Key Takeaway: “Distributed Ledger Technology (DLT) is good for recording asset ownership, automating business agreements, and providing transparency.”
Why use DLT? DLT is useful for many things, and it can be tricky to define it in simple terms without giving a technical definition. There’s also a risk of oversimplification. How would you answer the question, “What is a database good for?” Let’s give it a go:
Consider this: by definition, centralised systems create data silos. Whereas blockchains are:
One of the fundamental properties of modern computing is that data is very easy to duplicate. The ability to copy and transmit information with stunningly low cost and high reliability was the very innovation that ushered in the information age. However, this generated a side-effect: when digitising something of value (an asset), the digital representation of the asset can also now be easily copied and transmitted.
Here’s an explanation on how to manage digital assets:
Consider a ‘digital’ asset to be an entry on a database representing $1 million.
And now consider a physical asset being a bar of gold.
A natively digital asset (aka “tokenised” asset) converges the best properties of both.
NOTE: some in the industry use the word tokenised to mean an asset as a bearer-instrument. We use it here in the more general sense to represent an asset that has been deployed onto a distributed ledger, thereby giving it the programmable-source-of-truth property we desire.
Fundamentally, an asset is a thing of agreed value by a group (network) of entities (companies, people), and such an asset can be represented on a ledger.
In the same way, the current state of a process can be tracked and updated with a full and agreed history of progress. Over time, this will also reveal external bottlenecks that can be targeted for further optimisation.
A distributed ledger means the information about who owns what things of value is the same for everyone, i.e. the “truth” about the current state of affairs is indisputable.
Why use blockchain? The key insight here is that we can converge a (legal) product with its digital representation rather than having them separate. Take, for example, a new personal loan - the origination of a new financial asset. The loan can be entirely represented on a distributed ledger, including the terms and conditions, offer and acceptance, and history of repayments. Further, now that this asset is programmable, it can be distributed (shared) with others, making it a trivial matter to bundle a group of such loans and resell them as new securities, with a full look-through back to the underlying asset for the investor, all perfectly synchronised within seconds. These securitised assets can then be traded further down the value chain by extending the ledger, and so it goes.
Using blockchain for executive technology strategy is crucial. Consensus-based data replication can be incredibly useful, particularly in the management of digital assets, public information, and inter-business workflow. It’s no accident that the term smart contracts invites comparison with more prosaic “legal” contracts (although many in the blockchain space concur that smart contracts are a lot more like dumb programs). The key difference is that they run autonomously, or in other words, across multiple nodes at the same time independent of any one operator, giving each node complete assurance that the data they see is the same as what their counterparties see.
The benefits and potential have been publicly recognised:
Centralised systems create data silos. DLT offers an alternative to APIs for data sharing.
Remember, DLT enables business relationships to operate at the speed of consensus (mere seconds), which is much faster when you can rely on the information as soon as it appears.
Message-based systems (APIs) work by your counterparty hiding information, and you needing to trust what you're told.
State-based systems (DLT) work by your counterparty, showing you the information so you can see for yourself.
There are, of course, certain trade-offs and elements to always be aware of when planning how to use a distributed ledger for any use case, particularly when managing digital assets.
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About the Author:
Matthew Hale is Block8's, Chief Technology Officer. He is an expert in developing decentralised software products and has designed numerous solutions for startups, enterprises, government and OpenTech since 2014.
Matthew regularly speaks at technology conferences, meetups and podcasts and holds several advisory positions on technical industry boards and committees. He is also a heavy contributor to blockchain and fintech-related public inquiry and writes about the nature and benefits of distributed ledger technology on our blog.
Matthew holds a degree in Electrical Engineering from UNSW and has stayed close to both the code and the latest research ever since encountering Bitcoin in 2011.