LEDGERPATH

Blockchains vs DLTs, any difference?

We’ve probably all heard of Bitcoin. How much you know about Bitcoin will vary, but the term blockchain surely has been associated with it by now.

So what’s a blockchain anyway? And how does it relate to Distributed Ledger Technology, or DLT?

In short, a blockchain is a subset of a DLT. It’s an implementation of a ledger, using certain techniques, which, over time, creates a chain of what we call blocks. A block is a set of data, in which we’ll find the transactions and operations that occurred during that block. There’s also other data in the block, like a timestamp and what’s called a hash.

Now a hash is a value, which is calculated using what we can call a one way function or a hash function. It’s a mathematical method of producing a number, from other numbers, where it is very difficult to go the other way. A simple, but stupid, hash function of 10 numbers could be to add them all together. It’s very difficult to find (without getting lucky or knowing it otherwise) the 10 original numbers from the sum of them. But it’s not a good hash function because it’s very easy to create a given sum from some selected input. So we also need it to be difficult to guess what input creates a given hash output.

In Bitcoin (and other similar blockchains), something called Proof of Work (PoW) is used to ensure the integrity of the blockchain (a consensus algorithm). All the blocks are linked through a chain, using the mentioned hash function principle. By taking data from the current block and the hash of the previous block, we link them together by producing the hash of this data in the next block.

Because reproducing the hash with other (valid) input which differs from the original input is practically unthinkable, we can with sufficient certainty look at the current block and follow that block backwards all the way to the initial genesis block. But it’s not difficult to create a new child block and link this to the previous. We therefore need a method which makes this more difficult, and that’s where PoW enters the picture.

By creating a challenge, you can ensure that only one block survives as the legitimate next block. For Bitcoin, this challenge is to create a hash with a certain number of zeros. How many zeros depend on the current difficulty of the network, which is a factor that automatically adjusts itself up and down depending on the total amount of distributed computing power available. Since it is very difficult to guess what input produces a given hash output, the mining nodes in the Bitcoin network randomly try a lot of different data. Whomever gets lucky and first find the random input that, together with all the other block data we mentioned earlier, produces a sufficiently formated hash wins the round.

Winning the round in Bitcoin includes getting a certain amount of Bitcoin credited to your Bitcoin account as a reward. This is why the process is called mining, and it’s a method to incentivize people to operate the required hardware to ensure the blockchain can exist and progress.

PoW is a very inefficient method which requires a lot of electricity. Some argue therefore that the value of Bitcoin is tied to the cost of electricity, something we disagree with here at LEDGERPATH. But we’ll get back to that in later blog posts, where we’ll also look at other incentive methods, like Proof of Stake (PoS), or methods where the incentive doesn’t come directly from operating of the hardware and software, like various voting systems.

A lot of things have been mentioned above, like PoW, PoS, voting systems, and how to value cryptocurrencies like Bitcoin. These are things we’ll dive into going forward, in an attempt at educating and showing the potential benefits with DLTs. So if you don’t want to miss out on this, please subscribe to our mailing list below.



This blog post was written by Christian. He's got several years of experience working within FinTech holding a MSc in Quantitative Finance and a BSc in Computer Science and Industrial Automation.

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