A quick and simple answer to an important question.
Even though they are different, the terms Blockchain and Distributed Ledger Technology (DLT) are often used interchangeably. This has led to a significant amount of confusion. So, what’s the difference?
A distributed ledger is a database of replicated, shared, and synchronized digital data that is geographically spread across multiple sites in a network. Rather than having a central administrator like a traditional database, (think banks, governments & accountants), distributed ledgers have a system of synchronized databases that provide an auditable history of information and are visible to anyone within the network. Distributed ledgers rely on similar principles of consensus to a blockchain.
Although distributed ledger technology and blockchain share the same conceptual origin and purpose — a decentralized database or log of records, they are not exactly the same.
Born out of the Bitcoin cryptocurrency in 2008, a blockchain is a specific type of distributed ledger with a distinct set of features or operational processes. Unlike other distributed ledgers, blockchains package transactions or sets of data into cryptographic hash-linked blocks in a sequential chain. They use a consensus system (e.g., Proof of Work) to determine how new blocks get added to the chain-of-blocks, unlike distributed ledgers which do not require such a chain.
To summarize, a blockchain is a decentralized database which logs records by grouping transactions (data) into blocks. These records are unchangeable, append-only and can be used to create and document a history of lots of different things.
“Every blockchain is a distributed ledger, but not every distributed ledger is a blockchain. Each of these concepts requires decentralization and consensus among nodes. However, the blockchain organizes data in blocks, and updates the entries using an append-only structure.” — Shaan Ray
In Bitcoins case, the Bitcoin blockchain records bitcoin transactions, but this is just the tip of the iceberg. Blockchains can theoretically be used in several ways for many kinds of records way beyond monetary transactions. Anything that needs to be immutably recorded like health-care related records, or contracts, and much more.
What are the different types of blockchains
Blockchains come in different shapes and sizes. Here’s a high-level overview.
Single-use public blockchains
This would be like the Bitcoin public blockchain network which is secured by a costly albeit effective mining process. The use case/s for Bitcoin is payments and value storage.
Multi-use public blockchains
This could be like Ethereum. The major difference between the Bitcoin, single-use blockchain and the Ethereum, multi-use blockchain is their purpose and capabilities. Whereas Bitcoin provides one specific function, peer-to-peer electronic Bitcoin payments, Ethereum offers a platform that enables developers to build and deploy other decentralized applications — like Bitcoin, for example. Here, you get a public network but also a developer network where developers can write smart contracts and all sorts of use cases.
No public network in this case but rather an invite-only, permissioned private network that can also feature a developer network. An enterprise blockchain can be set up in many ways, for example, a consortium of companies in specific industries like insurance, banking, or healthcare.
“Think of an enterprise blockchain as executing transactions that track assets as they change hands among organizations — assets that can be tangible, such as physical goods or a contract document, or intangible, such as digital use rights.” — Chris Murphy
Because there is no need to secure a public network, much of the computational power required to reach consensus in public blockchains can be reduced resulting in faster transactions and enhanced scalability. It’s in this enterprise blockchain space where the more pressing questions about whether a blockchain adds value or is needed at all start to emerge.
What should a business use? Blockchain or Distributed Ledger?
This is a hard question to answer without specific facts and business needs at hand. However, it’s possible to present the most optimum theoretical scenarios as to when a blockchain or other type of distributed ledger could be needed.
The Blockchain- DLT Spectrum
Andreas Wallendahl of ConsenSys explains this nicely by placing blockchain and distributed ledgers on a spectrum. On the one side, you have public blockchains. These have many nodes, are decentralized and can be used by anyone in the world. At the other end, you have a single database with one node, and next to that, as you move a little toward the middle of the spectrum, a database shared between just two or three nodes or a distributed ledger.
As you can see, there is a big continuum on this spectrum from a single node database with one party to what is essentially a public database that anyone, anywhere in the world can access. As you may quickly realize, using a public blockchain makes little sense for the vast majority of business use cases.
The reality is that almost all businesses will either only need data for themselves, which means that a simple database will usually suffice or they may need to share data with a few other parties which can be handled by a distributed ledger. If you can solve your business’ needs using a central database a blockchain is not a viable option.
Blockchains become more relevant when multiple businesses need to maintain and share data in a situation where trust is an issue. It may also be applicable in cases where reliance on a central party to store and validate transaction data is not optimal or where there is a requirement for records to be immutable. Using a blockchain is an option where the ability to do things like tokenize assets and write smart contracts is required.
Of course, this is just a high-level overview and there are many different matters that need to be assessed.