Distributed Ledger Technology (DLT), or distributed ledger technology, is a database of digital records that are replicated, shared and synchronized, and geographically distributed across multiple sites, countries and/or institutions.
DLT is, essentially, a record of ownership of virtual assets maintained in a decentralized manner, in which transactions and changes of ownership are carried out and verified through cryptography, enabling secure transactions between two parties without the need for a central authority or third parties to verify them, as the system itself is responsible for doing so through its nodes (1).
All participants can have their own identical copy of the database. Any change to it is reflected in all copies within minutes, or in some cases seconds. The recorded assets may be financial, legal, physical or electronic. All information in the ledger is stored securely and accurately using cryptography and can be accessed using cryptographic keys and signatures. Once the information is stored, it becomes an immutable database and is governed by the rules of the network. While centralized ledgers are prone to cyberattacks, distributed ones are inherently more difficult to hack because all distributed copies must be attacked simultaneously for an attack to succeed. In addition, these ledgers are resistant to malicious changes by a single party.
Although this technology may result in a loss of value for traditional financial institutions and their role in fiduciary intermediation, its potential use in many financial areas—international payments (non-SEPA), syndicated loans, post-trade activities (clearing and settlement) and custody, or for reporting and compliance obligations—is encouraging research into its use by those institutions themselves.
It is still too early to know precisely what the future practical applications of this type of technology will be in the financial system. Nevertheless, it is generally estimated that DLT, which would function as a notary public, could make it possible to reduce costs and increase efficiency when processing and recording transactions.
Underlying this technology is blockchain technology, or “blockchain”, which was invented to create the digital currency Bitcoin in 2008. Blockchain algorithms
allow Bitcoin transactions to be grouped into blocks and added to a “chain” of existing blocks stored linearly and using a cryptographic signature. In other words, blockchain is a type of DLT, made up of unalterable digital data recorded in packages called “blocks”.
(1) Nodes are each of the participants in a distributed ledger. Different nodes may have different rights to read, write and/or delete data.
