger is characterized by traceability, which allows all transaction records within the blockchain to be tracked and verified. This feature allows businesses to track every transaction involving their digital assets (from the last transaction to its origin), ensuring a transparent audit process.

With a cryptographic ledger, businesses can provide proof of their transactions for regulatory compliance and verify the authenticity of transactions, which helps prevent fraud. Another advantage is that companies can monitor the movement of their assets in real-time, which significantly improves supply chain management.

Improved security

Company transactions are encrypted and stored securely using advanced cryptography, protecting data from tampering and unauthorized access. This level of security provides greater confidence to companies, their clients, and the users involved.

Reduces the risk of catastrophic failure

As the crypto ledger is decentralized, there is no central point of control, eliminating dependence on a single entity and reducing the risk of catastrophic failures and censorship. The collaboration of multiple nodes maintains the network.

Prevents fraud and manipulation

Once a company transaction is recorded and confirmed, it cannot be altered or deleted. This is achieved through unique digital signatures (cryptographic hashes), which function as unique “fingerprints” for the data of each transaction within the blockchain. If any data were to change, the hash would also change, which would be immediately noticeable as it would not match the previous hash stored in the ledger. This ensures data integrity and prevents fraud and manipulation within the company.

This information is very useful in financial transactions, legal agreements, and any other scenario where the integrity of the company’s data is a fundamental factor.

Reduction of operating costs

By using a cryptographic ledger, businesses can reduce operating costs in different ways:

• Because transactions on a blockchain are automatically verified using consensus algorithms, the time and costs associated with manual verification are reduced.
• Transaction settlement can occur in minutes (rather than days or weeks), reducing the cost of capital tied up during long settlement periods.
• Smart contracts automate the execution of agreements when certain conditions are met, eliminating the need for intermediaries to monitor and execute these agreements.
• Blockchain transparency facilitates auditing processes and transaction tracking, reducing operational costs and time spent on internal control activities.

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Slow transactions

Due to the characteristics of Bitcoin, some people think that Bitcoin payment processors’ transactions are slow. While it is true that confirming a transaction may take some time due to the mining process, these payment processors often implement techniques and protocols to speed up this process and streamline transactions. An example of this is the Lightning Network, whose creation improved Bitcoin’s scalability, allowing actions that normally cannot be performed in the Bitcoin network, to be one of its main improvements, the execution of transactions instantaneously and with a low cost in its commissions.

Centralized payment network

Another myth about payment processors for Bitcoin is that it operates under a centralized network. However, Bitcoin and the blockchain are decentralized. For example, validation in Bitcoin is decentralized because it is done through a process called mining, in which miners compete to solve complex mathematical problems. This distributed consensus process ensures that all transactions are valid and correctly recorded on the blockchain without relying on a central authority.

Another outstanding feature of Bitcoin and blockchain technology is that it has a geographic distribution of nodes, which are geographically distributed around the world, allowing the network not to be concentrated in a single location or jurisdiction, making it resistant to targeted attacks or interference or influence by a single entity or government.

Low flexibility

Many people believe that payment processors for Bitcoin are not flexible since, being a cryptocurrency, some think that its use is limited exclusively to Bitcoins, leaving aside FIAT money. However, such processors allow receiving payments in Bitcoin and automatically converting them to FIAT money, which gives great flexibility to the business or merchant using such payment processors.

Difficult to use

Some people may believe that payment processors for Bitcoin are hard to use. While blockchain technology may be complex for some people to understand, payment processors have a second purpose as they were created to simplify business transactions and are accessible to everyone, which requires their interface to be intuitive and user-friendly. Currently, many Bitcoin payment processors have the same interface (and level of complexity) as any other conventional (FIAT currency) payment processor on the market.

Unsafe tool

Another myth about these payment processors is that they are insecure financial tools. Although throughout the history of Bitcoin, vulnerabilities have been found in some systems and payment processors, the truth is that these have occurred due to inadequate protocols and security measures.

Thanks to blockchain technology features such as cryptography, decentralization, privacy authentication, and better security procedures and measures, there are now a variety of payment processors that have a high level of security. An example of this is Pilsenga‘s payment processor for Bitcoin, which is compatible with Lightning Network and is designed especially for medium-sized companies.

