It seems everybody is talking about it, but in reality, it is relatively small. It is generating a huge hype, but few have the underlying fundamentals.
When bitcoin first emerged back in 2009, it was described as a ‘cryptocurrency’ based on ‘blockchain’ using ‘DLT’.DLT is the generic name for various implementation of blockchain technology solutions. Blockchain is the technology of bitcoin. There are now new versions of blockchain technology that have much wider applicability beyond cryptocurrency.
The term “Distributed LedgerTechnology” (DLT) is used to describe a ledger shared across a network.Itallows participants or nodes to write and read transactions to the shared ledger. As the name implies, it is distributed widely in a precisely controlled fashion. DLT allows transactions to be carried out directly withoutintermediaries.DLT enables “peer-to-peer” transactions between the nodes.
A ledger, according to the Oxford Dictionary, is “a book or other collection of financial accounts”. Ledgers first arising when people started trading goods and services and needed to keep records of transactions. Today’s conventional ledger system is often a centralized system. One example of a conventional “ledger” is a bank account record, in which every debit or credit transaction of a bank customer is maintained.
A distributed ledger, unlike a conventional ledger system, is collectively maintained by all the participants of the system, rather than by one central authority. Each participant is a “node” of the distributed ledger system. The nodes participate in creating and maintaining the distributed ledger. Since a local copy of the ledger is maintained in each node, the system is known as a distributed ledger.
DLT is a database (ledger) that is shared (distributed) across a network. Transactions or records are copied to all participants.The point is, there is no ‘central’ point of authority. Transactions are copied securely and rapidly using cryptography onto different participants. Transactions are not stored in a central database. All participants of the network store data locally. Traditional intermediaries, e.g. a bank, are no longer required. Participants in the network act as witnesses to each transaction.
DLT is a protocol for building a replicated and shared record ledger system. Such a system may be used to record a wide range of items, such as asset ownership, asset transfer transactions, and contract agreements. While its ledger function is like that of a conventional paper-based or electronic-based ledger system, its capabilities go much further.
A blockchain is a type of distributed ledger, comprised of unchangeable, digitally recorded data in blocks. Each block is ‘chained’ to the next block, using a cryptographic signature. This allows blockchains to be used like a ledger. Blockchain 1.0 is currency and refers to the deployment of cryptocurrencies in applications related to cash such as payments and remittances. Blockchain 2.0 is contracts and refers to all the financial applications that are being built on the blockchain technology. Blockchain 3.0 is applications beyond currency and finance.
Bitcoin DLT came onto the scene with the introduction of bitcoin. Bitcoin, one of the best-known applications of DLT. Bitcoin is a digital asset that utilizes a peer-to-peer payment system, enabling transactions to take place between users directly without the need of a centralized authority to control and administer the system. All the transactions are verified by network nodes, and recorded in a distributed database.
Traditionally, a payment transaction requires a centralized authority acting as an intermediary (e.g. a bank or clearing house) to process the money and transfer it between accounts. Unlike conventional transactions, bitcoin distributes it over the DLT network. The nodes verify transactions and publish them to the ledgers and each transaction is added to the distributed database Hence, no centralized authority is required to manage, control or authorize transactions between participants.
Over the past several yearsDLT such as blockchain has exploded. Regulators, consultants, technology firms and academia are promoting DLT for financial services. Blockchain technology has moved beyond cryptocurrencies, and its application is now being considered for all parts of the financial system. Capital raising, trading, clearing and settlement, global payments, deposits and lending, property and casualty claims processing, identity management, compliance, risk management, and anti-money laundering have all been identified as significant potential DLT use cases.
DLT application in financial services industry has the potential to transform the way value is transferred, information is shared and business logic is coded.The World Economic Forum (WEF) has identified six key value drivers for DLT in financial services:
Insufficient and inconsistent understandingof technology poses challenges to wideradoption of DLT.The potential highcosts and perceivedrisks associated with early adoption ofDLT and possibility of disruptingexisting practices may stancefurtherchallenges to businesses.Because of the emergingnature of the technology, there is a lackof governance.The current regulatory environment withrespect to DLT isperceived as an obstacle to its widespreadadoption. The emergence ofmultiple, non-interoperable DLTimplementations could also limit widespreadadoption. Safeguarding dataintegrity is perceived as a key challenge too. The distributed nature of DLT and the needfor huge computing power could potentially result in high energy consumption cost. Key obstacles remain with the legal enforceability of DLT.
By removing the need for intermediaries, DLThas the potential to provide significantefficiency gains and cost savingsfor businesses.The adoption of DLT could potentiallyenable new revenue sources forbusinesses with new functionalities and innovations on top of existing services. The growth of the DLT ecosystem could result in thecreation of newcollaboration and engagementmodels.The decentralizednature of DLT could facilitatetransactional systems to become moreresilient.DLT hasthe potential to improve users’trust in carrying out transactions.The immutability of DLTtransactions offers reducing the propensityfor fraud.DLT could enable efficientand effective digital identity management through the use of cryptography. DLTcould be used to implement theunderlying mechanism for smart contractsacross different sectors.
Distributed ledger technology is gaining popularity fast. The opportunitiesarising from DLT are huge.However,there are also many challenges to strugglewith. Steps can be taken tobetter understandthe current realities and future impacts. The technology is currently in its infancy but it is here to stay in the long run. Source: Internet.
DLT reduces/eliminates manual efforts required to perform reconciliation and resolve disputes
Regulatory efficiency improvement
DLT enables real-time monitoring of financial activity between regulators and regulated entities
Counterparty risk reduction
DLT challenges the need to trust counterparties to fulfill obligations as agreements are codified and executed in a shared immutable environment.
Clearing and settlement time reduction
DLT disintermediates third parties that support transaction verification/validation and accelerates settlement
Liquidity and capital improvement
DLT reduces locked-in capital and provides transparency into sourcing liquidity for assets
DLT enables asset provenance and full transaction history to be established within single source of truth