If you ask the average cryptocurrency enthusiast what the technology behind Bitcoin is, there is a good chance that he or she would answer “blockchain technology.” And, although that answer is not necessarily wrong, it is certainly incomplete. While Bitcoin ‘runs’ on blockchain technology, the blockchain itself works by using what’s called distributed ledger technology (DLT). Read on to learn more about this technology and its potential uses beyond cryptocurrency.
What is Distributed Ledger Technology (DLT)?
The traditional ledger that accountants are familiar with is a general ledger. These are centralized databases that operate out of a fixed location, controlled by a central administrator. A general ledger has a single point of failure; if the centralized database is compromised, the whole ledger is vulnerable to manipulation. In contrast, a distributed ledger is a ledger is hosted and updated independently by multiple participants (each called a “node”) in a large network. The ledger is “distributed” because the various nodes share and synchronize copies of the ledger independently. Then, collectively, the nodes verify transactions through a consensus protocol with clear and auditable history.
What Are the Different Types of DLT?
Distributed ledgers can be permissioned or unpermissioned. A permissioned ledger is a private ledger; nodes must have permission to access it. Examples of privately implemented ledgers include securities clearing and payment systems. Permission may be granted by government departments, banks, or other entities. An unpermissioned ledger, such as Bitcoin, has no single owner. Anyone can contribute data to the ledger and everyone in possession of the ledger has identical copies of it. Participants maintain the integrity of the ledger by reaching a consensus about its state
Alternative Uses for DLT
A blockchain is just one way to implement a distributed ledger. As previously mentioned, distributed ledgers (and blockchains) have uses that go beyond digital assets like Bitcoin and Ethereum. For example:
“Stablecoins” (digital currencies that seek to maintain a stable value vis-à-vis a traditional fiat currency)
- New types of investments
- Payment systems
- Tokenized traditional assets (virtual tokens that represent traditional securities, bank accounts, real estate, etc._
- Tokenization for non-currency purposes (identification mechanisms, access mechanisms for gaming platforms or other services)
What is Tokenization?
“Tokenization” is the process of digitally representing an asset on a distributed ledger. Digital representation entails linking or embedding the economic value and rights derived from an asset into a digital token created on the blockchain. A digital asset may originate on the ledger (think Bitcoin mining)—these are referred to as “native tokens.” Or, an existing real asset may be represented electronically on a ledger—these are referred to as “non-native tokens.”
What is a Cryptocurrency Wallet?
A cryptocurrency wallet is a software program that interfaces with a blockchain, enabling users to send and receive digital currency and monitor their balance. The wallet doesn’t store cryptocurrency itself, but rather stores encryption keys used to digitally sign transactions. You can think of the wallet is an address book, storing the address on the blockchain where the asset resides, but not the asset itself.