Jul 12, 2017
Centralized Ledgers Vs Distributed Ledgers (Layman Understanding)
Hold tight this will be a long post and I assure you it doesn't take much time to read.
Ledger:
Ledger by definition it is a book of record keeping all the financial transactions of the organization. In schools and colleges you call it as a register.
Since ancient times, ledgers have been at the heart of economic transactions to record contracts, payments, buy-sell deals or movement of assets or property. The journey which began with recording on clay tablets or papyrus, made a big leap with the invention of paper. Over the last couple of decades, computers provided the process of record keeping and ledger maintenance great convenience and speed. Today, with innovation, the information stored on computers is moving towards much higher forms which is cryptographically secured, fast and decentralized. Forget about cryptography at the moment.
The above picture is the pictorial representation of how Centralized and Decentralized systems works.
Centralized Ledger:(See 0.1 Image first from the left)
A centralized ledger also known as general ledger contains all the accounts for recording transactions relating to a company’s assets, liabilities, owners’ equity, revenue, and expenses. Anything in the world which has a financial value needs a ledger. In modern days computerized ledger came into existence i.e Enterprise resource planning (ERP), the general ledger works as a central repository for accounting data transferred from all sub ledgers cash management, fixed assets, purchasing and projects. The general ledger is the backbone of any accounting system which holds financial and non-financial data for an organization. The collection of all accounts is known as the general ledger. In a manual or non-computerized system this may be a large book. Each account in the general ledger consists of one or more pages.
Cons of Centralized ledger:
For example the bank has total control over which transactions are posted on the ledger because its a centralized asset ledger which lists all transactions that is controlled by a single entity, such as a bank statement, by this they can fine you and directly take money away from you without your consent. This is a danger of centralized ledgers because if the entity-in-charge has malicious intent, it can do some serious damage to its clients.
Another disadvantage of a centralized ledger is the controlling entity can shut down without notice and transactions will no longer be processed. Giving this kind of authority to someone will result in error, whether it be accidental or not.
Distributed Ledger: (See 0.1 Image second from the left)
My first understanding after reading many articles it is nothing but a shared ledger. There is no central administrator or centralized data storage. A distributed ledger is essentially an asset database that can be shared across a network of multiple sites, geographies or institutions. All participants within a network ( Here network is nothing but all the people who are connected each other with their computers )can have their own identical copy of the ledger. Any changes to the ledger are reflected in all copies in minutes, or in some cases, seconds. The assets can be financial, legal, physical or electronic. The security and accuracy of the assets stored in the ledger are maintained cryptographically ( Cryptographically is nothing but encryption)look at the picture below.
I have entered balance of the account holder which consists of numbers and alphabets now the output is completely changed to
(2124F6EA6992A57D9518A2ACE130EBC07708D1D061A38F58D38E7C7069E55BD7 this is calling as hashing and the output is called hash function, ignore these terms you will learn in further articles.)
Entries can also be updated by one, some or all of the participants, according to rules agreed by the network. You might be seeing in many articles ‘Block Chain’ A Blockchain is just one type of distributed ledger
Two parties are able to make an exchange without the oversight or intermediation of a third party, strongly reducing or even eliminating counterparty risk.
Pros of using Distribute Ledger: ( Here I am taking Blockchain as an example because it is most favorite in the market )
Users are in control of all their information and transactions.
Data is complete, consistent, timely, accurate, and widely available.
Due to the decentralized networks, blockchain does not have a central point of failure and is better able to withstand malicious attacks.
Users can trust that transactions will be executed exactly as the protocol commands removing the need for a trusted third party.
Changes to public blockchains are publicly viewable by all parties creating transparency, and all transactions are immutable, meaning they cannot be altered or deleted.
With all transactions being added to a single public ledger, it reduces the clutter and complications of multiple ledgers.
Interbank transactions can potentially take days for clearing and final settlement, especially outside of working hours. Blockchain transactions can reduce transaction times to minutes and are processed 24/7.
By eliminating third party intermediaries and overhead costs for exchanging assets, blockchains have the potential to greatly reduce transaction fees.
I know there are many mistakes please correct me if I am wrong thanks for reading patiently.
