The Genesis of Distributed Ledger Technologies and the Online Democratization

Avnish Mehta, Director - Digital Transformation, Collabera Inc.With over 15,000+ professionals globally, Collabera Inc. offers Global 2000 companies comprehensive IT and professional staffing and services to help them achieve their business objectives.

Traditionally, businesses have been creating value intrinsically. With advent of the Internet and the Digital technologies, the value creation has moved out to the ecosystem with co-creation at its core. The business entity’s intent, size and complexity remained almost the same with role changing from owning the value creation to acting as its gatekeeper. This centralization of power continued as earlier, and consumers remained hostage to their agenda.

Is there a way for the democratization of the value generation activity at scale which is traditionally owned by business entities?

Platform Alternative
Remember torrents? When people used this peer-to-peer technology to connect anywhere in the world to share movies, music etc.?

It had no central authority and yet operated on global scale with ease. The ‘asset’or ‘value’ was stored locally and shared when requested. The P2P software aided the discoverability. The incentive in absence of central authority was that, that with more ‘assets’ out there, the accessibility to diverse assets was better. Also, this ensured that only in demand (quality) assets dominated. This sort of incentivization is part of the ‘Game Theory’ that deals with strategies of the participants that lead to desired outcomes. While torrents usage infringed on law, the P2P technology and the involved incentives provideda fundamental way for individuals to collaborate to exchange ‘value’ directly; hence reducing costs, enabling open, free and unhindered access in other words ‘true democratization’.

Secure Distribution
The digital assets are in the form of information. It can be financial, intellectual property, media, access codes etc. This information needs to be protected while stored or being exchanged. Cryptography makes sure of:
1.Confidentiality-The asset is kept private using encryption.
2.Integrity-The asset is verifiable using hashing or other techniques
3.Authentication-The sender or receivers’ identities are confirmed.
4.Non-repudiation-Undeniability of contract or communication

With cryptography, the secure exchange of digital assets or 'tokens’ became possible. The assets can be transferred securely by encrypting. The integrity or the errors during transmission can be caught by testing against a hash. Digital signing by the sender makes sure that the asset was transferred by the genuine owner.

Show me the money
Since digital tokens are nothing but encoded information, these can be copied to create as many instances. This becomes problematic if money is involved. This is generally referred to as ‘double spending problem’. Money needs to follow a singleton pattern i.e. only one instance or version should exist. This was being addressed in the digital world by using a centralized gate keeper or a third party who will queue the transections and process sequentially based on the timestamp. If the third party is also keeping a record of transactions that can be audited to tally the records of issuer and receiver, then this arrangement is termed as ‘Triple Entry accounting’.

With cryptography, the secure exchange of digital assets or ‘tokens’ became possible

There was no easy way to manage the ‘Triple-Entry accounting’ in the P2P network with decentralized approach. One can create multiple copies of digital money and transect with no way to confirm or verify his or her actual status during the transaction. In 2005, Ian Grigg published a paper titled, ‘Triple Entry Accounting’ specifically addressing this issue in context of Digital Transactions. Also, in 2008 Satoshi Nakamoto published a paper titled,‘Bitcoin: A Peer-to-Peer Electronic Cash System’that went further and gave details on how such a system can be implemented. This paper focused on digital money transaction in a decentralized scenario over P2P network. While the cryptography took care of security, authentication etc. for transaction between two parties, the paper focused more on how to reach a consistent state using ‘Proof of Work’ and ‘Consensus’ to accept a transection as valid in the wider network. This required maintaining a log of transactions that are hard to manipulate or modify over time. This implementation referred to linking of blocks that encapsulated transactions as chaining, it led to the creation of the term ‘Blockchains’.

Blockchain is the pioneer of thefield of Distributed Ledger Technology (DLT). Since then multiple approaches and implementation of Distributed Ledger have come into being that tried to address the issues and limitation that impacted the usage and adoption of original blockchain technology like scalability, high cost of processing transaction (mining cost), consensus algorithms that are more efficient as well as effective in handing forking. Two other notable approaches that have come up in the Distributed Ledger Technology field are Directed Acyclic Graphs(DAG) and Hashgraph. We already have evolution of blockchain to blockchain 2.0 and blockchain 3.0 where blockchain is being used interchangeably with DLT.

What Next?
As the DLT matures, a lot of new use cases for value creation, distribution and monetization will come to fore. Already Smart contracts and the automation and ease they bring in transacting across organization boundaries looks very promising. While there is a lot of hype and unrealistic expectations and flawed use cases being touted as a next big thing in relation to DLT, there is need to understand the context and the basic premise to use these technologies judiciously.