What is a Distributed Ledger – How it Works and Benefits

Introduction

What is a distributed ledger?

How does it work, and how is it different from blockchain?

These are some of the questions we will be answering in this article.

Web3 is very new.

There are a lot of confusing terminologies and buzzwords, and overall, there is a profound asymmetry of knowledge.

Being able to distinguish key terms and understand difficult concepts will put you ahead of the curve in the web3 space.

Perhaps the most important concept in web3 is the idea of “decentralization.” If you can understand how it’s achieved, a lot of other concepts become trivial.

With that in mind, let’s explore the technology that makes decentralization possible in web3.

The distributed ledger.

What is a distributed ledger?

A distributed ledger is a database that is used by multiple participants, and is shared and synchronized across many different locations, institutions, etc. Basically, you can think of a distributed ledger as a decentralized database of sorts.

The basic protocol of a distributed ledger is that:

1. Anyone can add to the ledger (in most cases).
2. Only signed transactions are valid.
3. No one can overspend.

The point of having a distributed ledger is so that people can share assets with each other in a peer-to-peer fashion. What that means is that two people can send each other money without having to go through a third party.

But how does that work? Having a third party verify your transactions is very useful. It ensures that you cannot get scammed or taken advantage of by the person you are transacting with.

For example, if you are buying a house with your bank you can be sure that the person selling you the house isn’t scamming you — As long as you follow the bank’s protocol, you are most likely going to get the house. And if you don’t, the bank is responsible.

Now picture trying to buy a house without a central figure (e.g. the bank). Imagine if it was a peer-to-peer system. If you were to pay 800,000 USD to the house owner, what is to stop them from turning around and saying “you never paid me, I’m keeping the house”?

For a peer-to-peer system to work, we would need a way for transactions to be logged and verifiable. That is where the distributed ledger comes in.

A distributed ledger acts as a “record” of transactions that multiple users share. Everyone can see the ledger as it is synchronized across many different locations. So there are no doubts about who owns what.

Again, you can think of a distributed ledger like a decentralized database. Everything is public. Anyone can add to it. And everyone who looks at the ledger can read and verify that you own the house.

Another key feature of a distributed ledger is that every transaction is signed cryptographically. Keep in mind that in a centralized model, you would need to login and verify your identity before being allowed to spend money. The bank, using a combination of your pin and card number, would verify and secure your transaction.

Distributed ledgers do not use card numbers and pins to verify your transactions. Instead, in a distributed ledger, anytime you want to move assets across the ledger, your cryptographic signature is required.

This is important because it prevents malicious users from committing fraud and spending other people’s money.

So in short, in a distributed ledger, there is some record of transactions, and each of those transactions has to be cryptographically signed. Additionally, anyone can see the ledger, and in most cases, anyone can add to the ledger. Those are the basics of a distributed ledger.

What is a Blockchain?

You can think of a blockchain as a type of distributed ledger. What makes it different from other distributed ledger technologies is its data storage (among other things).

Interestingly enough, blockchain distributed ledger technology actually stores data in “blocks” and “chains”.

Meaning that data is packed into groups of transactions called blocks, which are connected to each other by…