In spite of Distributed Ledger Technology DLT) and blockchain being the most common buzzwords that are used in different events and seed-raises to enhance investments, not many people know the difference between the two technologies.
Even in 2021, these two technologies remain a mystery to most of the people around the world.
What is Blockchain?
In the past decade, the blockchain has grown to become more popular than the DLT itself. The reason behind this growth comes from the rise of Bitcoin and other digital currencies in the past ten years.
Even though blockchain has become the central spine of most of the cryptocurrencies, it, of course, has several other use cases and applications. These applications have proven to have the potential of getting implemented across many different sectors. Some of the sectors that will benefit from the blockchain include finance, health, agriculture and many others.
Commentators and analysts are convinced that the blockchain might even redefine some of these sectors. Hence, what makes blockchain to rank as the most critical innovation of the last decade?
By description, blockchain is the sequence and series of records that cannot be changed. A large body of computers manages it entirely. These computers authenticate transactions in the network. They might be hundreds, thousands, or even millions in numbers.
As a result of its immutability, security, and lack of a central authority, blockchain has grown extensively in its popularity. It cuts away any need or purpose of a middleman. Therefore, it enables products and prospective services to get rendered directly to the customers without any need for intermediaries.
One perfect example is the analogy of pizza. It is the same way as purchasing a pizza without the delivery services or paying clients oceans and miles away from your country directly without the need of using mediums like PayPal or Visa cutting in the deal.
Blockchain has been known to avail the ground for a majority of the smart contracts and protocols, and it is only going to become stronger. In the future, it will find more use cases, and technological advancements take place.
How Does Blockchain Work?
This technology is modelled as a series of immutable records that are made secure since they have cryptography linking the blocks. Undoubtedly, this is the origin of the ‘chain’ concept. As the years pass by, the blockchain is getting more use cases that are practical in the real world.
Two types of records exist in a blockchain system. First, there is the Transaction, and then there is the block. When looking at the transaction system, it is noted that its record stores time-stamped transactions without charging any transaction costs. On the flip side, the block records are secured by a cryptography hash. It features encoded information of the preceding block.
All the blocks that exist in a blockchain are time-stamped. They always record the present state of the system cryptographically. Therefore, any future alteration must be validated by the majority of the network. Practically, the addition of a new block to the existing chain is a challenging task that involves more processes.
Any form of an increase in block taking into account every addition must have to be authenticated by the existing network. Hence, the blockchain is made more secure by such characteristics. By needing most of the system to verify any change eliminates trust issues by giving the authority to the majority.
A Bitcoin Core developer, Kalle Alm, explained the importance of this process. He insisted that verification gets rid of the possibility of fraudulent transactions while simultaneously eliminating trust issues. He added:
“Blockchains alleviate the trust required in a shared time-stamped database. For a public cryptocurrency, this is necessary, or someone might go and give themselves a million USD. Still, for a private database, especially when it is not a cryptocurrency but some more abstract form of smart contract platform, it starts to make less and less sense.”
Distributed Ledger Technology Elaborated
Even though blockchain is very much hyped, it is just a type of distributed ledger. A great analogy to explain it is that of a pencil. In the instance that a pencil is a writing material as well as any other kind of pen, then, the blockchain can be described as a perfect pencil.
Even though that analogy is quite oversimplified, the primary point remains that blockchain is a particular kind of distributed ledger. Hence, other types of ledgers may exist with different use cases other than the blockchain. The distributed ledger is also described as a public database since it requires many witnesses.
Notably, the ledger is readily open to all participants. Just like the case of the blockchain, the DLT does not need any intermediary, which makes the underlying concept of DLTs very interesting. The blockchain has stolen the show from DLTs and grown to become respectable and popular over the years. But, there is a high probability that other forms of digital ledgers may come up soon.
According to an explanation by Vice President of Blockchain Markets and Engagements for IBM, James Wallis, DLT applications in the future might come off in the most unexpected ways and places. He added:
“You will see uses for DLT that you can’t even think of today. But that this will involve a level of sharing that hasn’t existed before.”
What Is the Difference?
As explained earlier in this publication, the blockchain is just a type of DLT. It just happens to have become the most famous underlying DLT technology globally. Nevertheless, other significant differences set the blockchain apart from its parent technology.
The DLT is not essentially permissionless. In most cases, a DLT is normally considered to need permission. On the flip side, the blockchain is a permissionless system.
The underlying model that works behind the blockchain is always specific about the openness and growth of the network. Therefore, a blockchain is open to anyone and everyone who wants to use it. In that context, any party can create and validate nodes on the former, while at the latter, it is not the case.
According to Marta Piekarska, the director of the ecosystem at Hyperledger, this exact feature might be the most integral one that separates the two technologies. He elaborated:
“First and foremost: one is permissionless, the other is permissioned. This means that in the first case, anyone can participate in the network. In the other: only chosen participants have access to it. This also determined the size of the network: Bitcoin wants to grow infinitely, while in a permissioned blockchain space, the number of parties is smaller.”
Besides this, not every DLT is cryptographically hashed. It is maybe rare and pointless in most of the other existing DLTs. These slight differences contribute to an assortment of other significant differences that, in the end, affect the performance of both subjects.
As it is popularly known, the blockchain is entirely decentralized. Nonetheless, the DLT’s database is extensively centralized, although many participants share it. It leads to the issue of scalability. Through the decentralization of the entire network, the blockchain is typically slower in transactions than a majority of the DLTs. That leads to significantly inferior scalability.
Nevertheless, blockchain has proven that it is here to stay with its ever-increasing use cases providing enough proof of that. Other applications and forms of distributed ledger technologies might come up soon.