Home Blockchain What are the different types of DLTs & how they work?

What are the different types of DLTs & how they work?

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Let me clarify from the get-go that although both the terms DLT (Digital Ledger Technology) & Blockchain are used interchangeably, there is a certain differentiation between the two that needs to be understood to clear any misconceptions. The 700-year old paper-based double entry system (debit/credit) which originated in Italy was prevalent everywhere till the invention of Computers & Internet. Although the idea of Blockchain gained relevance & fame after the launch of Bitcoin in 2008, the idea had been conceptualized as far back as 1991 when Stuart Haber and W. Scott Stornetta with their work on cryptographically secure (tamper proof) chain of blocks of data with the associated timestamps.

DLT is a wider term used to encompass the digital database technology which has different implementations in the ecosystem, of which the Blockchain is the most popular one. DLT consists of nodes on the underlying network which employ different agreement processes to reach a common conclusion. Thus the DLT not only digitized the whole ecosystem but provided the functionalities of dynamism, immutability, security & decentralization.

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BLOCKCHAIN

The simplest and most common example of the DLT is the Blockchain in which blocks of data are connected to each other via data identifiers which start with a hash. There are about 4 stages to every transaction in this example where someone has to initiate a transaction, which needs to be verified by the nodes on the network through an agreement (e.g PoW consensus in Bitcoin). The consensus mechanism verifies whether the transaction occurred as it is claimed to be, before storing the transaction amount & the digital signatures of the sender and the receiver. One last step before storing the information on the block is assigning the data code which also contains information of the predecessor block thus maintaining the chain of blocks. Depending on the types pf DLT blockchains, the other people may or may not be able to see the transactions.

  1. Federated — Most restrictive, Limited access, Much better scalability, transparency & privacy e.g. A Central bank or R3 consortium
  2. Permissioned/Private — Access can be public or private but verification or audit permission for a few only, simplified compliance & data handling e.g. Bankchain
  3. Permissionless/Public — Open source Public network, transparency with anonymity as no third-party involved, minimum costs with no need for maintenance. However, results in slow processing e.g. Bitcoin
  4. Hybrid — A combination of Public/Private network with partially restricted participation, Offers flexibility with what data is kept private & what is stored on the public ledger. Better scalability with consensus not required from every node on the network e.g. Hyperledger

The most popular blockchains are of the Cryptocurrencies Bitcoin & Ethereum. However, the drawback with “Blockchain-DLT” is limited transactions per second (TPS) or lack of scalability with miners having the power to postpone or cancel the transaction altogether. Having said that, different consensus mechanisms can be employed to verify the transactions.

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HASHGRAPH

Although Blockchain & Hashgraph serve a similar purpose with the underlying DLT – a peer-to-peer transparent monetary system which does not require a central regulatory authority, there are some fundamental differences in how Hashgraphs go about accomplishing this, thus improving on the limitations of the Blockchain-DLT. Hashgraphs solely rely on consensus mechanism to verify transactions on their network. The consensus is achieved via Virtual Voting & Gossip techniques, which bring higher scalability & lower storage requirements. Unlike Blockchain, multiple transactions can be stored in a parallel stack in the hashgraph ledger within a single timestamp called an “Event.” The major difference between the two DLT implementations is the consensus mechanisms.

While Blockchain gives too much power to miners with the authority to choose which transaction to verify & when, Hashgraph, on the other hand, verifies the transactions in the order they are received reducing the transaction time significantly. Once an “event” is initiated, every node on the network chooses a neighboring node randomly using the gossip protocol to transmit the information to other nodes. The whole network knows about the transaction as the information is spread across the network within a few minutes. Finally, every node validates the transaction through virtual voting before adding it to the ledger. Since the transaction validation is achieved solely through consensus and no “Proof of work” is required for validation, making Hashgraph much less computation-intensive. Since all the nodes know about the transaction and can make the changes accordingly & than discard the transaction – which basically means you don’t have to keep the transaction record indefinitely on the Hashgraph ledger lessening the storage requirements as well.

The Hashgraph technology is the invention of Leemon Baird, the co-founder and the CTO of Swirlds – which has been available for public use since August 2018. The other noticeable player is the Hedera hashgraph platform which allows highly scalable & secure applications to be developed just like the pioneer Swirlds. The white paper of Hadera claims speeds of 200,000 TPS up to 500,000. Practical applications built on top of these platforms should be able to confirm this claim – you can test the Hedera main net by creating a profile on their website.

