Do you know what a digital ledger is? Here’s a hint: there’s no relation to Heath Ledger.
Ledgers are the foundation of accounting, and they are about as ancient as money and writing.
Since ancient times, ledgers have been at the center of economic transactions. They have been used in various ways, such as recording contracts, payments, movement of assets or property, or buy-sell deals. When the journey first commenced, their medium was primarily clay, stone, paper, and papyrus. However, after computers became normalized in the 80’s and 90’s, paper records were digitized, often by manual data entry.
Many believe when digital ledgers first started out, they mimicked the cataloging and accounting of the paper-based world. Further, it could be said that digitization has been applied more to the logistics of paper documents rather than focusing on their creation. To date, paper-based institutions remain the backbone of society: seals, written signatures, bills, money, and certificates.
So what allowed for the creation of distributed ledgers? For the most part, it’s thanks to computer power and breakthroughs in cryptography, but the discovery and use of some new algorithms definitely played a defining role as well.
It isn’t too surprising that digital ledgers are starting to make a name for themselves as the technology has massive potential to change the way institutions, governments, and corporations work. For starters, digital ledger technology can help governments in tax collection, as well as the issuance of passports and record land registries.
Let’s get into the basics:
Essentially, a distributed ledger is a database that it is held and updated independently by each node (or participant) in a massive network. The distribution itself is unique as records are not communicated to various nodes by one central authority, but are instead constructed independently and held by every participant. To simplify, every single node/participant on the network processes each and every transaction, which means they come to their own conclusions and then vote on those conclusions to make the majority agree on one outcome.
After there is a consensus, the distributed ledger is updated, and all nodes keep their own identical copy of the ledger. Why? This architecture allows for a new dexterity as a system of record that goes above and beyond being a simple database.
When learning about distributed ledgers, it is important to remember that ledgers are a dynamic type of media and it has properties and capabilities that outshine static paper-based ledgers. If you are interested in learning more, it is key that you read up on the functions of a blockchain as there is quite a bit of confusion as to what exactly is meant by a blockchain.
The essence of these types of relationships is that the cost of trust (which, before now, was provided by lawyers, banks, governments notaries, regulatory compliance officers, etc…) is avoided by the architecture and the qualities of the distributed ledger.
So why is this important? Well, the invention of distributed ledgers is a major player in a revolution of how information is accumulated and communications. It applies and looks at both dynamic data, like transactions, and static data, such as a registry. Further, distributed ledgers let users move beyond the simple custodianship of a database and pivot energy to how we use, challenge, manipulate and take value from databases. Because of this, distributed ledgers are less about maintaining a database and more about managing a system of records.
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