DLT Crypto Explained: What Is Distributed Ledger Technology and How It Works

DLT stands for Distributed Ledger Technology and is used widely throughout the cryptocurrency industry.

Blockchain networks are created from distributed ledger technology infrastructures and the foundations allow users to easily trace, monitor, and record data. 

This page will explain the ins and outs of distributed ledger technologies including how they work and their comparison to blockchain networks.

What is Distributed Ledger Technology?

Distributed Ledger Technology (DLT) allows information and data to be stored securely using cryptography as a backbone. 

Accessing data from DLTs can be done using cryptographic signatures known as keys. Once data is recorded it becomes immutable and impossible to alter making DLTs useful for recording important data.

The rules that a distributed ledger abides by are written into the database’s code and govern how the ledger can be viewed and accessed by users. 

Distributed ledgers are decentralized in nature. Their encryption and security make it hard for attackers to impenetrate which is why multiple cyber attacks must happen all at once against multiple copies of a DLT for the network to face a real threat. 

Copies of the ledger are stored on connected devices called nodes. Each node stores its own copy of the ledger and any changes or additions to the ledger must be accepted and recorded by all connected nodes. 

A distributed ledger can be connected to any amount of nodes, but generally, the more nodes there are the more secure and decentralized a network is. 

For example, if a transaction takes place on a distributed ledger, all nodes must record that transaction and agree that it took place before adding that transaction to the database. 

Once all nodes reach a consensus, data is finalized before being protected by encryption. All blockchain networks utilize these data recording measures.

There are three main types of distributed ledgers. Permissioned ledgers where only users with specific permissions can access to view data, public ledgers whereby anybody can view data, and private ledgers which provide limited access to users and are largely operated by a central authority. 

Various Uses for Distributed Ledger Technology 

Distributed ledger technology has many use cases, especially when sensitive data needs to be recorded and remain immutable. 

DLTs can be used to record transactions with transparency and security at their core. Without the need for a third party to keep note of records, DLTs are very useful for financial record keeping. 

Aside from financial records, DLTs can also be used in other industries and services such as identity tracking, recording ownership rights, and even election voting.

For voting, a distributed ledger can be used to immutably track votes for an election with transparency to the public. 

For ownership rights, distributed ledgers allow the ownership of a recorded item to be traced back to its original owner, or every other owner up until its most recent altercation

Tamper-proof indienty records can be produced using distributed technology which can help combat identify theft and curtail fraud. 

Distributed Ledger Technology in Crypto

Cryptocurrencies are all produced from distributed ledger technology, but not all cryptocurrencies use the same blockchain architectures.

Hedera Hashgraph (HBAR), is not considered a ‘blockchain’ because it uses Hashgraph technology which works differently from usual blockchain networks. 

Hashgraph technology is part of distributed ledger tech that allows greater scalability, faster data recording speeds, and a unique Hashgraph consensus. 

Commonly, cryptocurrencies utilize proof-of-work, proof-of-stake, and delegated proof-of-stake for nodes to reach consensus. But what are Proof-of-work and proof-of-stake networks?

In proof-of-work (POW) consensus mechanisms, validators must compete with each other to “mine” blocks. This is done by completing difficult cryptographic puzzles that reward successful validators with crypto. 

For proof-of-stake (POS) networks, validators must hold a stake in the network, usually achieved by holding a certain amount of a network’s cryptocurrency, to be given a go at validating a transaction. Validators who hold the most stake will receive more transactions to verify. 

In delegated proof-of-stake networks (DPoS), similar to PoS, the network will select a certain number of validators and delegate their tokens to a staking pool.  

DLTs vs Blockchains

Blockchains are a form of distributed ledger but distributed ledgers themselves can take up various forms and commit to different roles.

Compared to DLTs, blockchain networks will prioritize the infrastructure of creating blocks to manage and organize data while a DLT can take up nonlinear infrastructures. 

For blockchain networks, the common proof-of-work, proof-of-stake, and delegated proof-of-stake consensus mechanisms are used while DLTs can be more broad in how they deal with consensus. 

An example of a distributed ledger system used actively is Hyperledger, developed and created by the Hyperledger Foundation and Linux. Intel and IBM have both made contributions to Heyperledger’s open-source community.

Another example of a popular DLT crypto network is Hedera’s Hashgraph system which cannot be defined as a blockchain network due to the way it operates. All blockchains are DLTs, but not all DLTs can be blockchains. 

The Future Ahead for DLTs

Distributed ledgers have paved the way for a new type of financial ecosystem with decentralization and transparency as priorities. 

As time goes on, DLTs may become more widespread as governments tackle the complexities of how they work with new regulations and laws. 

Most recently, the European Central Bank has been testing DLTs to settle central bank money with the Algorand blockchain used in trials.

While distributed ledger technologies such as blockchains continue to become popularized, we may see new forms of distributed ledgers being used outside of the financial world. 

Already, blockchains and DLTs are being used in supply chains, data reports, recording important data, and tracing ownership rights. The future for DLTs will be very interesting.