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Distributed ledger technology: How does the DLT work?

Distributed ledger technology (or “DLT” for short) refers to a decentralized database that stores information in blocks that are distributed across a computer network.

DLT technology using the example of blockchain

The best known DLT application is the blockchain. Blocks represent cryptographically linked database entries that record transactions transparently and tamper-proof.

Nodes, which are access points to a DLT, are an integral part of the network and possess a copy of the entire database, known as the ledger, to validate transactions. This increases trust by mitigating the potential malfunction of a single node.

DLT: How a distributed ledger works Figure 1: How a distributed ledger works

Continuous data synchronization in the DLT

Transparency: continuous synchronization ensures that each node always has the latest information. This makes DLT a trustworthy and transparent solution for handling data and transactions in digital networks.

Transactions: to ensure verified and binding entries, transactions are signed and verified by nodes using cryptographic methods before being included in a block. This prevents forgery and guarantees that only valid transactions are recorded in the ledger.

Verified and binding DLT entries: Proof of Work, Proof of Stake and Proof of Authority

Consensus: various mechanisms such as Proof of Work (PoW), Proof of Stake (PoS), and Proof of Authority (PoA) are used to achieve consensus on transaction validation and maintain ledger integrity.

  • PoW relies on computationally intensive tasks to generate the next block, but this requires significant power consumption.
  • PoS, on the other hand, selects the block producer based on the stake of cryptocurrency held, which is more efficient.
  • PoA delegates block creation to known and trustworthy nodes, thereby improving speed and scalability.

The choice of consensus mechanism depends on the specific requirements of the DLT network.

To access a DLT, participants typically use a wallet.

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Julian Schmeing / author BankingHub

Julian Schmeing

Partner Office Munich
Philipp Kerber / author BankingHub

Philipp Kerber

Senior Consultant
George Stylianou / author BankingHub

George Stylianou

Senior Consultant Office Berlin

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