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DAG

Directed Acyclic Graph or (DAG) is another highly scalable alternative to Blockchain-DLT, which uses a different data structure for its highly efficient consensus mechanism. One of the biggest advantages of the DAG-DLT is the ability to offer fee-less Nano-transactions. In simpler words, the more transactions take place on the network, the faster it becomes. All the nodes on the DAG have the dual function of not only validating a transaction but also represents a validated transaction as well. Any node can initiate a transaction but to validate, it has to verify two previous transactions on the ledger too. The sequence of transactions is called a branch – longer a branch of a validated transaction by a person, the more weight it carries. Keep in mind though that an algorithm selects randomly two previous transactions to validate. NXT is the first platform to utilize DAG when it came out in November 2015. The other two noticeable implementations are IOTA Tangle & ByteBall.  Two more advantages of DAG implementation provides is the Quantum-resistance Winternitz One-Time signature scheme acting as a firewall against a break-in attempt by quantum computers – and second is the Masked Authenticated Messaging (MAM) which allows secure & encrypted communication between two nodes.

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HOLOCHAIN

The company Holochain prides itself in presenting the next frontier of Digital Ledger technology. The most visible change the platform has provided is moving away from the data-centric to an agent-centric approach. The avoidance of a global consensus protocol gives Holochain-DLT virtually limitless scalability. Whereas Blockchain seeks to decentralize the transactions on the network, Holochain intends to make the interactions between the individual nodes decentralized as well. Each individual node on the network runs a chain of their own where they have the independence to operate on their own network while being part of the bigger network consisting of thousands of other similar nodes. Users can store data in what’s called a distributed hash table (DHT) by using specific keys – this data storage also stays distributed in different locations around the globe.

This true decentralization of the network at every level gives Holochain-DLT the ability to achieve millions of TPS. Validation at the micro level relieves the traffic congestion on the network completely. Since every node has its own ledger, it is identified by a specific value identifier called the “DNA.” If the other nodes received a message using the specific node DNA, they would transmit it to the rest of the network, but if there is a malicious attempt to add false information to the network, the transaction would be rejected & the failed attempt would be reported to the rest of the network to avoid this in the future. This is a pretty bulletproof security feature of the Holochain.  Whereas in Blockchain, the computational burden adds up with the addition of blocks, the addition of nodes on a Holochain means more room for computation. Also the transactions fees are non-existent since there is no need for miners which makes it so energy-efficient as well as no hardware equipment is required. Individual nodes can not only process transactions brought to them but provide an infinite space for the development of dApps.

Figure 2: Ownership Transfer

RADIX (TEMPO)

Another relatively new entrant to the DLT space is Radix. This innovation lets you create a Tempo distributed ledger without the blockchain for public & private networks alike, which doesn’t require any modifications. The implementation is extremely lightweight as you don’t need any hardware components. The Radix-DLT also offers time stamps apart from other functionalities described below.

  • Every instance on the Ledger in known as the Universe & every event therein is called an atom
  • Global Ledger is distributed among the cluster of nodes – any node can choose to carry a subset of the ledger called shards – this redistribution increases the scalability manifold
  • All the shard carrying nodes are given a unique ID
  • Special algorithms are used for time stamping events on the Ledger
  • Nodes use the gossip protocol to broadcast & synchronize their shards
  • The nodes use Logical Clocks to validate transactions, which is accomplished by remembering the sequence of transactions to reach consensus

The project is still in very early stages of development but shows great potential. At the time of writing, the platform was recording 1700-1800 TPS with 20 nodes & and a finality time of less than 5 seconds. To summarize the project, in their own words:

“Radix can run on almost any device, is API driven, has its own low volatility token, and it is scalable enough for the entire world to use it simultaneously.”

The comparison between the DLTs goes to show that we have already come a long way in this digital revolution. Projects like Holochain & Radix are taking the idea of decentralization to the next level which has the potential to disrupt the ecosystems in ways we can’t even imagine. As the DLT finds more use cases across varying sectors & industries, it is only helping to fuel this revolution even further.

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Faisal Khan
Faisal is based in Canada with a background in Finance/Economics & Computers. He has been actively trading FOREX for the past 11 years. Faisal is also an active Stocks trader with a passion for everything Crypto. His enthusiasm & interest in learning new technologies has turned him into an avid Crypto/Blockchain & Fintech enthusiast. Currently working for a Mobile platform called Tradelike as the Senior Technical Analyst. His interest for writing has stayed with him all his life ever since started the first Internet magazine of Pakistan in 1998. He blogs regularly on Financial markets, trading strategies & Cryptocurrencies. Loves to travel.

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