Distributed & Centralized Ledgers

What is a Distributed Ledger (DLT)?

A simple distributed ledger definition and way to think about them is that they are shared and distributed databases across multiple regions, institutions, and individuals and are accessible by multiple parties.

Distributed Ledger Technology (DLT) is the infrastructure and protocols that form a database of records spread across a series of nodes and computers rather than one contained in a single central entity. Each node owns a copy of the ledger and maintains an active record of any changes made across the network.

DLTs have many advantages over centralized ledgers but the true distributed ledger meaning is that they allow for simultaneous access, validating, and record updating to the network database. This form of group consensus underpins DLT. Any update to the database will be verified, recorded, and reflected across the network on each copy of the ledger.

DLTs can be designed in an open, permissionless manner where anyone can download and run a copy of the ledger or in a permissioned restrictive way where controls and limits are placed on users and their access.

How Distributed Ledger Works

Distributed ledgers operate by multiple users on a network controlling and maintaining a copy of the database. When any member updates the database, it is communicated to the rest of the network. The network then verifies, confirms, and updates its version of the database so that everyone maintains a cohesive copy of the most recent version.

What is a Centralized Ledger?

An easy centralized ledger definition to remember is that they are databases that are administered and controlled by a single central entity like a government, business, or financial institution.

When compared to DLT the centralized ledger meaning, advantages, and disadvantages become clear. A central entity collects, stores, and secures all the data, and any changes made to a centralized ledger must originate from and be approved by the central entity. This is the form of ledger technology that most people are familiar with today.

How Centralized Ledger Works

Centralized ledgers operate by a central entity that receives and records all information. All information is recorded in a central location. The database is administered under the full control of the central entity, which dictates what users have access to which parts of the database.

Blockchain and DLT

While many people use the two terms interchangeably, there are some subtle but important distinctions between them.

Blockchains have a specific design that collects and records data in a series of grouped transactions called blocks. Miners then add blocks through the process of cryptographic hashing. Each block has three distinct features in its architecture. A record of the transactions, a unique hash number (nonce) that reflects the information within the block, and the previous block’s hash number. These blocks are connected in a chain, creating an immutable record of each transaction within each block.

By comparison, not every DLT requires these same functions. An easy way to remember the distinction between the two is that all blockchains are distributed ledgers, but not all distributed ledgers are blockchains.

What Industries Use Distributed Ledger Technology/Centralized Ledger Technology

There are new industries adopting DLT every day. Any industry that can utilize data storage or record keeping can take advantage of ledger technology. However, some industries are naturally better suited to its adoption, like finance, supply chain management, healthcare, voting, and elections, to name a few.

Centralized ledgers are still widely used in most private businesses and government departments, which require a higher degree of security and control over sensitive information.

Uses of Distributed & Centralized Ledgers

Both forms of ledgers are used to record and store data. This can range in anything from healthcare records and financial transactions to digital signatures of authentication for provenance.

New use cases have emerged with the advancement of blockchain technology and the rise of digital assets, including cryptocurrencies, non-fungible tokens (NFTs), and decentralized finance (DeFi) infrastructure.

Examples of Distributed Ledger and Centralized Ledger

Bitcoin and Hyperledger are two of the most famous open source blockchain projects. IOTA is an example of a nonblockchain DLT.

Most legacy banks and government record offices rely on centralized ledgers.

Distributed Ledger Pros and Cons

Centralized Ledger Pros and Cons

Centralized Ledger vs Distributed Ledger

The Bottom Line

While DLT has exploded in popularity since the advent of Bitcoin and the birth of blockchain technology in 2009, DLT and centralized ledger provide clear advantages for specific industries.

Within DLT, there are also varying degrees of decentralization and distribution, which can impact their scalability and security. There are also distinct use cases for both permissioned and permissionless distributed ledgers, with new ones being advanced every day.

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