WHY YOU SHOULD USE DECENTRALIZED LEDGERS
What is a ledger (in cryptocurrency)?
A crypto ledger is a record keeping system in cryptocurrency. It is usually public and maintains all information on users’ identities, their cryptocurrency balances, and all transactions completed among different crypto holders.
In light of this, for privacy sake, all information is stored in secure and anonymous form to follow the security and privacy protocols of cryptocurrency generally.
To help understand this better, we should weigh the two types of ledgers; public and private.
In decentralized finance (crypto and other digital assets), the ledgers are public and accessible save for a few. However, in traditional banking systems, the ledgers are private.
Examples of crypto exchange companies that make use of private ledgers include FTX and Coinbase. This means their transactions are not made available for the public and there are no costs for on-chain transactions. Also, they do not wait for on-chain validations.
How do cryptocurrency transactions on a public ledger work?
From the creation of a cryptocurrency token, a blockchain network for it is also created. A blockchain network is a public ledger. It is a chain of blocks on which transaction details are recorded after they have been authenticated and verified by the designated network participants who are also known as miners.
After this, full nodes (which are the blockchain custodians and are responsible for keeping all copies of the ledger in sync and storing encrypted data of past transactions while creating new blocks as necessary) maintain a copy of the whole ledger on their devices in the crypto network.
The public ledger is then distributed as participants connect and contribute to the blockchain network activities. This means that hundreds and thousands of participants will all keep a copy of the ledger. They know all the details about the tokens, balance, holders and also can point out frauds and scams if they happen.
The use of the public ledger keeps the blockchain network as secure as possible in the long run.
What is a decentralized ledger?
A decentralized ledger is a public ledger that has all the records of all transactions which happen on a network. The nodes that maintain the records collaborate in following the protocol rules. A perfect example is Bitcoin which uses blockchain to maintain its decentralised ledger. The decentralized ledger allows anyone to read and write directly into it, hence the decentralisation. Every time a new transaction is generated, each node receives a copy of the new state of the ledger. The ledger then will be updated only when the majority of the nodes confirm the transaction. All nodes in the Bitcoin network keep and validate identical copies of the ledger to prevent any central point of failure or fraud.
In DeFi, a Blockchain uses the Decentralized Ledger Technology to keep data and record as safe as possible.
Blockchain is literally like a chain format of digital information in blocks which are held together by code and data. This is why it remains best framework for various cryptocurrencies to provide a decentralized ledger across several computer networks.
It allows transactions to take place successfully without need for a trusted intermediary or interference by another entity.
Blockchain technology is not owned by anyone and can be said to be managed by a network of personal computers. The format was however invented by an entity called “Satoshi Nakamoto”, whose identity is unclear till this moment, in 2008 to function as Bitcoin’s public ledger. The Blockchain technology is not ran by a person or a group of people, but rather by various computer networks. The network can then be accessed by anyone who is authorized to access it.
Blockchain uses cryptography to prevent records from being compromised or manipulated by unauthorized users. Cryptography is a method of protecting information and communications through the use of codes, so that only authorized individuals can read and process it.
Blockchain in cryptocurrency also helps to monitor transactions to verify that money is not being spent more than once (double-spending), and that each currency only has one owner at a time.
Benefits of using a decentralized ledger (blockchain technology)
- Security: So far, the clearest and effective use of blockchain has been in managing the transactions of Bitcoin currency. It is slowly getting adopted in the corporate and financial sectors in recent times and that’s largely due to its security benefits. This security is currently its largest selling point. It helps to prevent hacking because information is spread across thousands of computers making it harder to manipulate. According to Don & Alex Tapscott, authors of Blockchain Revolution (a book that covers the intricacies of Blockchain technology):
“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
- Transparency: Blockchain/decentralized ledgers are decentralized, meaning any network member can access, and verify data recorded into the blockchain. Therefore, the public can trust the network. On the other hand, a traditional database, like the traditional banking system, is centralized and does not support transparency. Users cannot verify information whenever they want, and the administration makes a selected set of data public. Still, individuals cannot verify the data that is made public.
- Lack of censorship: A decentralized ledger has no interference from a centralized organization or the government. Nobody is in control of it and that means it is not subject to any law or regulations.
- Fast transaction speed: Transactions made on decentralized blockchain networks are faster than transactions made using traditional banking methods.
Key takeaways
- A decentralized ledger is a complete record of all transactions on a network.
- Decentralized ledgers are maintained and updated by many computer systems that are referred to as nodes.
- Decentralized ledgers exist only on blockchain networks.
- Decentralized ledgers allow transactions to take place without a third-party interference.
- The major benefit of using decentralized ledgers is it’s security.
- It is almost impossible to tamper with data on a decentralized ledger hence it’s tight security.
