Distributed ledger technologies
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Distributed ledger technologies
DLT Investigative Task
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Abstract
This paper provides an overview of the current state of development, applications, best practices,
business models, future trends, and associated concerns surrounding Distributed Ledger
Technologies (DLTs). DLTs have been used in the financial, healthcare, supply chain, and
energy sectors to provide secure, transparent, and efficient transaction processing. Technical
issues such as scalability, interoperability, privacy, and security, as well as non-technical issues
such as regulatory compliance, must be addressed for effective implementation. Hybrid DLTs,
expanding scalability and interoperability, strengthening security and privacy, and resolving
legal and regulatory challenges are all areas needing further investigation.
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1.0 Introduction
A new option for safe, transparent, and effective transaction processing across industries is distributed ledger technology (DLTs). Distributed ledger technologies (DLTs) use distributed databases replicated over a network of nodes to provide all participants with a synchronized and shared view of transactions (Sunyaev & Sunyaev, 2020). Financial services, healthcare, the supply chain, and even the energy sector have all been profoundly impacted by DLTs like blockchain, Tangle, and Hashgraph. Scalability, interoperability, regulatory frameworks, and acceptance hurdles are just a few of the technical and non-technical difficulties with DLT implementation. This paper aims to provide readers with a review of the literature about the current state of development, applications, best practices, business models, future trends, and associated concerns surrounding DLTs.
2.0 Current Development of DLTs
With the launch of blockchain, the most well-known and widely-used DLT, distributed
ledger technology has advanced greatly. Blockchain is a distributed ledger technology that
employs cryptography for securing and verifying transactions in a trustless and centrally
untrusted environment, removing the need for traditional financial intermediaries like banks
(Babich & Hilary, 2019). With the introduction of Bitcoin in 2008, which was the initial use of
blockchain technology, many additional blockchain-based applications have evolved, with
Ethereum being only one of them (Taş & Tanrıöver, 2019).
Introducing smart contracts to Ethereum, another blockchain-based DLT has allowed
programmers to create dApps that automate intricate business procedures (Taş & Tanrıöver,
2019). Smart contracts remove the need for third parties and red tape by encoding all the
agreement conditions into the code. As a result of Ethereum's success, several more blockchain-
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based apps have been developed. Nevertheless, blockchain has a few drawbacks, such as slow
transaction throughput, high energy consumption, and a lack of anonymity. Blockchain's Proof
of Work (PoW) consensus method, which needs miners to solve complicated mathematical
problems to add new blocks to the chain, is to blame for the network's slow transaction
throughput (Schinckus, 2021). As a result, the blockchain's transaction throughput is limited by
the time and energy required for this procedure. Due to the open and public nature of the
blockchain, all transactions can be seen by anybody on the network.
Hence, new DLTs like Tangle and Hashgraph have evolved to address these issues.
Distributed ledger technology (DLT) that consumes less energy than blockchain includes Tangle,
a directed acyclic graph (DAG) DLT that employs a consensus process called "Proof of Work
(PoW) + Proof of Stake (PoS)" ( Živić, Kadušić & Kadušić, 2020). Unlike Bitcoin, in Tangle,
miners aren't required to solve complicated mathematical problems to verify transactions;
instead, the nodes directly involved in the transaction do so. This makes Tangle more efficient
than blockchain in energy use since it removes the need for mining, which consumes much
power. Tangle also has a high transaction throughput and can process several transactions in
parallel.
Hashgraph is a patented DLT that outperforms blockchain regarding scalability and
security by implementing a consensus method called "Gossip About Gossip." Using Hashgraph,
the network may establish consensus in seconds thanks to its voting-based transaction validation
system, making it far quicker than blockchain (ALAHMAD et al.,2022). Hashgraph's distinctive
consensus process employs a digital voting system to guarantee the legitimacy of all transactions,
further enhancing the system's already impressive degree of safety.
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2.1 Applications of DLTs
DLTs are useful in several contexts. Because of their distributed nature, DLTs are a great
option for sectors that need reliable and trustworthy infrastructure.
Distributed ledger technologies (DLTs) have been used in the financial sector's payment
processing and settlement systems to enable quick and safe transactions between traders. DLTs
have the potential to minimize dependency on intermediaries like banks and payment processors,
which would have a positive impact on transaction costs and efficiencies (Romero Ugarte, 2018).
Smart contracts used inside DLTs may also automate the implementation of monetary
agreements, removing human mistakes and the possibility of legal conflicts. Moreover, DLTs
have been used in peer-to-peer lending, where borrowers and lenders may interact directly
without needing an intermediary. Lenders may increase their profits on investment, while
borrowers can access loans at more affordable rates thanks to this system. A further use of DLTs
in the financial sector is digital identity management, which allows users to easily and securely
verify their identities without the intervention of a third party.
