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Dec 18, 2020
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Some Facts Behind Centralized Ledgers and Distributed Ledgers

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and when blockchains are ledgers and ledgers are not blockchains

The recent development of blockchain led to many terms that depict its uses in many cases. Intertwining words can sometimes sow confusion between centralized and decentralized ledgers or between distributed and distributed yet centralized systems.

So, let us tackle first, ledgers

A ledger is simply a record book that keeps all financial transactions of a company. It goes by another name called register when it concerns schools, colleges, and universities. It has always been the economic nerve point of every business transaction since time immemorial such as the recording of payments, contracts, buying or selling dealerships, or property and asset movement. From stone tablets to papyrus, to paper and to computers, record keeping principles have always pretty much been the same. But as of late, ledgers have become the basis of financial infrastructures for a fast and secured way of processing and keeping sensitive transactional data in cryptographical ways.

How does a centralized ledger work?

A centralized ledger is managed by one person or entity that has control over all the recorded contents of the general ledger related to the assets of the company including liabilities, expenses, revenues, the owner’s equity, and other transactions that involve financial value. The centralized ledger reposits all data coming from the company’s sub-ledgers involving cash management, purchases, and other projects, both financial and non-financial. The traditional manual general ledger can be a bulky book of different accounts consisting of several pages each.

Any problem with that?

Many dangers lurk within a centralized ledger that incurs damage or ruin to a client. A conventional financial institution with a centralized ledger can either penalize you or take your money without you knowing it because the ledger can be tampered with maliciously by the controlling person or entity. They can even stop the processing of transactions without prior notice. An error can also likely occur with wrong entries due to human limitations. A centralized ledger has only one point of failure.

Enter distributed ledger

A distributed ledger, on the other hand, is nothing else but a shared ledger, where the database is kept and distributed among multiple sites and no centralized entity or single person controls it. Any change that is attempted by one site will be reflected to the other participating sites in a matter of seconds. The security and accuracy of the distributed ledger are guaranteed by hashing functions and by cryptographic encryptions which can only be opened by cryptographic keys.

Other advantages of a distributed ledger

While users have no control over their data in a centralized ledger, a distributed ledger will have handed power and control of users over all of their recorded transactions and other information. The data entered is complete and accurate, consistent and timely, and is readily available, meaning, the data is transparent and immutable, rendering it unalterable and cannot be deleted. Since the database is shared and synchronized on multiple participating sites, it has no single point of failure and, therefore, will be able to parry any malicious attack. There will be no need for intermediaries between transacting parties, thereby reducing fees and counterparty risk since command protocols will have to be executed for any transaction to succeed. The distributed ledger technology (DLT) will be so organized by hashing, timestamp, and cryptographic signatures, that any complication or clutter associated with manual and centralized ledgers will be a thing of the past. Another advantage is the round-the-clock 24/7 functioning of DLTs that processing time is done and over within a matter of minutes. Whereas institutional transactions can take days or weeks and are halted during weekends and holidays.

To conclude

It is important to remember that while a blockchain is a type of distributed ledger, not all distributed ledgers are blockchains. If the structure of a blockchain is the chained sequence of blocks, distributed ledgers do not need such, including proof of work. It is only a type of database that is distributed among the multitude of participating sites.

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Some Facts Behind Centralized Ledgers and Distributed Ledgers was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

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