Distributed ledger is the essence of the blockchain technology that is behind the Bitcoin and many other cryptocurrencies.
To understand why blockchain the same as a distributed ledger, it is necessary to understand what a blockchain is and how it works.
A block on the blockchain is similar a page in a ledger. Every block of the blockchain contains certain information. On the Bitcoin network, this information is about financial transactions. Because the Bitcoin network is fully transparent, you can see this information in real time for all the transactions on the network and all the blocks that the network has. You can do so by visiting https://blockchain.info/ For example, block #513832 contains information about 1137 transactions that have occurred on the Bitcoin blockchain. The volume of these transactions was 450.83979347 BTC. You can see this information by visiting the page of block #513832 located at https://blockchain.info/block/000000000000000000072c2e25bf20b895af16d7a74f009cb67262ac64378c0e.
The records that you will see on the page, just like the records you will see on all other pages for blocks of the Bitcoin blockchain, are very similar to a paper ledger with records of transactions.
The innovation that blockchain distributed ledger brings to the world is the way it connects the blocks of a blockchain.
On the Bitcoin network, each block has a cryptographic hash. A hash is a string of data. A set of data can have only one hash when it goes through a cryptography algorithm. The cryptographic algorithm that the Bitcoin network uses is called SHA-256. This algorithm has been designed by the United States National Security Agency.
Here’s how the hashing function works: let’s say you have a set of data (1, 1, 1, 342, 34, 6, 5, 3, 2, 2). A set can be very different and can be much longer than the set in the example above. For example, on the Bitcoin network sets contain information about hundreds and sometimes thousands of transactions on the network. When you put the set through a cryptography algorithm, you get a hash that is much shorter than the set, for example, let’s say that the hash for the set above is c43p.
Because a set of data can only have one hash, verification of sent data is easy. If you need to make sure that the data you’ve sent to someone is intact, all you have to do is check the hash. You would send the data. Next, you would ask the party that received the data to run it through the same cryptography algorithm and then compare the hashes. If the party sends you c43p, it means that the data has not been damaged.
Algorithms such as SHA-256 return very different hashes for very similar sets of data. This means that if (1, 1, 1, 342, 34, 6, 5, 3, 2, 2) returns the hash of c43p, changing just one digit, say, 1 into 2, and running the set (2, 1, 1, 342, 34, 6, 5, 3, 2, 2) through the same cryptography algorithm, would return completely different hash, for example, aaa12Q. If you send data to someone and have c43p as hash and get aaa12Q as a verification code, you would now that something happened to the data that you’ve sent.
On the Bitcoin network, miners use transactions they include in blocks of the Bitcoin distributed ledger to create hashes. Every next block of the network contains a hash of the previous block, which in practical terms means that it contains a code that verifies all the transactions on the Bitcoin network since the inception of the network because all the blocks on the network are connected.
This also means that the Bitcoin distributed ledger is extremely secure. If someone tried to change even one digit in one of the transactions on the Bitcoin blockchain, the hash for the block would be completely different, just as shown in the example above.
In terms of ledger analogy, this means that pages or blocks of the ledger are connected in an extremely secure way and if someone tried to change even a tiny bit of information about one transaction of the ledger, the ledger would not accept the change because all the transactions in it are connected via a series of hashes.
Distribution of the ledgers on the network
The blockchain ledger is distributed because there is no central server that contains a copy of the ledger. Exact copies of the ledger are located on the computers of users of the network. A computer that contains a full copy of a blockchain is called a node. For example, you can see the number of nodes with a full copy of Bitcoin distributed ledger in real time as you are reading this article by visiting https://bitnodes.earn.com/
Because blockchain ledgers are distributed, every user of a distributed ledger is an integral part of the network. The more users a network has, the more secure it becomes because even if there’s just one copy of the ledger left, the network would be able to clone it and restore itself in case of an attack.
Possible applications of distributed ledgers
Bitcoin and other cryptocurrencies are just one application of distributed ledgers. Such ledgers can be used for almost anything imaginable, from transferring car ownership to verifying the legitimacy of copyrights to verifying university diplomas. The test pilot for verification of university diplomas has been successfully completed by the Massachusetts Institute of Technology (MIT) in the summer of 2017. Students of the class of 2017 have received an option to get not only a paper diploma but also a way to show their diploma with their cellphones.
The MIT has developed the project in collaboration with a private company called Learning Machine. Just like the MIT, Learning Machine is located in Cambridge, Massachusetts. The companies decided to work together because currently, the process of verification of academic credentials is slow and inefficient. When a school graduate applies for a job, either he has to send a request to the school, or the prospective employer has to request a transcript from the school. This process is long, inefficient, prone to errors, and requires human involvement, which makes it expensive. With the app that the MIT and Learning Company have developed, graduates of the institution can prove that they are MIT graduates simply by using their phone. The process also puts MIT graduate in charge, allowing them to decide with whom and when they share their records.