The definition of a distributed ledger is simple. Ledgers document transactions and are the basis for accounting. They have existed since writing and trade began thousands of years ago. Ever heard of cuneiform clay tablets? Most of them simply recorded commerce. But a bag of clay is no longer required for accounting. In the present — and by many accounts the future — accounting can be done on a distributed ledger through computers, in this case those supporting blockchain and is decentralized(distributed = spread out). The distributed ledger exists as a peer-to-peer network busy documenting transactions and has no single managing authority but rather is based on consensus (we will get to that in a minute). In short, it is the accounting heart of blockchain. Bitcoin (BTC), ethereum (ETH), litecoin (LTC), etc. would not exist without distributed ledgers. The Huobi virtual currency marketplace wouldn’t either.
The technology behind distributed ledgers (distributed ledger technology (DLT) isn’t about what it is, but what it does. DLT allows cryptocurrency transactions to have a transparent, hack-resistant record that can’t be manipulated. And it removes banking middlemen from the equation. The numerous, globally distributed nodes on the network each maintain the entire history of transactions for the virtual currency. Trying to disrupt a single node of the ledger — or even an entire country’s nodes — would still not be enough to corrupt this type of accounting system.
Now, about that consensus part. You might be wondering; Doesn’t “consensus” require time and throttle the whole process? Not in this case. A distributed ledger’s nodes use a consensus algorithm to agree on the validity of a transaction. Each node processes every transaction, decides on the validity, then issues a vote. If the majority agree, the transaction is accepted and added to the ledger across all nodes, which adhere to a strict protocol for communication. People are not involved in the decision making, just the algorithm is. It’s really, really fast — like futuristic fast.
So, why does knowing what a distributed ledger is matter to your cryptocurrency trading? You don’t exactly need to understand what it is to be a trader. But it’s interesting to know that all of your trades are being recorded on the respective currencies’ blockchain and therefore on a multitude of nodes. You can look up your transactions on the blockchain ledger using your transaction ID (TXID). But we will leave navigating the digital currency blockchain records for a future article.
Some of you may be interested in a more detailed explanation of DLT elements. Check out decentralized, secure by design, protocol or Byzantine fault tolerance to get your geek on.
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