Distributed ledger Technology
Published: 2022-03-02 15:39:07

# Definition


A distributed ledger is essentially an asset database that can be shared across 
a network of multiple sites, geographies or institutions. All participants within 
a network can have their own identical copy of the ledger. Any changes to the 
ledger are reflected in all copies in minutes, or in some cases, seconds. The 
assets can be financial, legal, physical or electronic. The security and accuracy 
of the assets stored in the ledger are maintained cryptographically through the use of ‘keys’ and signatures to control who can do what within the shared ledger. 
Entries can also be updated by one, some or all of the participants, according to 
rules agreed by the network. 
DLT comes on the heels of several peer-to-peer (P2P) technologies enabled by the 
internet, such as email, sharing music or other media files, and internet telephony. 
However, internet-based transfers of asset ownership have long been elusive, as 
this requires ensuring that an asset is only transferred by its true owner and ensuring 
that the asset cannot be transferred more than once, i.e. no double-spend. The asset in question could be anything of value.

# Application of DLT 

- Cryptocurrency and Bitcoin
 
Underlying this technology is the ‘block chain’, which was invented to create 
the peer-to-peer digital cash Bitcoin in 2008. Block chain algorithms enable 
Bitcoin transactions to be aggregated in ‘blocks’ and these are added to a 
‘chain’ of existing blocks using a cryptographic signature. The Bitcoin ledger is 
constructed in a distributed and ‘permissionless’ fashion, so that anyone can 
add a block of transactions if they can solve a new cryptographic puzzle to add 
each new block. The incentive for doing this is that there is currently a reward 
in the form of twenty five Bitcoins awarded to the solver of the puzzle for each 
‘block’. Anyone with access to the internet and the computing power to solve 
the cryptographic puzzles can add to the ledger and they are known as ‘Bitcoin 
miners’. The mining analogy is apt because the process of mining Bitcoin is 
energy intensive as it requires very large computing power. It has been estimated 
that the energy requirements to run Bitcoin are in excess of 1GW and may be 
comparable to the electricity usage of Ireland.
Bitcoin is an online equivalent of cash

- Government taxation and revenue policies
Distributed ledger technologies have the potential to help governments to 
collect taxes, deliver benefits, issue passports, record land registries, assure the 
supply chain of goods and generally ensure the integrity of government records 
and services. In the NHS, the technology offers the potential to improve health 
care by improving and authenticating the delivery of services and by sharing 
records securely according to exact rules. For the consumer of all of these 
services, the technology offers the potential, according to the circumstances, for 
individual consumers to control access to personal records and to know who has 
accessed them.

- money & Payments 
• Payment authorization, clearance & settlement
• International remittances and cross-border payments (alternative to correspondent banking) 
• Foreign exchange
• Micropayments

- Healthcare 
Electronic medical records


- Governance • E-voting systems
• E-Residence
• Government record-keeping, e.g. criminal records
• Reducing fraud and error in government payments
• Reducing tax fraud
• Protection of critical infrastructure against cyberattacks



# Merits of DLTS
- Decentralization and disintermediation. DLT enables direct transfers of digital 
value or tokens between two counterparties and decentralized record-keeping, 
removing the need for an intermediary or central authority who controls the ledger. 
This can translate into lower costs, better scalability and faster time to market.

- Greater transparency and easier auditability. 
All network members have a 
full copy of the distributed ledger (which can be encrypted). Changes can only be made when consensus is established and they are propagated across the entire network in real-time. This feature, combined with the lack of a central authority or limited involvement of a central authority, has the potential to reduce fraud and eliminate reconciliation costs. 

- Automation & programmability. DLT enables programming pre-agreed 
conditions that are automatically executed once certain conditions hold. This is 
referred to as “smart contracts” (see section 8), for example invoices that pay 
themselves when a shipment arrives or share certificates which automatically 
send owners dividends or cash-for-work programs that pay beneficiaries out 
once the contracted work is completed. Smart contracts can be done in traditional 
centralized ledger systems as well, but the design of centralized ledger systems 
requires such actions to be implemented only after the concerned parties have 
agreed to the underlying transaction as recorded in the central system, which in 
some contexts can take upwards of a day. In contrast, in a DLT, the counterparties 
by definition agree the moment the transaction is completed, as both have the 
same record of the transaction. Also, the result of the execution of the “smart contract” itself will take additional time to propagate and be reconciled in a traditional ledger system.
 
