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Unlike traditional centralized ledgers that are backed by a single entity, distributed ledgers (DLT) have no central authority and permit multiple participants to store and update the same database at the same time. DLT is more fault-tolerant and has no chance of one single failure.

DLTs can also facilitate the creation of smart contracts that are self-executing transactions that can be programmed to verify or enforce agreements between parties. The technology also allows the transparency of each participant by allowing them to see the same transaction data.

While DLTs eliminate the requirement for a central government, they do require a substantial amount of computing power to run their consensus algorithms and process transactions. To reduce this cost the majority of DLTs reward active participation with virtual currencies.

Blockchain is one kind of DLT, but there are many others. For instance the Directed acyclic Network (DAG) utilizes an entirely different format of data than a blockchain. It also utilizes gossip protocol to transmit transaction data between nodes. The DAG is updated in chronological order, and the transactions are verified by a mix of virtual votes, hashing algorithms and other protocols.

Distributed ledgers are an effective tool, but it is important to know what they’re not. While they enhance transparency, accountability and security, they’re not an alternative for central databases. Organizations have long gathered data in multiple locations on paper or siloed software joining it into a single database only often. DLT allows these bits of information to be shared instantly with other participants while maintaining identical copies in their devices or nodes. This can help to avoid costly and time consuming reconciliations and errors.