# Distributed Ledgers: Definition, How They're Used, and Potential

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## What Are Distributed Ledgers?

A distributed ledger is a transaction database that is stored and synchronized across multiple sites, institutions, or geographies. Network nodes store copies of the ledger and communicate any changes made by users to other nodes, which append their ledgers to match. Modern communication technology makes these changes happen in a matter of seconds, depending on the rates at which nodes compare their states.

Distributed ledgers contrast centralized ledgers, which are most commonly used by businesses and governments. Centralized [ledgers](https://www.investopedia.com/terms/g/generalledger.asp) are more prone to cyber-attacks and fraud, as they have a single point of failure, but they offer more security in that there are fewer opportunities for access.

Blockchains and direct acyclic graphs are types of distributed ledgers.

### Key Takeaways

*   A distributed ledger is a transaction database that is synchronized across different sites and geographies.
*   The need for a central authority to keep a check against manipulation is eliminated by using a distributed ledger.
*   Distributed ledgers reduce the risk of fraud because the nodes can be programmed to compare their states and reject unverified changes.

## Understanding Distributed Ledgers

Data is collected and entered into digital files and then stored on computers. These files make up ledgers. Software is used to access and use this data, and access is granted to users who require it. In the past and in many cases, currently, these ledgers have been stored in central locations and controlled by specific users. These locations could be a closed network on a storage system stored in a room and maintained by system technicians. Data was usually audited and verified by humans, who are prone to make mistakes and corruption.

Distributed ledgers use the same concept of storing data in files, but instead of one working copy of the ledger stored on a server (with backups), identical copies are allowed to be stored on multiple machines in different geographies. The computers, called nodes, automatically update their ledger copies and broadcast their states to other nodes. All nodes are programmed to verify other nodes' ledgers, and the network maintains its database.

Most of this work is done using encryption techniques such as hashing data and then comparing it, which is done very quickly on modern computers and networks.

## Advantages of Distributed Ledgers

While centralized ledgers are prone to cyber-attacks, distributed ledgers are inherently harder to attack because a majority of the distributed copies need to be altered simultaneously for them to be successful. Because of their distributed nature, these records are resistant to malicious changes by a single party. Distributed ledgers can also allow for much more transparency than is available in centralized ledgers.

This transparency makes an [audit trail](https://www.investopedia.com/terms/a/audittrail.asp) much easier when conducting data audits and financial reviews. This helps remove the possibility of [fraud](https://www.investopedia.com/terms/f/fraud.asp) occurring on the financial books of a company.  

Distributed ledgers also reduce operational inefficiencies and speed up the amount of time a transaction takes to complete. They are automated and, therefore, can function 24/7. All of these factors reduce overall costs for the entities that use and operate them.

## Distributed Ledger Uses

Distributed ledger technology has great potential to revolutionize the way governments, institutions, and corporations work. It can help governments collect tax, issue passports, and record land registries, licenses, and the outlay of [Social Security benefits](https://www.investopedia.com/terms/s/social-security-benefits.asp), as well as voting procedures.

The technology is making waves in several industries, including:

*   Finance
*   Music and entertainment
*   Diamond and precious assets
*   Artwork
*   Supply chains of various commodities

While distributed ledger technology has multiple advantages, it’s in a budding stage and is still being explored in terms of how to adopt it in the best possible way. One thing is clear, though: The future format of centuries-old centralized ledgers is to be decentralized.

## What Is the Purpose of a Distributed Ledger?

A distributed ledger is used to prevent data tampering and make data management more efficient and accurate.

## What Is the Difference Between Ledger and Distributed Ledgers?

Distributed ledgers are stored across a wide network and use different techniques to compare and validate copies. Centralized ledgers are stored in a central location and are usually controlled by an entity.

## What Are the Three Types of Distributed Ledgers?

Generally, distributed ledgers are categorized into "private," "public," "permissioned," and "permissionless." They can then be designed as private permissioned, public permissionless, or private permissionless ledgers.

## The Bottom Line

Distributed ledgers are records of transactions that are stored across a network. The copies of these records can be programmed to automatically compare and validate data to ensure they are accurate and have not been altered. This programming makes these ledgers more reliable and accurate than traditional data entry and auditing techniques.

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