Distributed Ledger Technology

Throughout time, stories have been passed down over generations, leading to the creation of some pretty tall tales. What would be more helpful for keeping these stories in line with reality?

Clearly yes! If everyone had the same version of the story, there would be no confusion. That's the premise behind __distributed ledger technology (DLT)__. A distributed ledger is a database that may be shared among entities in a network. This offers potential improvements in financing services and financial record keeping. DLT networks allow for creating, exchanging, and tracking ownership of financial assets on a peer-to-peer (P2P) basis.

Not quite. If more people heard the story, it still would probably change over multiple generations, leading to even more confusion.

No, actually. Over time the storyteller could change minor details, which would lead to confusion.

The consensus mechanism is the key feature here. Just like the same copy of a story, it's the process in which the computer entities or nodes agree on a common ledger. Consensus is achieved by transaction validation and agreement on the ledger update. This leads to transactions that are transparent and accessible. And just like the story can't be modified, how might you describe transactions on the DLT?

No way. DLT technology isn't illegal; all participants can see all transactions.

That's not it. All parties on the network can see the transaction ledger, so there are no disputes.

Exactly. Since the ledger is public, there's no changing the DLT, just like there would be no way to change a story that is written down. It's unchangeable, or "immutable." This is why DLT has enormous potential in finance, as it can accommodate __smart contracts__, which are computer programs that execute on the basis of pre-specified terms and conditions agreed to by the parties of a contract. Smart contracts automatically execute contingent claims for derivatives and transfer collateral in case of default.

But for all this transparency and open communication, there can also be significant risks, especially ones associated with technology and computers. What would be a key feature of protecting this information?

That's it! Encryption is a key feature of the DLT, and __cryptography__, which is an algorithmic process of encrypting data, creates a high level of security. One type of DLT is the __blockchain__, a digital ledger where information is recorded sequentially within blocks that are chained together and secured. Just like other DLTs, the blockchain participants validate new transactions via a consensus mechanism that confirms the new transaction and the order of the older transactions.

No way. Common passwords would allow anyone access to the network.

No. Although open-source software can be used to create the DLT, it needs additional protection to safeguard the sensitive data.

This blockchain consensus mechanism is crucial to its success because it works by requiring a cryptographic problem to be solved. These problems take significant computing power, making it difficult and extremely expensive for an individual third party to change historical data. In order to do so, a person would have to control most of the network's nodes. So what does blockchain rely upon to be successful?

Definitely not. A single node would give ultimate power to one person.

Not quite. That's going to give power to a limited few.

You're right! Broad network participation is crucial for blockchain's success because it ensures that the power of the majority will dictate the acceptance and approval of transactions.

Think about how using DLT can address common risks in trading. What's one risk that DLT helps address?

That's it! It's actually all of those risks. By using a distributed ledger with near-real-time settlement, the credit risk of settling the trade is reduced, the liquidity of the counterparty is addressed, and the counterparty risk is nearly eliminated. This has the potential to be a big step for financial transactions. This settlement and clearing helps more than just traders. Compliance and regulatory authorities are excited about the potential for DLT to maintain near-real-time reviews over transactions. This can lead to more accurate records and transparency and create operational efficiency and auditability. Plus, there's the added benefit of a single ledger, which can increase communications and support between firms, exchanges, custodians, and regulators. DLT has advantages like accuracy, transparency, and security, but it's not without flaws. Some issues include potential breaches in privacy and data protection, as well as the significant energy required for computational processes. However, the potential of DLT to revolutionize the way financial transactions and records are handled is undeniable. It remains a promising innovation in the financial industry.

To summarize: [[summary]]

What benefits might DLT provide?

True, but it provides greater accuracy and transparency as well.

True, but it provides increased security as well.

You're right!

DLT is based on a distributed ledger, a type of database shared among a network of participants. Each participant has a copy of the digital database, ensuring a verified record of all transactions. A distributed ledger network has all participants (nodes) connected to each other, each with a copy of the distributed ledger. The consensus mechanism is at the center, where nodes agree on new transactions and ledger updates.

If everyone had a written copy of the events

If more people heard the story over multiple generations

If one person had to continually tell everyone the story over and over

Illegal

Disputable

Unchangeable

Encryption

Common passwords

Open-source software

A single, ultimate node

A few controlling nodes

Broad network participation

Credit risk

Liquidity risk

Counterparty risk

Continue

Increased security

Greater accuracy and transparency

Both of these