What is Blockchain Distributed Ledgers

digitalization

The terms blockchain and distributed ledger technology (DLT) are on everyone's lips. Often the two terms are used synonymously, because in principle the same thing is often meant. But are there differences or are both the same in the end? From a technical point of view, there are definitely differences that have different effects depending on the application.

Blockchain - definition

A blockchain chains blocks with one another and correlates the transactions they contain with one another (example with Bitcoin). As a comparison, one can imagine a house of cards that is gaining more and more height. The number of transactions increases the number of blocks in a blockchain. The balance is ensured by the network used and the rules implemented. With the house of cards as with the blockchain, the following applies: the higher and wider, the more stable the construct. The attempt to exchange a single card, i.e. in the case of the blockchain to change information about a transaction (for example to make a Bitcoin 100), has an effect on the entire structure.

What seems possible in theory, however, does not work in practice. In order to subsequently change information or transactions that have already been accepted, the majority of the active network would have to be convinced. This applies to the transaction to be changed as well as to all transactions subsequently based on it and accepted.

In the case of a blockchain, information, i.e. transactions in the network, is usually sent to all participants in order to check them for correctness by participants who are willing to validate and to attach them to the chain. The disadvantage of this broadcast comes at the expense of the confidentiality and privacy of transactions. The content of the transaction is not visible to all network participants, but the associated meta information. In other words, data such as the number of transactions sent by a party, senders and recipients, timestamps and possibly the value. The participants can read or even deduce various pieces of information.

Distributed Ledger Technology - Definition

The use of distributed ledger technology extends the properties of a register or cash book with a consensus in order to synchronize the distributed, accepted and validated transactions in the network. In contrast to a blockchain, there is the option of sharing information on a “need-to-know basis” - that is, only with authorized parties - and thus guaranteeing confidentiality and privacy. Claims as required by the finance or insurance sector.

One DLT platform that is already in use is "R3 Corda". The merger of insurance institutions illustrates the added value of this DLT approach. All participants have the same data basis, including information about their originator and the transaction history. In the interests of competition and despite the joint exchange of data, individual institutes have a legitimate interest in not sharing the number of insurance claims they process or collect with the entire network. There are also blockchain-based platforms that meet these requirements; however, this usually leads to a higher complexity combined with a lower scalability.

What is a DLT or a blockchain ecosystem?

A distributed ledger or blockchain ecosystem consists of different components. The focus is usually on the platform. This can be divided into different areas and forms of implementation, which consist of public or private and permissioned or permissionless. These options can be combined with one another and are more or less useful depending on the application.

Bitcoin or Ethereum can be found in public and permissionless. In the private and permissioned environment, corporate applications and universal platforms such as Hyperledger Fabric or application-specific ones such as Hyperledger Indy for the case of digital identities are known. The main differences between these forms are the type of access - open or restrictive - and the consensus mechanisms available for common truth-finding.

What was the first DLT / blockchain application?

Short answer: the bitcoin. Blockchain is the technology used, Bitcoin the application. The initial hypothesis of blockchain looked at the question of how the "double-spending" problem, i.e. the double spending of digital money, can be mapped between unknown parties without central authority.

What is the network and platform concept based on?

Bitcoin is based on a network with unknown actors which solves the problem of "double spending" while offering traceability and security. Due to the high expenditure in the form of computing power and the energy required for block production (proof-of-work), manipulation is not worthwhile. Even if it were possible to take over the entire network with the help of astronomically high computing capacity and make all Bitcoin your own, the profit would only be a heap of virtual tokens that have no real equivalent in the form of a fiat currency such as the euro. However, with Bitcoin there was initially no additional option to set conditions - such as sending X from A to B if Y occurs at time Z. This lack of opportunity was the spark and the birth of Ethereum and smart contracts.

Blockchain and Distributed Ledger Technology enable the connection of actors within an ecosystem and give companies the opportunity to solve previously unprofitable or technically unsolvable problems such as micro-insurance or P2P financing. In addition, they call for new business models and relationships.

What are smart contracts?

Smart contracts can best be compared to a distributed application that can be used to share and execute business logics with the parties connected in the network. The possibilities of smart contracts triggered a hype in companies, as the combination of traceability, transparency, disintermediation, programmable transactions and business logic was and is seen as a solution to many current problems.

What are DLT or blockchain doing in the financial world?

Basically, both blockchain and distributed ledger technology are used in finance. The most recent and most prominent development here is Central Bank Digital Currency (CBDC) - the digital central bank money. Since the beginning of 2020, banks have also been allowed to store cryptocurrencies such as Bitcoin on the basis of the law on the “Implementation of the Amendment Directive to the Fourth EU Money Laundering Directive”, which is ensured by means of custody solutions. Furthermore, DLT is also finding its way into clearing and settlement transactions in order to minimize risks and accelerate processes.

What do DLT or blockchain do in the supply chain?

Supply chains should ensure transparency, sustainability, ethics, but also efficient and faster trading. Blockchain technology makes it possible to build a delivery network from the supply chain. To do this, data silos are broken up and various industries, from raw materials to transport to further processing, are linked via a platform. A common, forgery-proof database reduces the susceptibility to errors and the need for manual corrections. Distributed Ledger Technology also opens up opportunities for more efficient financing or pre-financing of goods or compensation payments within the networks.

How is DLT or blockchain related to digital identity?

How many identities do i need? Who will issue them to me? Who will check me Who will manage my identity? Do I know who is checking me out? What can I do with my identity? All questions of the digital identity crisis. A digital and decentralized identity based on blockchain offers decisive advantages here: It enables legally secure proof of identity, sovereignty over one's own data and selective release of attributes and information in the respective application.

When determining the age, it is no longer necessary to share further personal data (address or height). Only the date of birth, the issuing institution and the validity of the information are relevant and can be managed independently by the owner. In the future, unique digital identities, either personal or that of goods, will become more relevant in order to be able to securely develop and map digital services in the supply chain and in finance as well as new business areas.