Blockchain Byte - Week 6 : Distributed Ledger Technology

Recap

To recap, last week

1. We defined blockchain as a system that allows a network of connected computers to maintain a single, updated and secured ledger
2. We defined ledger as a record where a company’s assets,liabilities, income & expenses are booked.
3. We compared some aspects of traditional banking system with a blockchain. Some of you may think why was blockchain compared to a bank?
   This comparison was done as banks move value across markets and societies through their financial intermediation function. (Source: here).
   There is tremendous opportunity for Blockchain to do the same in the digital realm.

Let us now explore the term Distributed Ledger Technology or DLT.

Distributed Ledger Technology or DLT

A ledger is used to record money spent or received & this is maintained within a company. It is not shared with external parties as the information is confidential. A shared or distributed ledger is a new paradigm especially between unrelated parties with zero trust.

Let us take an example of four people who got funding to start their business

Four start up founders A, B C & D got funding of $50 each. They record the amount received in a common public ledger (let us call it “Founders’ Ledger”) which they all share (Decentralized). So each of them show a balance of $ 50 which all can see

A wants to pay $10 to D & initiates a transaction in the ledger sending $10 to D

A asks B,C & D to add the transaction to their ledgers (Communication)

The following checks are done by B, C & D

a. Does A have the requisite balance in his / her ledger?

b. If yes, has A actually authorized the transaction?

If both the above conditions are true, then the transaction is added to the common ledger (Trust) which results in A’s balance reducing by $10 & D’s balance increasing by $10.

The below diagram summarizes the above with updated balances

Network Effects

Now the Founders’ Ledger has become popular that more people start using it since people need not trust each other. More computers get added to the shared ledger.

The users only need to trust the process governing ledger updation & maintenance. The volume of transactions start to increase. Everyone who is part of the system still checks & verifies each & every transaction.

Consensus

Transactions are now grouped into pages and everyone need to agree on including these pages into the ledger. This means transactions within those pages get included only if those who are part of the platform agree to adding those pages to the ledger. (Consensus)

Controls & Immutability

To ensure the transactions in the pages added are not tampered with, the pages are water marked with a seal so no one can modify any entry subsequently (Immutability). Also, the pages are numbered so that it is possible to trace any amount from the time it enters the ledger till its final recording.

Incentives

To ensure all the participants stay honest and process transactions by checking and adding more pages, a reward mechanism was initiated to reward those who add pages to the ledger & ensure that only the right transactions are added to the ledger after relevant checks and controls are followed.

This in a nutshell is how a blockchain functions. I have referenced points discussed last week in brackets. If you refer back to last week blog, it should make more sense now.

Let us go down the rabbit hole (again!!) and analyze how each function described above is carried out in an actual blockchain!!