- Immutability & verifiability. 
DLT can provide an immutable and verifiable 
audit trail of transactions of any digital or physical asset. While in most cases, 
immutability is desirable, it can create problems related to recourse mechanisms if the system fails. Immutability of the ledger, however, does not mean that a countervailing transaction to annul a disputed transaction cannot be created. This is in line with how dispute 
resolution works, for example in payment card systems. The original record would, however, in this case still remain. Two MIT researchers have recently filed a patent for a cryptographic solution 
that would allow an administrator to ‘unlock’ units 
in a blockchain and edit them, though this is highly 
controversial as immutability is seen as one of the core advantages of the first blockchains.

- Gains in speed and efficiency. 
DLT offers 
the potential of increasing speed and lowering 
inefficiencies by removing or reducing frictions in 
transactions or in clearing and settlement processes 
by removing intermediaries and automating 
processes. 

-Cost reductions. 
DLT offers the potential for 
significant cost reductions due to removing the 
need for reconciliation as DLT-based systems by 
definition contain the “shared truth” and hence there 
is no need to reconcile one version of “truth” with 
that of one’s counterparties. Additional sources of 
cost reduction could be lower infrastructure costs for 
maintaining a DL, as well as reductions in frictions 
and fraud. According to some estimates, distributed 
ledger technology could save the financial industry 
alone around $15-20 billion per year.
-  Enhanced cybersecurity resilience.
 DLT has the 
potential to provide a more resilient system than 
traditional centralized databases and offer better 
protection against different types of cyber attacks 
because of its distributed nature, which removes 
the single point of attack.

### Challenges associated with DLT
 - Privacy: In permissionless ledgers, such as Bitcoin 
and Ethereum, all transactions are open and visible 
to all network members, though they can be 
encrypted and the identity of the user is hidden. In 
certain contexts, the identity of the participant can 
be inferred based on transaction patterns or other 
markers. Permissioned DLs encounter the same 
issue. This is one of the key concerns of applying 
DLT to financial market infrastructures and it is one 
of the issues which CORDA and Fabric propose to 
address in their design.


- Environmental costs. 
Using proof-of-work as a 
consensus mechanism creates a large electricity 
footprint as vast amounts of computing processing 
power are used up for “mining”. (This concern 
mainly applies to permissionless blockchains that 
use proof-of-work protocols.)

- Bleeding Edge/Lack of Maturity.
 DLT remains at an early stage of development 
and there are still serious concerns about the robustness and resilience of DLT 
especially for large volume transactions, availability of standardized hardware 
and software applications, and also ample supply of skilled professionals. 
However, large traditional IT players like IBM and Microsoft, as well as 
financial sector players like Visa and MasterCard have started developing DLT 
products and services, which could eventually provide the same level of trust 
and confidence as traditional IT systems offer today.
- Scalability and Transaction Speed. 
Current iterations of permissionless 
distributed ledgers face issues related to scalability of blockchains, both in 
terms of transaction volume and speed of verifications. Existing permissionless 
blockchains have limited transaction speed. Bitcoin, for example, can only 
process between 4-7 transactions per second due to the limitation of the block 
size at one megabyte, a subject of controversy in the bitcoin community. (Block 
size could be increased but bigger blocks would take longer to propagate 
through the network, worsening the risks of forking.) This problem, however, 
could be resolved over time and is most pronounced in the Bitcoin system. 
Other permissionless DLT systems like Ethereum report higher transaction 
throughputs. In addition, permissioned blockchains have greater capacity and 
can process higher transaction volumes but these lack global scale and come at the expense of a more centralized, less transparent platform, which removes 
many of the benefits from the distributed, open nature of public DLT systems.

- Interoperability and Integration. 
Different DLT 
systems will need to be interoperable with other 
ledgers and integrated with existing systems if 
they are to be introduced at scale into the financial 
system. In addition, the cost of integrating DLT 
into financial infrastructures like payment and 
settlement systems will require industry wide co-
ordination and collaboration and require significant 
expenses. There are efforts underway to develop 
DL frameworks specifically for the financial 
sector, notably the CORDA framework by R3 
CEV and Fabric by Hyperledger project. These 
two frameworks are an effort to address specific 
requirements raised by industry practitioners in 
areas such as: 
• allowing transactions between counterparties 
in a peer-to-peer manner; need for validating 
identity of counterparties; 
• limiting visibility of transactions on a need-to-
know basis; need for regulators to have access 
to transactions; 
• ensuring equivalence between smart contracts 
and actual legal prose; 
• using existing industry standard software tools; 
• interfaces between multiple distributed ledgers; 
and 
• supporting a variety of consensus models, 
including one approach of just having the 
transacting counterparties participate in the 
consensus. 
These frameworks, in essence, explore using 
DL approaches within prevailing business and 
regulatory practices. CORDA is specifically 
focused on the financial sector whereas 
Hyperledger seeks to provide a broader framework 
with initial applications proposed for the financial 
sector and for supply chain management.