Distributed Ledgers
Description
By Andrej Zwitter and Jilles Hazenberg:
"Blockchain technology and DLT can be defined as decentralized and trustless ledgers, recording transactions across a peer-to-peer network. These features create the potential to provide transparency as well as accountability. Such technologies could impact not only the financial sector (e.g., Bitcoin, Libra) but also diverse fields such as supply chain management, digital identity, smart contracts, voting (e.g., liquid democracy), health records, water management, and much more.
To summarize this in a simplified manner, a blockchain is a decentralized database that stores a registry of assets and transactions across a peer-to-peer network. The “asset” may not only be money or transactional information, but also information regarding ownership, contracts, goods, and any other information (Warburg, 2016). A blockchain does not duplicate the value that is transferred, like other peer-to-peer networks, but instead, it registers that a value has been transferred from one actor to another. Moreover, DLT does not require any central control system, and it stores the transaction history in blocks of data that are cryptographically locked together. As it is replicated on every node in the blockchain network, it becomes an immutable and transparent historical record of all transactions (Balva, 2017).
Blockchain is based on a consensus mechanism. This mechanism basically relies on “hashing” and a type of “proof,” e.g., “proof of work,” “proof of stake,” and other proofs. Hashing is the process of creating a digital fingerprint of any sort of information shared in the transaction. The hash is a way of verifying the authenticity of the transaction. This allows users to identify whether data have been tampered with.
The technical specifications of DLT systems are becoming increasingly varied in nature. This shows that often-highlighted features of blockchain technologies, such as immutability, transparency, and trustlessness, are in fact design features rather than sine qua non-conditions (Zwitter and Boisse-Despiaux, 2018). However, one can say that blockchain is a technology that lowers the uncertainty regarding transactions between parties that do not otherwise share trust. The idea of a “trustless” technology means that DLT, by nature of a validated ledger shared across all peers, reduces the uncertainty of not having recourse if something goes wrong with a transaction. Since DLT allows the tracing of every transaction, from the beginning until it is validated and added to the blockchain (or similarly structured ledgers), users can verify whether an error has happened, and also where the error has occurred."
(https://www.frontiersin.org/journals/blockchain/articles/10.3389/fbloc.2020.00012/full)
History
Distributed Ledger Technology as a pivot in history
Chris Berg, Sinclair Davidson and Jason Potts:
"Ledgers appear at the dawn of written communication. Ledgers and writing developed simultaneously in the Ancient Near East to record production, trade, and debt. Clay tablets baked with cuneiform script detailed units of rations, taxes, workers and so forth. The first international ‘community’ was arranged through a structured network of alliances that functioned a lot like a distributed ledger.
The first major change to ledgers appeared in the fourteenth century with the invention of double entry bookkeeping. By recording both debits and credits, double entry bookkeeping conserved data across multiple (distributed) ledgers, and allowed for the reconciliation of information between ledgers.
The nineteenth century saw the next advance in ledger technology with the rise of large corporate firms and large bureaucracies. These centralised ledgers enabled dramatic increases in organisational size and scope, but relied entirely on trust in the centralised institutions.
In the late twentieth century ledgers moved from analog to digital ledgers. For example, in the 1970s the Australian passport ledger was digitised and centralised. A database allows for more complex distribution, calculation, analysis and tracking. A database is computable and searchable.
But a database still relies on trust; a digitised ledger is only as reliable as the organisation that maintains it (and the individuals they employ). It is this problem that the blockchain solves. The blockchain is a distributed ledgers that does not rely on a trusted central authority to maintain and validate the ledger."
More information
* Book: Distributed Ledgers: Design and Regulation of Financial Infrastructure and Payment Systems. Robert Townsend. (MIT Press)
(PLEASE NOTE: Distributed Ledgers is available for free via an open access grant here: https://doi.org/10.7551/mitpress/13382.001.0001)
"An economic analysis of the transformative potential and optimal design of distributed ledger technology (DLT), discussing key components and applications. ... The book focuses more broadly on an economic analysis of what DLT can do. It begins by analyzing key individual components, comparing and contrasting the economics framework with the frameworks of computer science and data management disciplines to clarify the technology and initiate steps to combine these disciplines.
The book also covers familiar but key component parts of distributed ledgers: ledgers as financial accounts, e-messages and e-value transfers, cryptography, and contracts including multi-party mechanisms. Each component is discussed, evaluated, and illustrated through the context of historical and contemporary economies, with featured applications in both developed economies and emerging-market countries. These use cases are a hallmark of the monograph. A recurrent focus is the general-equilibrium impact of innovations and welfare gains from innovations featuring key components.
Contract theory is used to derive optimal arrangements, constrained only by obstacles to trade, featuring how the various aspects of ledgers can deepen infrastructure. Mechanism design and monetary theory are used to study public versus partitioned ledgers and improvements in payment systems. Prudential regulation, rather than being a barrier to innovation, can be improved with the use of DLT.
The goal of the book is to provide blueprints for the optimal design and regulation of financial systems given what we know today, including not only choices at the endpoints of the spectrum, of centralized versus decentralized systems, as in the hype, but the choice of hybrid forms in between. Each key component is assessed from both computer science and economic perspectives, and syntheses are offered. Overall, the monograph provides a vision for where we are heading, being clear about obstacles along the way."
* Working paper, "Distributed Ledgers: Innovation and Regulation in Financial Infrastructure and Payment Systems." Robert Townsend.