Whose ledger is it anyway?

Distributed ledger technologies (DLTs) and blockchains are often used synonymous, however they are fundamentally distinct. While DLTs serve as shared data management systems, blockchains are an example of an application, that is functionally closer to file transfer protocols. This article aims to elucidate the disparity between DLTs and blockchains, emphasizing that blockchains are indeed not a suitable mechanism to store information.

Distributed Ledger Technologies

DLTs function as systems for recording, sharing, and synchronizing digital data across multiple entities without a central authority. They can provide transparency, security, and tamper resistance, akin to a database, making them suitable for various applications such as supply chain management, and financial transactions, incrementally better than legacy database solutions connected through application programming interfaces.

State Machines

Contrary to common misconception, blockchains are not a type of DLT but rather a unique system within the realm of decentralized software. While DLTs resemble databases, blockchains more closely resemble file transfer protocols. They facilitate the secure transfer and control of data, through a chain of blocks linked by cryptographic hashes. A blockchain does indeed not execute transactions, it merely performs state changes - whether or not the state change constitutes a transaction is frequently non-deterministic, and as such undesirable side effect of blockchains that enable the unnecessary recording of metadata not required to prove the state change.

Key Differences Between DLTs and Blockchains

1. Functionality. DLTs primarily serve as shared databases (which may use blockchain technology for encryption), whereas blockchains function as distributed systems for secure data transfer and control.
2. Architecture. DLTs typically employ structures akin to databases, while blockchains feature a chain of blocks for data security and authentication.
3. Consensus Mechanisms. DLTs may utilize various consensus mechanisms, including proof of authority or practical Byzantine fault tolerance (PBFT), whereas blockchains commonly employ proof of work or proof of stake.
4. Immutability. Both DLTs and blockchains offer immutability, but the mechanisms for achieving it differ. DLTs ensure data integrity through decentralized validation, while blockchains achieve immutability through cryptographic hashing and consensus algorithms.

Blockchain vs. Blockchain Technology

Blockchain technology, at its core, is primarily a type of encryption that can be used to build a blockchain when deployed using distributed nodes. This encryption ensures the security and immutability of transactions, making it ideal for building decentralized software solutions that demand trustless transactions such as a blockchain. Similar to using 'internet technology' to build an application, using 'blockchain technology' towards a solution often does not actually result in a blockchain-based outcome.

Decentralized Software Solutions

Blockchains are thus best understood as decentralized software solutions or state machines. They serve an extremely narrow but critical purpose: to act as digital vending machines that facilitate the change of control of bytes from one controller to another. This functionality is crucial in eliminating the pervasive problem of third-party control over bytes representing the rights of individuals on the web.

Eliminating Third-Party Control

One of the primary challenges of the current web architecture is the control that third parties have over bytes representing individual rights. This control frequently leads to undesirable externalities, including principal-agent problems, censorship, and human rights violations. Blockchains offer a solution by limiting access and control over these bytes, thereby reducing these externalities.

Building Digital Vending Machines*

To fully leverage the potential of blockchains, it is essential to view them as digital vending machines. These vending machines enable individuals to exchange control over bytes representing their rights securely and transparently. By using blockchains in this way, developers can address many of the issues plaguing the current web architecture.

Conclusions

In conclusion, blockchains are not synonymous with DLTs; rather, they represent a distinct application within the broader category of decentralized technologies. While DLTs function as decentralized databases, blockchains operate as unique systems for secure data transfer and recording, resembling file transfer protocols. Understanding this differentiation is crucial for accurately assessing the capabilities and limitations of each technology and selecting the most suitable option for specific use cases. Blockchains must not be confused with secure databases. Instead, they should be seen as decentralized software solutions that serve a specific purpose within the World Wide Web. By using blockchains as digital vending machines to change control over bytes representing individual rights, we can mitigate many of the problems associated with third-party control and create a more secure and equitable digital environment.

*The concept was first introduced by Nick Szabo in this short article on smart contracts.

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