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Next, we will learn about some of the applications of Blockchain technology in the banking and financial sector.

Creation of new financial products and services

With the adoption of Blockchain technology in the financial and banking sector, new products and services have been developed, including decentralized applications, wallets, tokens, micro finances, digital coins, and smart contracts, among others.

For example, smart contracts offer several advantages in the banking and financial sector since their design is oriented to execute automatically when particular predefined conditions are met; this means that execution rules are clear and transparent for all parties involved, and additionally, users or participants can easily verify the conditions of the contract and its execution.

The execution of smart contracts instantly and automatically (once predefined conditions are met) leads to a significant reduction in transaction processing and settlement times, which also improves operational efficiency and reduces the risk of human error.

Audit and compliance tools

With the adoption of blockchain technology, the banking and financial sector has been able to develop tools dedicated to auditing and regulatory compliance, resulting in transactions obtained in a faster, more transparent, and more effective way, assisting in making the auditing and monitoring processes of financial activities (by supervisor or regulatory entities) more efficient and easier to use.

Credit information systems

Blockchain technology enables the creation of more secure and reliable credit information systems, allowing multiple tasks, functions, or processes effectively, such as:

– Manage credit information.

– Provide and confirm shared records.

– Manage and verify financial activities.

– Credit rating.

– Verify and protect customer privacy.

More efficient payment-clearing systems

Blockchain technology enables the development of efficient payment-clearing systems. Here are some examples:

– Distributed clearing mechanisms that allow for more efficient and secure interbank payments.

– Transactions with greater liquidity and transparency.

– Reduced risks and financial transaction costs.

– More efficient and secure cross-border payments.

Tools for the inclusion of the unbanked population

The banking and financial sector (relying on Fintech and blockchain technology) has been able to develop specific tools for the unbanked population, which has allowed their inclusion in the financial system and digital economy, as people can access blockchain-based financial services from anywhere in the world, as long as they have an internet connection.

Blockchain technology enables peer-to-peer financial transactions without intermediaries such as banks or other financial institutions; this reduces the costs associated with financial services and makes them more accessible to low-income people.

An example of this is blockchain-based digital wallets, which allow people to store, send, and receive digital money and cryptocurrencies without the need for a traditional bank account; this is very useful for people who do not have access to traditional banking services but do have a cell phone with Internet access.

Identity and personal information management

Blockchain technology can lead to the creation of efficient, decentralized, and highly secure digital identity systems; this allows banking and financial sector users to have control over their personal information and selectively share their identity data with certain financial institutions and other online services.

Fraud prevention and money laundering

Blockchain technology can help prevent fraud and money laundering by providing an immutable and transparent record of all financial transactions. Financial institutions can analyze data and create algorithms to detect suspicious patterns and fraudulent activity in real-time.

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Blockchain technology became known globally thanks to the popularity of the Bitcoin cryptocurrency; however, different sectors use blockchain technology. Following, we will learn about the main characteristics of this technology:

Decentralized system

The blockchain is a technology based on a decentralized system since the users control the network operation without requiring a central authority. Data transfer in a blockchain does not need a “third party” to certify the information since it is distributed among multiple independent and equal nodes, which examine the data and validate it autonomously.

Transparency

All transactions made on the blockchain are visible to all network users, as every node in the network has access to the same information, creating a high degree of transparency and trust in the system. Significantly, each transaction on the blockchain is permanently recorded and can be traced back to its origin; this allows participants to examine the transaction history and verify the authenticity and integrity of the data.

Verification of traceability

Blockchain is identified as a system that allows tracking and verifying the traceability of all the information that has been recorded in each of the nodes along the entire blockchain, which allows visualizing each of the operations that have been carried out. Importantly, assets on the blockchain often have unique identifiers (hash codes or specific addresses), which make it easy to track the provenance and movement of assets along the blockchain.

Immutable records

Blockchain technology is characterized as a system whose records are immutable since the information of each of its operations and transactions cannot be changed, modified, or deleted within the network. This feature makes the blockchain work as a digital ledger where all operations are recorded.

