The definition of distributed ledger technology (DLT) appears in federal legislation, such as 42 U.S.C. § 19222, in state legislation, such as in Arkansas and Tennessee, as well as in reports published by the U.S. Government Accountability Office and the World Bank.
The term distributed ledger technology (DLT) refers to the technology that supports a ledger-based system, the operation of which is based on distributed ledgers rather than the control of a central authority. By distributing ledgers across the entire system, such a ledger-based system not only validates and records information but also synchronically shares the recorded information across all participants of the system.
The consensus mechanism of a distributed ledger technology-based (DLT) system refers to the rule on which all participants agree that determines the manner of validating and recording information, as well as synchronically sharing the recorded information. A distributed ledger technology (DLT) system can be permissionless or permissioned. A permissionless distributed ledger technology (DLT) system is accessible to any person, whereas a permissioned distributed ledger technology (DLT) system is only accessible to pre-approved members.
Despite the different categories of consensus mechanisms of blockchains, the validity of a blockchain’s distributed ledgers is ensured by the chronological linking via cryptographic hash between each different block containing key information regarding cryptocurrency payments. This shows that modifying the information contained in a block must be accompanied by the modification of all of its subsequent blocks and the distribution of all the modified blocks to all participants, thereby ensuring that no single party could modify any information contained in any block without the consensus of the entire community.
While the terms “blockchain” and “distributed ledger technology (DLT)” often appear simultaneously, they should not be used interchangeably. Instead, it should be noted that blockchain is merely one category of distributed ledger technology-based (DLT) system, which has been widely known since Satoshi Nakamoto published the famous Bitcoin whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System. Amongst the various subcategories of distributed ledger technologies (DLTs), the technology supporting the operation of a variety of blockchains is a chain-based model, which exists in parallel to a chainless model, such as Direct Acyclic Graph (DAG). Additionally, while the consensus mechanism of a blockchain often involves either a Proof-of-Work (PoW) consensus mechanism or a Proof-of-Stake (PoS) consensus mechanism, there are also other categories of consensus mechanisms in a variety of distributed ledger technology (DLT) systems, such as Proof-of-Authority (PoA).
Distributed ledger technology (DLT) could support a variety of services, and the most notable one involves the exchange and payment of cryptocurrency. Yet, distributed ledger technology (DLT) is not free from legal issues, such as the anti-money laundering challenges stemming from the anonymity and/or pseudonymity of cryptocurrency wallet holders, thereby calling for updates in the existing anti-money laundering law. Additionally, the substantial energy cost of mining Bitcoins based on the Proof-of-Work (PoW) consensus mechanism also results in both energy and environmental concerns.
[Written in October of 2024 by Kai Wang with the Wex Definitions Team]