DLTs have been used in the healthcare industry to safely and privately store and share
patient medical information safely and privately. DLTs may protect patients' privacy while
minimizing the risks of medical record fraud, mistakes, and duplication(Gorbunova et al.,2022).
DLTs may also monitor the distribution chain for vaccinations and other medications, providing
full visibility and auditability from production to consumption.
Distributed ledger technologies (DLTs) are utilized in supply chain management for real-
time tracking of products and services, lowering the potential for fraud and increasing openness
and trust between all parties (Li & Kassem, 2021). As a bonus, DLTs may follow products from
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their raw material source to their ultimate destination, establishing full transparency and
accountability.
Peer-to-peer energy trading is one use of DLTs in the energy sector; it eliminates the
middleman by facilitating transactions between generators and users. Applying DLTs in grid
management paves the way for more effective resource distribution and consumer optimization
(Scuri et al.,2019). Digital ledger technologies (DLTs) may also be used to keep tabs on carbon
credits, helping businesses keep tabs on their environmental effect.
2.2 Best Practices and Business Models for DLTs
Adhering to best practices that assist in solving issues of scalability, energy efficiency,
interoperability, privacy, security, and regulatory compliance is crucial for the effective
implementation of DLTs.
The capacity of DLTs to scale to a high volume of transactions is an ongoing problem.
DLTs should be built to guarantee scalability so transactions may be processed in parallel.
Consensus methods should be fine-tuned to verify transactions quickly and efficiently with few
resources (Alsboui et al.,2021). The high energy requirements of DLTs are mostly attributable to
consensus procedures like proof of work (PoW). To combat this issue, cutting-edge DLTs are
being built using more power-efficient consensus procedures like proof of stake (PoS) and proof
of authority (PoA).
The term "interoperability" describes the capacity for several DLTs to interact with one
another and share information (Alsboui et al.,2021). The Interledger Protocol (ILP) and the
Blockchain Interoperability Alliance are two examples of standards and protocols that distributed
ledger technologies (DLTs) should be built to comply with to guarantee interoperability (BIA).
Data encryption, digital signatures, and multi-factor authentication are just a few of the privacy
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and security measures that DLTs should implement first and foremost. Additionally, DLTs
should be built with security in mind to restrict access to private information to only those who
need it.
To guarantee that distributed ledger technologies (DLTs) comply with legal frameworks
and standards that encourage innovation while preserving the interests of stakeholders,
regulatory compliance is essential. DLTs should be built to comply with current rules, or new
regulations should be drafted to account for the difficulties and advantages of DLTs.
2.3 Business Models for DLTs The community works together to build and maintain DLTs as part of an open-source
business model. As this paradigm encourages community input, it can potentially increase DLTs'
openness and decentralization (Yang et al.,2020). Also, the community's shared responsibility for
the DLT's upkeep and upgrades may assist in lowering costs and hazards associated with
development.
Consortiums are multi-stakeholder organizations that work together to create and
implement distributed ledger technologies. When stakeholders pool their efforts to build and
launch the DLT, costs, and risks may be mitigated using this strategy (Yang et al.,2020).
Consortiums may aid in making sure the DLT is tailored to the requirements of many different
parties.
Permissioned private networks are owned and administered by a single entity, allowing
for more privacy and security. Organizations like banks and governments that need tight control
over the DLT may benefit greatly from this paradigm.
Hybrid models, which mix aspects of the business above paradigms, are gaining
popularity (Yang et al.,2020). For instance, a distributed ledger technology (DLT) may be built
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using open-source software and then deployed on a private permissioned network for enhanced
security and privacy.
2.4 Future Trends in DLTs
Finance, supply chain management, healthcare, and government are just a few fields
where Distributed Ledger Technology (DLTs) are promising. The openness, immutability,
security, and decentralization offered by DLTs have attracted much interest. Nevertheless, many
obstacles remain to be solved, such as scalability, interoperability, privacy, and regulation, since
DLTs are still in their infancy.
Researchers and developers are considering several options, including using hybrid
DLTs, to meet these problems. Hybrid distributed ledger technologies (DLTs) combine the
strengths of several DLTs, such as blockchain and Tangle, to provide a system that is both more
effective and more scalable (Farahani, Firouzi & Luecking, 2021). IOTA uses Tangle, a
distributed ledger technology (DLT), since it is more scalable than conventional blockchain and
can process several transactions in parallel without requiring miners.
