On this webpage, We will be discussing Central Ledger And Distributed Ledgers. A physical book or a computer file used to record transactions in a centralized manner is called a central ledger. Comparison of Centralized Ledgers and Distributed Ledgers. Kinds of systems and ledgers.
Definition of Central Ledger
A central ledger is a book of record either a physical book or a digital file. That store’s transactions in a centralized manner. As opposed to decentralized ledgers used in distributed ledger technology (DLT).
Since the dawn of civilization, Ledgers have been used to record and confirm the ownership of assets. And the legal identity of individuals, their legal status and political rights.
In the 16th century, double-entry bookkeeping became widely used in Italy. And this played a vital role in the development of the capitalist economic system. Through the revolutionization of the use of ledgers in the banking sector. According to some experts, employing the principle of double-entry has greatly improved the accuracy of ledger records.
Central Ledger And Distributed Ledgers
Generally, the accounting department of any business is charged with the responsibility of computing the central ledger. For financial analysis, tax reporting, and more. Although efficient, the principle of relying on a central authority makes the ledger. Susceptible to any errors made by that authority – either deliberate or accidental.
Distributed ledger technology (DLT) on the other hand is a more recent evolution of the concept of ledgers. That aims to decentralize the process of bookkeeping. And remove the central authority which acts as a single point of failure. Bitcoin’s (BTC) blockchain is one of the most successful examples of a decentralized ledger.
Kinds of systems and ledgers
In this section, to understand the layout of the types of ledgers, refer to the diagrams above. Before that, let’s understand the different types of systems.
From the perspective of control, there are two types of systems centralized and decentralized systems:
- Centralized system: One entity controls the entire system, where an entity can be a person or an enterprise.
- Decentralized system: In a decentralized system, there could be multiple entities controlling the system. There is no single point of control, and the control is shared between various independent entities.
From the perspective of location, there are two types of systems—centralized and distributed systems:
- Centralized system: All the constituting parts of the system, such as servers, ledgers, and so on, are co-located and exist at the same location
- Distributed system: All the constituting parts of the system, such as servers, ledgers, and so on, are NOT co-located and exist at different locations
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These categories of the system lead to the following variants of the system
- Distributed yet centralized system: here, the system is controlled by a central authority but the constituting parts of it are at different locations. For example, cloud service providers offer various services such as compute, storage, SaaS, PaaS, IaaS, and so on. These services manage by the cloud service provider and offer via servers and databases that distribute.
- Distributed system: here, the system is managed by multiple entities and at different locations. This means that the system is decentralized in terms of control and distribution in terms of location. Examples include DLT and blockchain which are based on the P2P network, where nodes (peers or participants) are independent and globally spread (distributed). A distributed system is a superset of a decentralized system and is based on a P2P network.
Centralized Ledgers
Most of our discussion so far focused on the centralized ledger in an accounting system. A central ledger is like a primary archive for anything with a financial value and serves as the pillar of any business.
Although with its advantages, centralized ledger systems have their drawbacks too. For instance, the fact that a bank has total control over the transactions recorded in its ledger, as well as bank statements, means that if anyone with malicious intents gains access to these documents, the consequences could have a domino effect of not only prohibiting future transactions but also closing down the entire business. This argument is common among blockchain advocates who are in support of a total decentralization of trust authorities.
Central Ledger And Distributed Ledgers
Assessing a more practical challenge about banks, you’d discover that each bank, following the principle of double-entry, has to maintain its own ledger to reflect its truth. In the process of transacting with other banks, they need to reconcile their truths according to their respective ledgers to obtain a final version of what’s true to them all. As a result, banks invest hugely to reach an agreement about their accounts.
In addition, in a bid to avoid any chance of a single point of control and single point of failure, financial institutions have their own ledgers and systems to guide against this. This arrangement becomes interesting when new customers place their trust in these banks by opening accounts and putting money in them. Now, to uphold that trust, banks invest heavily both in time and resources to ensure that they build and maintain a system while checking with other banks to guarantee that their systems integrate. All these are done to ensure they have a common truth.
If you analyze this closely, you will see that each bank’s ledger is replicating the functionality of the other banking institutions. Now, what if one of the banking institute’s systems fails? Is this going to lead to a situation where reconciliation is not possible? Doesn’t this sound more like a single point of failure? The answers lie in the distributed ledger discussed in the following section and throughout the book
Distributed Ledgers
Across the world, in the economical, legal, political, and institutional systems, the key elements are transactions, contracts, and documents. They dictate the relationship between countries, enterprises, organizations, communities, and individuals, and, most importantly, they are perceived to offer trust. Interestingly, these elements have not joined the digital transformation to a greater extent and for a greater cause. So, what is the solution?
Distributed ledgers and DLT, along with blockchain, offer the solution to such critical challenges. In this section, we will explore more about distributed ledgers and DLTs. In a distributed ledger, there is no central authority or a central administrator. It is an asset database that is shared over the network, where each party on the network has an identical copy of the ledger. These assets can be financial, legal, and electronic assets. Changes to the value of these assets reflect throughout the network, and each copy of the ledger is appended.
