Centralized Ledgers and Distributed Ledgers

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  • February 05, 2021
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Spotting the difference

History is preserved based on oral and written traditions. Without it, there is no way we can accurately remember what happened in the past, how it connects to the present, and how it will affect the future.

In the field of economics, the mind is so finite that it cannot in any way register a vivid recall of an industry so complex and filled with deals, transactions, contracts, debts, payments, buying and selling, consignments, manufacture, deliveries, shipments, insurance, and all other intangibles of the trading system between all peoples, domestic and international, that the written ledger came about and played a vital and central role in the flow of operations.

In short, a ledger is a record book of responsibilities, accountabilities, and commitments.

Centralized Ledgers

A centralized ledger, or a general ledger, is the main copy of all the company’s money trails. It is recorded there all of the company’s transactions, revenues, assets, liabilities, expenses, and equity, including projects, plans, and other sensitive financial and non-financial data. All other sub-ledgers are reconciled, recorded, and stored in the centralized ledger. It may consist of one or more books with many pages. Since time immemorial, the centralized ledger served as the traditional backbone of any entity. 

The problem with centralized ledgers is that they can be controlled and manipulated. Anyone or any entity with malicious intent can make a statement appear or disappear. Records can be tampered with without consent, and company regulations and notices can be changed and implemented in an instant. Without any reconciling copy, it poses a potential danger as a single point of failure can entirely shut down a business or an industry due to an error, inadvertent or not.

Distributed Ledgers

The advent of the Internet made it possible to implement the distributed ledger technology, wherein participants of a network have identical copies of the ledger, hence, distributed ledger. In case of a new entry or change, it will appear in all the ledgers in a matter of seconds. Once entered, it is rendered immutable, meaning it can never be tampered with or deleted. Distributed ledger technology removes the control of any central administration, and no single storage exists as a single point of failure. Cryptography is employed for data accuracy and security. Any malicious attack on the ledger can easily be detected. The data is cleanly consistent, up-to-date, and readily available. In this case, transactions will go on smoothly, and protocols will function as programmed, eliminating the need for third-party mediations. It means lower transaction fees, faster processing, and round-the-clock availability of service.

Conclusion

The disruptive effects of distributed ledgers are now clearly visible as they exposed massive flaws in traditional ledgers that continue to paralyze otherwise efficient economic processes and business systems. Entrenched corruptive and malicious practices will inevitably be put to rest as there is no other way for the industries to improve but upgrade to digital mechanisms if they hope to survive the onslaught of technological advancement. Costly reconciliation departments and clearinghouses will become a thing of the past, while consensus will be the byword of the day.

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