The term distributed-ledger-technology (DLT) is a database architecture that enables the owners of digital goods to document and transfer these goods from peer to peer. Each transfer in a DLT is stored as a record in a distributed ledger (database). This database is stored in all nodes of a network.
In contrast to the classical approach, where a cash book is usually managed by only one instance, any number of equal copies of the cash book are stored decentrally by different parties. Appropriate measures are taken to ensure that new transactions to be added are taken over in all copies of the cash book and that an agreement (consensus) is reached on the current status of the cash book.
We also speak of decentralized account books or transaction databases. The technology is considered to be groundbreaking for the management of data on the Internet without having to rely on an owner platform.
Distributed ledger technologies differ in the way the networked computers come to an agreement (consensus protocols), for example by “proof of work”, “proof of stake” or other processes or combinations.
A DLT can have two types of ledgers:
Permissionless ledger: A ledger that is distributed on nodes that can be executed by anyone without permission. The purpose of a permissionless ledger is to allow anyone to contribute data to the ledger and have identical copies for anyone who owns the ledger. Nodes maintain the integrity of the cash book by reaching a consensus on its condition. A permissionless ledger can be used as an unalterable global record for transfers.
Permissioned ledger: A ledger that is distributed only to nodes that are selected by a central authority such as a bank or government.
Which main problem does DLT solve?
Problem: When data is stored in owner-managed databases, it is difficult to share this data with others without the possibility to modify it or lose it in other databases.
Solution: DLT creates a single truth that all participants can trust. When data is added to a distributed cash book, anyone with an Internet connection can access it by connecting to a node on the network.
The main features and advantages are:
The network is not controlled by any central instance. All network participants have equal rights, therefore the network cannot be shut down by a single actor. In addition, in a decentralized network there is no single point of failure in the technical system, whose failure causes the failure of the entire system. This also increases security against potential attackers. A decentralized network is more secure against manipulation because there are validation and authorization mechanisms across the entire network. Forgery-proof mathematical hash methods ensure that the data is trustworthy. Integrity is ensured as thousands of nodes validate each transaction.
Transactions once executed cannot be changed or reversed. With the DLT there is only one “source of truth”. Every unauthorized change in the network is directly disclosed, so that the correctness of transactions can be absolutely certain.
Trust, which was previously offered by intermediaries (banks, traders, etc.) as a service, can now be made available on a technical level. Since the financial crisis of 2008, trust in the traditional institutions of the economy, the financial market and even the state has decreased significantly. With DLT, two people or companies that do not know each other can do business with each other without having to trust each other and without an intermediary. This saves time (no contracts etc.) and money (no intermediary commissions).
Double spending problem is solved
One of the main advantages of decentralized technologies is that they solve the problem of double spending. Explanation: Since digital money is just a computer file, it is easy to forge by simply copying and pasting. Without DLT, banks track the money of all actors in their accounts, so no one can spend the same money twice. The DLT solves this problem differently and more efficiently than banks: it makes all transactions and accounts public so that it is immediately apparent when money is used twice.
Every user can track all transactions. It is a completely transparent system. Note: There are also so-called “privacy” solutions.
Transactions take much less time than transactions that require some kind of intermediary (bank).
In order to understand the advantages of IOTA’s distributed ledger technology over the classic blockchain, we first need to understand how the blockchain works in general and why the current disadvantages disqualify the blockchain for use in future IoT.
IOTA does not use the conventional blockchain technology but works with the innovative concept of a “tangle”. In a tangle, the user has to confirm at least two other transactions before a transaction can be made.
Shortly after Lehman Brothers filed for bankruptcy in 2008, a nine-page script appeared on the internet under the pseudonym “Satoshi Nakamoto”, outlining a new virtual currency: “Bitcoin: A Peer-to-Peer Electronic Cash System”.
A consensus mechanism is the way in which a group of people without a superior authority reaches a decision and ensures agreement.
Last Updated on 16. February 2021