Using DLTs for decentralized financial transactions is another growing area of interest in
blockchain technology (DeFi). Without traditional financial institutions like banks, brokers, or
clearinghouses, financial transactions may occur in the DeFi system (Gupta, 2016). Because it
promises to lower transaction costs, expand access to banking services, and improve the safety
and reliability of those services, DeFi is quickly gaining popularity. Secure and transparent
transactions, automated smart contracts, and decentralized applications are all made possible by
DLTs, making them an ideal platform for DeFi (dApps).
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Applications using the Internet of Things (IoT) are also anticipated to use DLTs
substantially. The Internet of Things (IoT) is a network of interconnected electronic gadgets and
sensors that allows them to collect, process, and disseminate information (Hussein, 2019). By
facilitating machine-to-machine (M2M) transactions and guaranteeing data privacy and security,
DLTs may offer a safe and decentralized architecture for the Internet of Things. DLTs'
immutability and auditability of transactions might also make novel business models like pay-
per-use pricing possible.
The tokenization of assets is another developing use case for distributed ledger
technologies. Real estate, equities, and commodities may all be tokenized and represented as
digital tokens on a blockchain (Heines et al.,2021). By tokenizing assets, investors may hold a
smaller stake in the whole, which improves liquidity and lowers transaction costs. Crowdfunding
and P2P lending are only two examples of innovative business models that tokenization might
make possible. It's also anticipated that DLTs would be combined with other cutting-edge
innovations like AI, big data, and cloud computing. For instance, more complex and intelligent
applications may be developed by merging DLTs with AI to construct autonomous and
decentralized systems. Moreover, DLTs can provide safe and decentralized big data
management, allowing for secure data exchange and analysis. Better, more efficient systems may
be built using DLTs that take advantage of the scalability, availability, and low cost of cloud
computing.
2.5 Issue Investigation of DLTs
2.5.1 Technical Issues
Scalability is a major technological challenge for the creation and implementation of
DLTs. Conventional blockchain-based DLTs like Bitcoin and Ethereum have poor transaction
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throughput, which leads to lengthy transaction times and hefty fees. Sharding, off-chain
transactions, and layer-two solutions like the Lightning Network are just some of the ideas
presented to deal with this problem (Farahani, Firouzi & Luecking, 2021). Interoperability is
another technical hurdle since each DLT uses its protocols and standards, making it difficult to
combine them. This may reduce the efficacy of distributed ledger technologies by creating
disjointed ecosystems. The Interledger Protocol (ILP) is one example of an interoperability
protocol developed to facilitate cross-chain transactions.
The development and implementation of DLTs also face significant challenges in
security and privacy. Several assaults, including 51% attacks, Sybil attacks, and quantum attacks,
may be launched against DLTs (Dunphy, Garratt & Petitcolas, 2018). Cryptographic methods
like zero-knowledge proofs and consensus mechanisms like proof-of-work (PoW) and proof-of-
stake (PoS) may be implemented to increase safety (ZKPs). DLTs enable transparency, which
may not always be desired; therefore, privacy is also a major problem. The security of the DLT
may be guaranteed without compromising privacy, thanks to methods like ring signatures,
homomorphic encryption, and mixers.
2.5.2 Non-Technical Issues
The development and implementation of DLTs also require resolving several related but
non-technical concerns. Distributed ledger technologies (DLTs) must adhere to the rules and
regulations in each country in which they are used. For instance, DLTs need to verify users'
identities and keep tabs on their transactions to stay in line with anti-money-laundering (AML)
and know-your-customer (KYC) rules (Dunphy, Garratt & Petitcolas, 2018). To further
complicate matters, DLTs may be used to keep track of and transfer ownership of digital goods,
making intellectual property (IP) a crucial legal problem. There are legal questions with the
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formulation and enforcement of smart contracts, which are contracts based on code that can
execute themselves.
In addition to technical factors, social, ethical, and professional concerns must be
considered while creating and deploying DLTs. DLTs have the potential to improve the industry
in several ways. They may help criminals, worsen income disparities, and invade people's
personal space, which are unexpected effects. The social and ethical ramifications of DLTs must
be carefully considered, and their conformity to industry norms and values must be ensured.
3.0 Conclusion
Distributed ledger technologies (DLTs) may bring about widespread structural changes
across many sectors, spawning new business models and opening up several avenues for creative
problem-solving. Scalability, interoperability, security, privacy, legal frameworks, and adoption
obstacles are only some of the technical and non-technical hurdles that must be cleared before
they can be implemented. To secure the advantages of DLTs while addressing their limits, their
development and implementation must adhere to best practices and standards. Developing hybrid
DLTs, expanding scalability and interoperability, strengthening security and privacy, and
resolving legal and regulatory challenges are all areas that need more investigation.
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