The blockchain is becoming increasingly important – and not just in financial markets. It also offers numerous possibilities in the everyday business of other industries: streamlining work procedures, automating processes, and providing complete transparency for all participants. This provides companies with an opportunity to save resources and costs as well as to build trust between the different parties involved in all types of transactions. The blockchain process is based on distributed ledger technology (DLT). Distributed ledger applications offer enormous potential for innovation, especially concerning granting loans or the Internet of Things (IoT). Read on to learn about this technology that has turned the financial world on its head.
A brief explanation of distributed ledger technology
DLT become known primarily due to cryptocurrencies – these having thrust it into the public eye. In this context, DLT is the technology that documents specific transactions. This is based on the principle whereby the ledger – which can be a file with a list of transactions – is distributed to different transaction accounts, thus becoming a distributed ledger. However, blockchain technology is only one variant of DLT. At its core, a ‘distributed ledger’ refers to a distributed type of ledger management that allows different people to use, copy and synchronize digital data across different locations. With the help of cryptographic methods, transactions are mapped in a way that makes them very difficult to manipulate and forge. Put, once data and information have been saved, they cannot be deleted or changed, and all updates are permanently stored. Unlike a conventional database, a distributed ledger does not rely on centralised data retention or administrative functions.
Since data and information are no longer stored at a single location but across a decentralised system, DLT represents a fundamental shift in how data is collected and shared. Since all parties can view and change the ledger, they can also track exactly who made the change. This ensures high transparency and minimizes the scope for forgery and fraud attempts.
The blockchain is one example of distributed ledger technology. Transactions are combined into individual blocks and arranged in sequence. Each new block is then sent to the nodes in a public or private network.
Differences and similarities to the blockchain
The two terms ‘blockchain technology’ and ‘distributed ledger technology’ are often mentioned together and used synonymously. Yet there are differences between them: blockchain is a variant of DLT. However, DLT does not always use the blockchain process.
What both processes have in common is that they create and use decentralised ledgers with the help of cryptography. Another feature common to both is that the datasets cannot be changed and are issued with a time stamp for verification purposes. As a result, both technologies are also considered to be tamper-proof and forgery-proof.
Nonetheless, the major difference is that DLT does not automatically use data blocks to create the distributed ledger. For example, it can also use a directed acyclic graph (DAG) or hybrid forms for this purpose.
Applications in different industries – two examples
Probably the best-known application of DLT is the blockchain and, by association, the financial sector and trading in cryptocurrencies such as bitcoin. However, DLT also offers the potential for further development in the financial sector: for instance, financial institutions and their service providers often face the challenge of making their verification processes more efficient. In many cases, these processes are still checked and handled manually, making them time-consuming and laborious. DLT can make granting loans – like syndicated loans, for instance – much simpler and more efficient, thereby also resulting in cost savings. Taking the example of a syndicated loan, DLT eliminates the time-consuming and work-intensive administration for the managing underwriter since the other creditors can access all data directly. They can view all information, such as credit contracts and transaction data, in real-time, which minimises their risk and increases their return by saving costs and manual effort.
DLT also offers simple and efficient solutions for the Internet of Things (IoT). For example, instead of documenting the maintenance schedules for a machine by hand and entering it into a system, sensors can be used to record the machine's condition. DLT is then used to record the information cryptographically and store it locally. All interested parties – such as a bank involved in financing the machine in question – can then access this data. This, in turn, lowers the risk for the financial institution and allows the company to benefit from more favourable lending terms.
The future of DLT
Although still in its infancy in terms of development, distributed ledger technology offers great potential to accelerate processes, design them more efficiently and cut costs for all sorts of companies because the technology eliminates the middleman. What's more, both DLT and the blockchain are considered to be tamper-proof and forgery-proof – thus making it difficult for cybercriminals to access sensitive data or take control of transactions. Furthermore, DLT connects parties and companies and provides maximum transparency for all participants.
Although it is impossible to predict definitively at this stage whether the technology will guarantee a breakthrough in all industries, developments in this area are progressing rapidly. For companies, this means that DLT offers opportunities for new business models and processes and to profit from a possible DLT network.