System with a high level of security

Blockchain technology comprises a series of distributed and interconnected nodes (forming a network) responsible for recording and providing cryptographic data protection. In this way, the system generates a copy in each node through which the information passes, which makes it difficult to falsify the data recorded along the blockchain. It is essential to note that each of the components that make up the network constantly verifies and validates the rest of the blocks, which provides the system with a high degree of security and reliability.

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Distributed Ledger Technology (DLT)

Distributed Ledger Technology, or DLT, is a decentralized database managed by several participants responsible for verifying and approving any information change through the database without a central authority. A distributed registry tends to increase the confidence of its users since it increases the transparency of each operation, which minimizes or hinders any manipulation or fraud, making it a system with a high level of security.

Blockchain technology

Blockchain technology is characterized as a decentralized database that works through a series of interlocking blocks (which refer to its name since they form a “blockchain”); when these blocks are created, they are closed with a cryptographic signature (hash), with which the next block is opened, then, when completing the operation, such information is certified and encrypted, which makes this information very difficult to manipulate.

Category level

One of the main differences to highlight between the DLT system and blockchain system is that DLT technology has a higher category than the Blockchain sort because, according to its class, we can say that all blockchain networks are DLT technologies but, on the contrary, not all DLTs are blockchain technology. For example, in the case of sports, we can say that 100-meter running is a discipline of athletics, but we cannot say that athletics is 100-meter running.

Place where the information is stored

Another significant feature that makes a difference between DLTs and blockchain is the site where the data is recorded or stored. Distributed accounting technology is a database distributed among participants, places, and regions. On the other hand, the blockchain’s operation depends on the constant generation of blocks that store the information, linking these blocks with others (creating the known blockchain), and finally generating a linked and immutable record of the information that these blocks will store.

Consensus

Consensus is another difference between these two technologies; in the case of blockchain, specific consensus algorithms such as Proofs of Work (PoW), Proofs of Stake (PoS), or Proofs of Authority (PoA) are used to validate and aggregate transactions. On the other hand, distributed accounting technologies use a variety of consensus algorithms according to their requirements, allowing for more flexibility in choosing the correct algorithm for each case.

Applicability

The applicability of these two technologies is another notable difference, as depending on the industry or sector, one may be more applicable than the other; for example, a DLT can be adopted or implemented in the banking sector, allowing its operations to be smoother and have fewer commissions, although not necessarily using a DLT requires adopting Blockchain technology as the principal system since we can use other DLT systems for that purpose, such as Tangle, Hashgraph, DAG, Holochain, Radix, among others.

Cryptographic ledgers

As we saw in our previous article, an example of distributed accounting based on blockchain technology can be cryptographic ledgers, which can validate and store all transactions in a system. Thanks to cryptography, each record is kept unchanged and independent within the blockchain, which makes it difficult to modify data in that record. Cryptography encrypts the data, making the information stored and sent intelligible, especially for those users with external or restricted access.

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Bitcoin Scalability

Bitcoin was not only the first cryptocurrency but also the first blockchain, which has been taken as a reference by different generations of cryptocurrencies in the market. However, despite being an extensive and strengthened network, Bitcoin’s scalability was affected by the high traffic and use of the same, which is why its fees and waiting times (for each transaction) were increasing. Due to this problem, studies on Bitcoin’s scalability began to be carried out to improve the network and have faster and less costly transactions.

Lightning Network

Lightning Network is a protocol designed to improve the scalability of Bitcoin; with this protocol, it is possible to perform actions that usually cannot be performed in the Bitcoin network. One of its main improvements is the execution of transactions instantly and with a low cost in their commissions. All this is possible because the Lightning Network protocol design appoints to work in a second layer over the Bitcoin blockchain.

It is essential to note that the Bitcoin network can only process between 7 to 10 transactions per second; however, thanks to Lightning Network, this problem was solved, increasing its processing capacity.

The Lightning Network’s capacity to handle transactions per second depends on many factors: the number of nodes and payment channels in the network, channel capacity, and available liquidity, among other technical elements. In theory, the Lightning Network could handle thousands or millions of transactions per second, provided it has sufficient adoption and capacity.

