What are Distributed Ledgers?
Distributed ledgers are the databases shared across a network and spread over various geographical locations. A ledger is a collection of financial accounts and, in such a case, distributed means spread out and controlled globally. Thus, distributed ledgers are held and reorganized by multiple parties in different locations and institutions.
Distributed ledgers can be assessed by the participants at each network node; the participants can obtain an identical copy of the recordings shared across the network. In case the ledger is edited or appended, the changes are replicated and copied to the participants. In order to make sure that the database is accurate, it is synchronized. Distributed ledgers and bitcoin use the same technology.
- Distributed ledgers are the databases shared across a network and can be accessed at various geographical locations.
- They are held, reorganized, and controlled by individuals called nodes. The need for a third party is eliminated in distributed ledgers.
- Distributed ledgers are considered highly secure, as they are inherently decentralized and provide a high amount of transparency.
How Distributed Ledgers Work
Distributed ledgers are held, reorganized, and controlled by individuals called nodes. The database is constructed independently by each node. Every transaction occurring on the network is processed, and a conclusion on the development of the database is created by each node.
Based on the transaction, voting is carried out on the changes completed on the database. All nodes participate in the voting, and if at least 51% of them agree, the new transaction is accepted on the database. Afterward, the nodes update the versions of the database so that all the devices or nodes will be of the same version. The new transaction is written onto a block on the blockchain.
Nodes in Proof-of-Work blockchain are also called miners. When a miner successfully puts a new transaction into a block, they receive a reward. It requires a dedicated 24×7 computer power. It is the responsibility of miners to compute the cryptographic hash for new blocks. Whoever, among the miners, successfully finds the hash first, gets the reward.
Miners dedicating more computational power to find the hash will be more successful. However, as blocks keep generating, it becomes more difficult to find subsequent hash scales. The goal is to keep a constant speed of generating the blocks.
Benefits of Distributed Ledgers
1. Highly transparent, secure, tamper-proof, and immutable
In distributed ledgers, the entries happen in the database without third-party involvement. After records are written into distributed ledgers, they cannot be altered by any other party. Hence, until the ledgers are distributed, the records cannot be tampered with.
2. The need for a third party is eliminated
Although it is not necessary to always operate the distributed ledgers without a third party, it can save a lot of money and time in some cases. In the supply chain business, results can be written directly by sensors to the blockchain without the need for a third party. It saves a considerable amount of money, effort, and time.
3. Inherently decentralized
The distributed ledgers’ inherently decentralized nature adds another layer of security. As the database is spread globally, it is difficult to attack.
4. Highly transparent
Distributed ledgers present with a high level of transparency. They allow all the stored information to be freely and easily viewable. It provides a significant amount of transparency desired by many industries.
Bitcoin is a highly popular example of a distributed ledger. It is a virtual currency that can be used for payments on a network that enables users to make non-reversible payments with transaction fees less than conventional online payment methods.
Ethereum is a popular distributed ledger that enables the developers to create their own applications. It is very popular because it introduced smart contracts. The smart contracts are self-executing and are triggered if certain pre-set, real-world conditions are fulfilled, and related data is entered into the blockchain.
Ripple is another example of a distributed ledger that is an open-source ledger focusing on payments, especially cross-border transactions. It was originally intended for banks.
What Is a Centralized Network?
Centralized networks are built around a single, centralized server/master node, which handles all major data processing and stores data and user information that other users can access. From there, client nodes can be connected to the main server and submit data requests instead of performing them directly. The majority of web services — including YouTube, a mobile app store, or your online banking account — are coordinated by a centralized network owner, meaning that all data transactions within these networks require verification via a third-party authority.
Centralized networks are currently the most widely used type of network on the web. These networks are dependent on a central network owner to connect all the other satellite users and devices — which means there is a single point of failure that can be deliberately exploited by malicious actors.
- Simple, rapid deployment: Since command chains are clearly defined within centralized networks, delegation within the network is relatively simple, and less cross-chatter is required within different levels of authorization. It’s also easy to add and remove client nodes from the network by creating or removing connections between the client node and main server. However, this does not increase the network’s computing power.
- Affordable maintenance: Centralized networks are typically the most cost-effective options for small systems and require fewer resources to set up and maintain. Furthermore, when a network administrator needs to patch or update the network, only the central server needs to be updated. This reduces the time and overhead necessary to keep a network up to date.
- Consistency: Given the top-down nature of centralized networks, it’s easier to standardize interactions between the main server and client nodes. That can lead to a more consistent and streamlined end user experience. Furthermore, since it’s relatively easy to track and collect data across the network, extraneous or deviant activity can be rooted out and removed in accordance with the network’s priorities and needs.
- Increased downtime risks: Since centralized networks have a single point of failure, if the main server crashes, the entire network will likely shut down. Client nodes will therefore not be able to send, receive, or process user requests on their own. Furthermore, server maintenance may involve temporarily powering off the main server, which will likely result in service interruptions and consequent inconvenience/diminished reliability from a user perspective.
- Higher security risks: Having a single point of failure also increases the chances of security breaches or disruptions from cybersecurity threats such as DDOS attacks, since there is only one target to compromise. Furthermore, since there is only one central depository for user data, centralized networks will always involve inherent privacy risks. If a main server is corrupted or taken offline, its data may be permanently lost.
- Limited scalability: Centralized networks can be hard to scale past a certain point, since the only way to do so is to add more storage, bandwidth, or processing power to the central server. Furthermore, if the network experiences traffic spikes beyond what the network was designed to handle, information bottlenecks may occur, with users further removed from the central server experiencing increased latency.
