distributed ledger technology dlt
Reading Time: 4 minutes

What is Distributed Ledger Technology (DLT)?

Distributed ledger technology, or DLT, refers to a system of recording transactions where data is copied and distributed across multiple computers (or nodes) around the world. These nodes are anonymous but work together to keep their copy of the records up to date to maintain consensus (one source of truth).

DLT provide the foundation for a decentralized database that is not owned or controlled by one central authority. Because data is duplicated across many computers, tampering and manipulating records is very difficult. The majority of nodes will always provide the correct data. As a result, DLT creates a secure, immutable database to store information that cannot be deleted or changed.

This type of distributed and decentralized database is the underlying technology of a blockchain. Bitcoin, the peer-to-peer electronic cash network, uses DLT to record transactions on its blockchain network.

Bitcoin and Distributed Ledger Technology

When a Bitcoin transaction occurs, that transaction is added to a “block” of data on the Bitcoin network. Bitcoin’s blocks are created once every 10 minutes. These blocks of data make up a “ledger”, a collection of accounts and account transactions. Each block is linked to a previous block, forming a chain of blocks that keep track of where each Bitcoin is sent to.

With DLT, a copy of this ledger of transactions is distributed and kept on the storage devices of miners and nodes. Miners are computer software and hardware setup by individuals to validate the transactions added to each block. Nodes, however, only keep a record of the Blockchain network and do not participate in mining.

What is Bitcoin Mining

Like mining gold, the equipment has to be set up to extract the rock from the ground. In Bitcoin mining, people set up Application Specific Integrated Circuit miners, ASIC miners for short to process computer code to mine Bitcoin.

Bitcoin mining encourages the network to keep operating and validating transactions. With no miners, transactions will not be processed.

To approve transactions for the next blocks of data, miners solve a complex cryptographic math problem with their computer hardware and software. The first miner to solve this problem for a block is rewarded with Bitcoin. In the Bitcoin network, each block occurs every 10 minutes. A miner that solves a block receives 6.25 Bitcoin, with this number halving every 4 years.

Currently, there are about 18.8 million out of 21 million Bitcoin mined, with all the supply expected to be mined by the year 2140

Proof of Work

The mining procedure described above refers to the Proof of Work consensus mechanism. Miners must “work” by expending electricity to guess a random string of letters and numbers called a “hash”. Each block has a hash that needs to be guessed to validate and record the transactions that occurred in the last 10 minutes. Because of trial and error, as well as competition from miners and nodes across the world, solving a block is extremely difficult.

However, when the first miner guesses the hash of a block correctly, it will receive Bitcoin as a reward. The miner also provides the answer (the proof) to other miners and nodes across the network who verify the answer themselves. This results in the ledger being updated simultaneously across all nodes, reaching consensus. Miners then proceed to solving the next block for the next set of transactions.

Permissionless vs. Permissioned DLT

Although the DLT we mentioned above is decentralized, a blockchain can either function as a permissionless or permissioned blockchain. Bitcoin is a permissionless blockchain because anyone can join the network as a miner, as a node, or just as a user performing a transaction.

A permissioned blockchain requires approval from a central authority to join the network, where they can validate or view transactions. Permissioned blockchains are considered private blockchains with a higher degree of centralization.

The benefits of a permissioned blockchain include higher security and faster transactions. However, they lack transparency and are more vulnerable to hacks and bad actors due to their centralized nature.

The Power of Distributed Ledger Technology

DLT and blockchain are changing the way we transact with one another. It enables us to move value and perform financial transactions without any intermediaries being involved.

New applications like DeFi and NFTs have exploded in the blockchain space and only time will tell what comes next!

Share on facebook
Share on twitter
Share on linkedin