There is much interest and confusion with the terminology used amongst the blockchain community and enthusiasts. Most especially is where the terms “blockchain” and “distributed ledger” are used interchangeably.
This article plans to explain and clarify the definition of a distributed ledger technology (DLT), and how blockchain relates to DLT. We will also discuss other DLT technologies such as Directed Acyclic Graphs (DAG) and Tempo.
Use a similar graphic below, but update DAG to have DAG/Tangle
DISTRIBUTED LEDGER TECHNOLOGY
Distributed Ledger Technology (DLT) is basically a fancy way of describe a database that is stored across several locations. The primary advantage of DLT is to reduce the risk of central storage where all of your data could be destroyed in an accident, theft, or fire.
Blockchain was the first fully functional DLT; however, there are new DLTs available such as Tempo and DAG. Basically, DLTs differ by their data structure, distribution of data storage, and the consensus mechanism being applied.
BLOCKCHAIN (EXAMPLES: BITCOIN, ETHEREUM, EOS, TOMO).
A DLT that’s data structure is a linked list of data blocks. Each block is comprised of a set of transactions that is verified & validated before being “chained” to the previous block. The chained blocks of data are distributed to all nodes in the network. Blockchains have no central authority or control mechanism. Decisions to produce new blocks into the chain are made via consensus mechanisms such as Proof-of-Work or Proof-of-Stake. As blockchain was the first fully functional DLT available, the phrases “distributed ledger” and “blockchain” are often used interchangeably; however, as new technologies such as DAG and Tempo become implemented, the use of the phrase distributed ledger should be used with more care.
DIRECTED ACYCLIC GRAPHS (EXAMPLES: IOTA,BYTEBALL, HASHGRAPH).
A DLT that is based on the mathematical model of a Directed Acyclic Graph, and its implementation is often called “Tangle”. For this reason, DAG and Tangle are often used interchangeably.
The DAG data structure is a network of nodes/vertices/sites (squares) that are connected to each other via edges (arrows). Each node must be connected to at least two other nodes. To create a new node, the node must verify and validate two previous nodes. Unvalidated nodes are called tips. Each node contains a set of data or transaction information.
The data structure of a DAG is a ledger that stores transactions in a graph format that points in one direction (i.e.,directed) and is non-circular such that past transactions cannot verify future and present transactions (i.e., acyclic).
The consensus mechanism in DAG requires each transaction to be validated by approving two previous transactions/sites. The validation process selects the two previous transactions based on an algorithm and Proof-of-Work must be completed by solving a cryptographic problem. Thus, Tangle does not require miners, as each node is a miner. As a result, the transaction costs for adding a new transaction are zero.
This improves the scalability of the technology, as the tangle builds a graph of transactions that references older transactions. As the consensus mechanism only requires each new transaction to approve two randomly selected previous transactions, multiple transactions can be verified immediately rather than having to wait for the next block. Theoretically, this allows for the parallel validation of multiple transactions. Where blockchain looks like a linear linked list of blocks, tangle looks like a tree or graph of data moving forward.
A weakness of Tangle is that there exists challenges in overcoming the synchronization of data across multiple nodes. Furthermore, to prevent malicious attacks on the network, Tangle employs a “Co-ordinator” that acts as a centralized, voluntary and temporary alternative consensus mechanism. One can argue that using a Co-ordinator node means that the technology is not sufficiently decentralized.
TEMPO (EXAMPLES: RADIX)
The main features of Tempo are use of “sharding” to distribute data across multiple nodes in the network, and the use of logical clocks in the consensus mechanism. In the traditional blockchain network, all full contain the entire ledger; however, sharding technology allows nodes to contain a subset of the ledger. This project is still in the very early stages of development.
An Honorary Senior Fellow at the University of Queensland with professional experience as a quantitative researcher for BlackRock and Bank of America Merrill Lynch in New York, USA. He led research teams in the development of capital models, securitized products and factor models in both equities and fixed income asset classes. Rand has several academic publications in cryptocurrency, portfolio management, systemic risk & quantitative trading