What Is a Decentralized Network?
By contrast, a decentralized network distributes information-processing workloads across multiple devices instead of relying on a single central server. Each of these separate devices serves as a mini central unit that interacts independently with other nodes. As a result, even if one of the master nodes crashes or is compromised, the other servers can continue providing data access to users, and the overall network will continue to operate with limited or zero disruption.
Decentralized networks are made possible by recent technological advancements that have equipped computers and other devices with a significant amount of processing power and can be synced up and leveraged for distributed processing. However, while decentralized networks are substantially different from centralized networks, it’s important to note that decentralized networks do not distribute data storage and processing evenly across the entire network and still rely on main servers, albeit more than one per network.
- Increased flexibility/scalability: Since decentralized networks do not have a single point of failure, they can continue to operate even if a master node is compromised or shut down. Furthermore, decentralized networks are easy to scale since you can simply add more devices to the network in order to increase its computing power, and network maintenance typically does not necessitate a full network shutdown.
- Faster performance: User requests are often completed faster when using a decentralized network because network administrators can create master nodes in regions where user activity is high, as opposed to routing connections over vast expanses to a single centralized server.
- Enhanced privacy: Decentralized networks enable a greater degree of user privacy, since information saved on the network is disseminated across multiple points instead of passing through a single point. This makes data flows more difficult to track across a network, and eliminates the risks of having a single target malicious actors can go after.
- High maintenance costs: Decentralized networks are more fault-tolerant than centralized networks. This makes maintaining these networks typically more costly and labor-intensive. Since a decentralized network relies on multiple devices to underpin the system, this places a commensurate burden on an organization’s IT resources. As a result, decentralized systems are often not suitable for organizations that only require a small system, since the cost/benefit ratio isn’t favorable under these circumstances.
- Coordination issues: Since master nodes within a decentralized network act independently and may not communicate with one another, larger organizations may run into coordination issues and have a difficult time directing and achieving collective tasks. While this is a deliberate feature of decentralized networks, it means that not all business models and organizational structures will necessarily benefit from using a decentralized network.
What Is a Distributed Network?
A distributed network is similar to a decentralized network in the sense that it forgoes a single centralized master server in favor of multiple network owners. However, distributed networks are composed of equal, interconnected nodes, meaning that data ownership and computational resources are shared evenly across the entire network. The term “distributed network” is sometimes used to describe a network that is simply geographically distributed but may follow a top-down node hierarchy model. In most instances, though, the term refers to a network where node locations and computational resources are evenly distributed.
Because distributed networks do not have a central server or a separate set of master nodes, the burden of data processing is crowdsourced across the network, with all users granted equal access to data. The decision-making process on a distributed network therefore typically involves individual nodes voting to change to a new state, and the final behavior of the system changes in accordance with the aggregate results of the decisions each individual node votes on. The specific processes by which a distributed network votes and makes decisions is contingent on the network’s consensus mechanism. All forms of distributed decision-making involve the network’s individual components interacting with one another in order to achieve a common goal.
Due to their geographically scattered nature, distributed networks are consequently extremely fault-tolerant and secure. Their advantages and disadvantages closely mirror those of decentralized networks, but at a higher magnitude.
- Extreme fault tolerance: With distributed networks, a node can fail independently without affecting the rest of the system, since the computational workload will simply be rebalanced among the remaining nodes. As a result, distributed data systems are significantly more robust than other network architectures that rely on some form of top-down node hierarchy.
- Speed and scalability: Distributed networks are more scalable than both centralized and decentralized networks. They generally exhibit lower latency as well due to the even distribution of network processing power and data.
- Enhanced transparency: Since data within a distributed network is shared evenly across the entire network, it is significantly harder to successfully modify, censor, or destroy information on the network. As a result, distributed networks are intrinsically more transparent than other systems, particularly given the fact that they often utilize cryptography to secure their data.
- High maintenance costs: As is the case with decentralized networks, distributed networks require more resources to maintain or reconfigure, since any meaningful change requires updating every individual node. And, since the distributed nodes have different latencies and do not follow a common clock, network administrators cannot temporally order commands or logs. As a result, it can be difficult to design and debug algorithms for a distributed network.
- Coordination Issues: In the absence of a node hierarchy, there are no superior nodes overseeing the behavior of subordinate nodes, and consequently there is no way to regulate individual nodes on the system. It can therefore be difficult to make timely decisions or achieve large-scale tasks. This decentralized chain of command can be an insurmountable issue for certain businesses and organizations. Furthermore, since it is difficult for any individual node to gain a global view of the entire network, it is therefore harder for individual nodes to make well-informed decisions based on the state of other nodes in the system.
Blockchain Networks: A Reconfiguration
When discussing the relative merits of different network architectures, it’s important to keep in mind that no configuration is superior to any other across all environments.
That being said, the modern internet was in large part built atop centralized networks, therefore most legacy systems involve some form of centralized configuration. Much innovation is currently taking place through the broader adoption of decentralized and distributed network structures, which in many ways were designed to address the limitations of legacy system architectures. For example, decentralized and distributed systems have the potential to actualize previously theoretical applications such as decentralized finance and the creation of self-sovereign identities.
As the spectrum of network configuration options continues to expand, organizations will become increasingly able to choose the network architecture that best suits their specific needs instead of trying to design around a limited set of network models. As a result, as alternative network architectures gain prevalence, the very fabric of the digital world may very well shift towards something more decentralized and distributed.