Operation

The development of the Lightning Network protocol and its payment channels lies in the soft fork (software update) designed by Segregated Witness (SegWit) that served as a solution to the “non-malleability” property of Bitcoin transactions, thus allowing for a breakthrough in network scalability. 

Regarding its operation, Lightning Network has four stages or outstanding features: payment channels, off-chain transactions, routing, and channel payments/closing.

Payment Channels

The Lightning Network lies in the bidirectional payment channels between two interested parties. Such routes operate as “virtual routes” through which transactions can flow without registering on the blockchain. To enable a channel, the two parties involved create a transaction on the main Bitcoin blockchain (this enablement has a transaction fee).

Off-chain transactions

After enabling the payment channel, the two parties can carry out transactions “outside” the main chain, registering the information in their local nodes. In this case, such transactions can be instantaneous and fee-free.

Routing

When one party (on the payment channel) wishes to send funds to another party that has no connection to its route, Lightning Network will use a “routing” system to find a “path” through different intermediate channels. Each node in the network has information about the capacity of adjacent channels and can calculate routes to transmit funds securely and efficiently.

Payments and channel closure

Payment channels can remain open as long as the parties involved see fit. When users decide to close a channel, they can do so through a final transaction, which the primary Bitcoin blockchain records, allowing the parties to access the funds they held in this channel. The prime blockchain records the final balance, and the parties involved can withdraw their funds to their respective Bitcoin addresses (unique alphanumeric strings used to receive payments on the Bitcoin network).

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What is a ledger?

An accounting ledger is a document in which the financial movements of a company or entity are registered. This document includes all the financial activities, which allows an orderly and precise follow-up of all the economic and financial operations of the company. The accounting book also serves to audit, with which other people can know (through interpreting its data) how the company or entity is being managed, especially from the financial point of view. 

Cryptographic Ledgers

Thanks to the advancement of technology and blockchain, digital ledgers had a significant breakthrough in recent years, as they had two critical factors to provide greater security to their database: cryptography and data control and verification algorithms.

These two factors allowed the development of cryptographic ledgers, in which all system transactions can be validated and stored. An example is the Bitcoin blockchain, where all transactions are recorded and protected with cryptography. 

It is essential to mention that, thanks to cryptography, each record is kept unchanged and independent within the blockchain, so it is tough to change any data in that record. Through cryptography, data is codified, allowing the information stored and sent to be intelligible to users with external or restricted access.

How do Cryptographic Ledgers work in a blockchain?

Transactions within a blockchain are grouped into blocks and added sequentially to the ledger. Each block contains a cryptographic “hash” generated using information from the previous block, creating a chain of   “interlocking” blocks. This feature makes it challenging to modify a prior transaction without changing all the following blocks, which provides an “extra layer” of security against data manipulation. 

Purpose of Cryptographic Ledgers

The primary purpose of a cryptographic ledger is to store (securely) all transaction data within a crypto asset’s network. It is important to note that cryptographic ledgers can be private and public, which allows them to be used in different environments. Among the advantages of cryptographic ledgers are the following:

– It allows having a system with a high level of security.

-It facilitates the control, auditing, and transparency of data.

-It allows immediate (and accurate) access to the history of all transactions within the network.

-It allows maintaining the anonymity of its users (optional.)

“Public” Cryptographic Ledgers

“Public” cryptographic ledgers are digital documents or systems within a public access network (open access), which allows any user to access the record at any time. This type of ledger is characterized as a digital decentralized document since an entity does not control them. Although each transaction is publicly recorded, users still have a private identity or pseudonym. An example of public cryptographic ledgers is the Ethereum and Bitcoin blockchain.

“Private” Cryptographic Ledgers

“Private” cryptographic ledgers are digital documents or systems within a private access network (limited access), only authorized users or network administrators can access them. This type of ledger is characterized as a digital document controlled by its owner, an individual, company, or organization. 

This type of ledger allows defining special rules for each user, thus getting access and visibility of all data independently but limitedly. When a data or record is added to this ledger, it must be approved by the authorized persons or administrators of the blockchain. Generally, this type of cryptographic ledger is used at the institutional, corporate, banking, or financial system level.

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