One thing is certain: distributed ledger technology itself is very real. The technology exists. But what about its impact? Is the usage of distributed ledger technology (DLT) the golden goose proponents claim it to be? Or is it like Bigfoot, where plenty of people claim the value exists but none have been able to prove it?
I’m in the camp that thinks it’s going to have a profound impact on the way we store transactions. Any relatively new technology receives doubt at first. It’s up to the early adopters and visionaries who build the technology to prove its worth. In this post, I’ll show you why I think DLT is here to stay.
What Is Distributed Ledger Technology?
Let’s start with a brief overview of what DLT is. The word ledger is pretty obvious. Ledgers have been around for a long time. Merchants at the dawn of recorded history stored transactions on clay tablets. Presumably, even before such recordings were in a form that could survive the test of time, people were keeping track of who owed who what.
Of course, we no longer record our transactions on clay tablets. They tend to break once hardened and can be ruined by the family cat climbing all over things he shouldn’t be. Nobody wants a cat print covering the only record of a debt owed to them. So, we naturally moved to much more resilient paper records. Then further onward to storing our ledgers in spreadsheets on our local computers, then into the cloud for extra redundancy and safe-keeping.
That last part is great, isn’t it? Storing all your data in the cloud alleviates a lot of concern should a catastrophic event wipe out your local data. It’s all backed up, on multiple servers, owned by a single company. But that last part is a bit of a problem. How do you know you can trust that company? What happens if they go out of business? Or what if they raise their rates to something you don’t want to pay?
What makes DLT so great is that it takes the next step in the evolution of the ledger. It alleviates the concerns mentioned above without re-introducing any of the downsides that technology has solved thus far. It does that by taking the data that would be stored on one entity’s systems and distributing it across multiple entities in a secure way using cryptography. As a result, you are no longer beholden to one company for access to your data.
How Does DLT Work?
To gain a better understanding of why I think this is an important technology, let’s take a closer look at how DLT works. It all starts with a peer-to-peer network. Those of you old enough to remember the Napster days will be familiar with the term P2P. BitTorrent is another popular P2P application.
But while people can use those systems for shady reasons, the P2P in DLT can eliminate shadiness. In both cases, the purpose of a P2P network is to spread that data out across many different systems, controlled by different people. The decentralized nature of P2P makes it impossible for any one person to alter the data or pull the plug on its storage.
Because P2P has been around for so long, and DLT is only just now becoming a thing, it should be easy to see that DLT is more than just P2P. The reason is simple: the stakes are much higher for storing important business transactions than for pirating the latest Metallica song.
This is why P2P networks alone aren’t enough. DLT also adds consensus-building mechanisms that ensure each of the peers is in sync with the others, is only sending valid data, and is doing so in a secure way.
The rise of blockchain technology, made most famous by Bitcoin, gave us the tools we need to accomplish this (though blockchain itself has been improved upon over the years for an even more robust solution). Ethereum gave us the second generation of the technology, allowing users to put smart contracts in place. The terms of the contract are automatically executed when the conditions are fulfilled.
Newer technology, such as directed acyclic graphs (DAG), removes the linear nature of blockchain and allows for much faster processing.
How Is Distributed Ledger Technology a Game Changer?
I’m sure this all sounds very good, but what does it actually mean for the way we conduct business? What makes me think DLT is going to revolutionize that? The issue is that there are a lot of problems with our current system. Those merchants who first got clay tablets were probably thrilled that they no longer had to keep stacks of leaves, beads, or whatever else. But the fragility of the new method presumably became readily apparent.
Still, it was better than what they had. So they learned to live with it until paper came along. We’re at the phase now where we’ve learned to live with our current system so well that we might not even realize how fragile it is.
In recent years, crypto has proven itself to be a trustworthy way to store value. A single Bitcoin is worth tens of thousands of dollars, and investors continue to see it as a worthy investment. El Salvador trusts in Bitcoin enough so much that it became the first country to recognize the cryptocurrency as official legal tender.
Since Bitcoin, crypto has driven other high-dollar investment vehicles, as I’ll discuss later. People trust crypto for a reason; It’s mathematically secure. The consensus mechanisms, encryption protocols, and distributed nature combine to make the system resilient to attacks. When using a distributed ledger, you no longer have to worry that your accountant is skimming off the top or that someone at your bank might misplace a decimal point.
The combination of security and automation limits those threats.
Modern banks are built on antiquated systems — not clay tablet antiquated, but antiquated enough to be far too slow for the speed at which business now operates. If you want to ensure money gets somewhere instantly, you still have to use cash or certified funds.
This process is slow because there are many links in the chain, and verification must occur at each step. Delivering money across borders adds even more intermediaries and more time to the equation. The banking industry stands to benefit immensely from DLT, which can remove all those intermediaries and allow for nearly instant transfers. With DLT, our ability to deliver confirmed payment will finally match our ability to deliver other electronic data.
Reduced Barrier to Entry
Removing all of these middlemen does more than just increase the speed at which the money can be transferred. It also reduces the barrier to entry for handling financial transactions. The World Bank even predicts that distributed ledger technology will be a key component in expanding financial access to traditionally unbanked populations.
Facebook made waves when they rebranded as Meta and announced their Metaverse. But virtual worlds powered by Ethereum and its smart contracts have existed for a few years now. These thriving virtual economies consist of a currency all their own, where participants buy virtual real estate to the tune of $500 million.
The type of automation, security, and trust required to get people to spend tens of thousands of dollars on virtual land (and have it be considered a serious investment) didn’t exist just a few years ago. But now, startups can create platforms where people store as much money as most people do in traditional banks.
Earlier, I mentioned how Ethereum paved the way for smart contracts in blockchain technology. DLT retains this feature, which opens up a lot of doors for how systems process transactions. It at least allows us to use those doors in improved ways.
In some sense, we’ve had access to “smart” money before. As a Federal Reserve report points out, PayPal has had an API that allows developers to work with their payment systems for a long time. PayPal’s system even allows for instant payments where banks fail to do so. In that sense, PayPal is extremely flexible.
But it’s as centralized as you can get. Many people have had their PayPal accounts frozen — and with it, their ability to earn a living. Alternatives such as Stripe offer the same benefits… and the same problem.
Smart contracts in DLT allow for the same flexibility as PayPal’s API. Payments can be sent automatically when a certain condition is met. The conditions that send the trigger are programmable, so they’re able to meet a variety of changing needs and complex scenarios.
Bring On DLT
Perhaps the biggest reason I think DLT will become a big deal in the future is that it solves problems that can’t be solved otherwise. There’s currently no other way to provide the transaction speed, ease-of-implementation, and trust factor that DLT does. Just like clay tablets to paper, it’s time for the business world to make the next leap in transaction storage. Distributed ledger technology provides us with the perfect vehicle for that leap.
This article was originally published on KirkCoburn.com.