Central Ledger And Distributed Ledgers
Many organizations, governments, and institutes use a central database of the ledger, which we discussed in the Centralized ledgers section. A centralized ledger needs a central authority to be trusted by transacting parties; however, in a distributed ledger, the need for a third party is omitted, which is one of the gravitational forces behind the attraction to DLT. Here, I have loosely used the term DLT because a distributed ledger can be called a shared ledger
or a DLT, and they are the same. What’s disruptive about a DLT is that the ledger database distributes, and spread on all of the nodes or computing devices across the network, and each node has an identical copy of the ledger, where nodes update themselves independently. All of the participating nodes reach an agreement to establish a single truth (true copy) for the ledger through a process called consensus. Once a consensus is reached, the distributed ledger is updated automatically and the latest truth (true agreed copy) of the ledger is appended to each node separately. While reading this paragraph, you might think about the reconciliation process of banks to establish trust and an agreement on the ledger. With DLT, trust (reconciliation) and consensus (agreement) happen seamlessly and automatically.
Central Ledger And Distributed Ledgers
What we just found out is that there is no central authority in the previous story to maintain the distributed ledger. DLT empowers systems to reduce the dependencies on various central authorities such as banks, lawyers, governments, regulatory offices, and third-party authorities. Distributed ledgers omit the need for a central authority to validate, authenticate, and process transactions. Transitions on DLT are timestamps and have a cryptographic unique identity,
where all records in question are available for the participants to view, and this ensures that the verifiable and auditable history of the transaction is in-store immutably. In the decentralized distributed ledger, the transaction replicates to the distributed ledger, which means all the participating nodes’ copies of the ledger append; however, there is no central single database. It is the network that is decentralized. Such a system needs a decentralized consensus as there is no single point of contact, or single authority or party. Hence, to ensure trust, a consensus is a must. In a traditional database system, a single party acts
on behalf of the transacting clients to modify the state of the system. However, in a distributed ledger, any party can record, and the protocols and algorithms govern the posting of transactions on the network’s ledger.
Comparison of Centralized Ledgers and Distributed Ledgers.
Hold tight this won’t be a long post and I assure you it doesn’t take much time to read.
Ledger
A ledger by definition is a book of record-keeping of all the financial transactions of the organization. In schools and colleges, you call it a register. Since the classical periods, when transaction recording started with clay tablets or papyrus and moved to paper, keeping a form of the ledger has been essential to record any payments, contracts, buy-sell deals, or movement of assets or property. In recent times, computers have provided the process of record-keeping and ledger maintenance with great convenience and speed. Today, with innovation, the information stored on computers is moving towards much higher forms that are cryptographically secure, fast, and decentralized. Forget about cryptography at the moment.
Centralized Ledger
The centralized ledger, commonly known as the general ledger serves as the main repository of any accounting system. It contains all the accounts of transactions both financial and non-financial data of a company transferred from all sub-ledgers cash management, fixed assets, purchasing, and projects. Anything with a financial value can be found in a ledger. In a manual or non-computerized system, the general ledger may be a large book. Each account in the general ledger consists of one or more pages. Nowadays, a computerized version of the ledger, ERP (Enterprise resource planning) is employed.
Disadvantages of Centralized ledger:
For example, because a bank operates a centralized ledger system, meaning it is managed by a single entity and has total control over which transactions are recorded in the ledger, a customer is fined unnecessarily and the money deducts from their account without prior consent.
This is a danger of centralized ledgers because if the entity-in-charge has malicious intent, it can do some serious damage to its clients.
Another disadvantage of a centralized ledger is that the controlling entity can shut down without notice and transactions will no longer process. Giving this kind of authority to someone will result in an error, whether it be accidental or not.
Distributed Ledger:
After reading different articles, I came to understand the distributed ledger as simply a shared ledger. There is no central administrator or centralized data storage. A distributed ledger is essentially an asset database that can share across a network of multiple sites, geographies, or institutions. All participants within a network (Here network is nothing but all the people who connect to each other with their computers) can have their own identical copy of the ledger. Any changes to the ledger reflect in all copies in minutes, in some cases, seconds. The assets can be financial, legal, physical, or electronic.
Entries can update by one, some, or all of the participants, according to rules agreed by the network. You might be familiar with the word “BlockChain”, this is just a perfect example of how the distributed ledger works.
Two parties can make an exchange without the oversight or intermediation of a third party, strongly reducing or even eliminating counterparty risk.
Advantages of using Distributed Ledger:
- Users are in control of all their information and transactions.
- Data is complete, consistent, timely, accurate, and widely available.
- Due to the decentralized networks, blockchain does not have a central point of failure and is better able to withstand malicious attacks.
- Users can trust that transactions will execute exactly as the protocol commands removing the need for a trusted third party.
- Changes to public blockchains are publicly viewable by all parties creating transparency, and all transactions are immutable, meaning they cannot be altered or deleted.
Central Ledger And Distributed Ledgers
The clutter and complications often associated with multiple ledgers reduce since all transactions add to a single public ledger
While Interbank transactions take a longer time for processing, especially outside business hours, Blockchain transactions can reduce transaction time to minutes and are processed 24/7.
Blockchains have the potential to greatly reduce transaction fees by eliminating third-party intermediaries and overhead costs for exchanging assets.
I know there are many mistakes please correct me if I am wrong thanks for reading patiently.