It is a common belief that blockchain and distributed ledgers are the same thing, but this would be an incorrect conclusion. It's easy to understand why the two are frequently confused, but they are most assuredly not the same. We have recently written about what blockchain is, but what about distributed ledger technology? What is it and how does it work? Who can benefit from using it? Let's talk about it.
What is a Distributed Ledger?
In simple terms, a distributed ledger is a database that exists across different locations and/or among many participants. Right now, many companies will use a centralized database that exists in a singular location, however, a distributed ledger removes third parties from the process—making them attractive to organizations.
Think of blockchain and distributed technology the way you may think of Band-Aids and bandages. Band-Aids are a brand of bandages, but they became so synonymous that one has become a stand-in for the other. A blockchain is one type of distributed ledger: a shared database filled with entries that must be confirmed and encrypted. On the surface, distributed ledger sounds a lot like blockchain. So, while all blockchains are distributed ledgers, not all distributed ledgers are blockchains. Unlike blockchain, a distributed ledger does not require a data structure in blocks. A distributed ledger is a type of database spread across multiple sites, regions, and/or participants.
Distributed Ledger Benefits
A distributed ledger gives control of all its information and transactions to the users and promotes transparency. They can minimize transaction time to minutes and are constantly processed to help businesses save money. The technology also facilitates efficiency and automation.
Distributed ledger with blockchain creates secure and transparent data transfers.
Distributed ledgers like blockchains are exceedingly useful for financial transactions because they remove inefficiencies and, because of its decentralized nature, they can also bring increased security. Blockchain and distributed ledger technology offers a way to securely and efficiently create a tamper-proof log of sensitive information. This may include anything from international money transfers to shareholder records. Financial processes are upgraded to offer companies a secure, digital alternative to processes run by a clearinghouse.
When you write data to a blockchain, it is inscribed on the network. When you have a series of transactions over time, you gain an accurate and undeniable audit trail. This is particularly useful for financial audits. Having data stored in a place where no one person owns or controls it, and no one can change what's already written and gives you benefits to double-entry book-keeping, helping reduce the risk of errors and fraud.
To conclude, blockchain is a specific type of distributed ledger. It is designed to keep transactions and interactions and bring transparency and efficiency to business all while improving security benefits. Blockchain and distributed ledger technology represents a new way to transact business. Because of the key concepts of cryptographic security, these technologies can change the way we organize our businesses on a fundamental level.