Decentralised vs. Centralised Ledgers
Everybody is talking about blockchain technology these days, but what is it all about?
The “ledger” is at the core of the blockchain, and that ledger is decentralized. Here’s a more in-depth explanation as to what that truly means.
What is the ledger?
By definition, the ledger is the book that keeps all the records in one place. At an organization, the ledger might be a book holding financial records. At a school or college, this is called the register.
Ledgers have long been a part of mankind. Since ancient civilizations, ledgers have been used to record payments, contracts, and the movement of property and assets. It all began with keeping records on clay tablets and papyrus. Today, we have much more modern ways of keeping records, but the basis remains the same.
Computers have now modernized the record keeping process, allowing us to maintain today’s ledgers with a great deal of speed and convenience. Thanks to innovation, the information that we store on our computer can be moved easily while being decentralized, quick to access, and secured by cryptography.
For now, let’s leave cryptography out of the picture to avoid complicating things unnecessarily.
The Centralized Ledger
A general ledger is a centralized ledger that puts all accounts in one place to record all transactions related to an organizations’ liabilities, assets, revenue, and expenses. Everything in the world that holds a financial value requires a ledger to track it.
Just a couple of decades ago, the computerized ledger came to be, known as ERP (Enterprise Resource Planning). This general ledger acts as the organization’s central repository. It holds all of the accounting data for the company that is transferred in from sub-ledgers dedicated to fixed assets, cash management, and so on.
The general ledger truly is the organization’s account system backbone. The general ledger is where all of the non-financial and financial data can be found. Each account gets a page (or more). All accounts are in it, whether it’s computerized or manual with the use of a large book.
There are obviously both pros and cons to the general ledger.
With a centralized ledger, a bank (for example) has total control over what gets listed on the ledger. That’s because this centralized ledger is controlled by the bank (a single entity). That means your bank statement and everything that shows on it is completely up to the bank, leaving room for corruption and error.
That’s really the biggest disadvantage of the centralized ledger. If the single entity in control of it happens to have malicious intent or someone with malicious intent gains access to it, clients can suffer tremendously. This happens with data breaches, false bank charges, and so much more.
Another con that comes along with a centralized ledger is that the single controlling entity can choose to shut the ledger down without notice. This means transactions won’t be processed any longer. This can result in a serious error, like deletion (whether accidental or done with malicious intent).
The Decentralized Ledger
To put it simply, a decentralized ledger is nothing more than a shared ledger. Unlike with a centralized ledger, a decentralized ledger has no single entity controlling it. There is no centralized data storage and no central administrator.
Essentially, the decentralized ledger is an asset database. This asset database can be shared across multiple sites, institutions, and geographical locations. Everyone who participates in the network (i.e., all clients at a bank) can have their own copy of the ledger, but every copy is identical.
Within moments and sometimes even seconds, if someone changes their copy of the ledger, that change will be reflected across all copies. Depending on the rules of the network, an entry can be updated by all, some, or just one participant. That might sound less secure, but it’s actually the opposite.
Cryptography is used to maintain the security and accuracy of the ledger. The blockchain is by far the most popular type of decentralized ledger, although others do exist. With a blockchain network, all users are in complete control of all information the ledger holds.
When a change is made to the blockchain (ledger), that change is viewable by every member of the network. This creates transparency. Transactions are also immutable, which means that they cannot be deleted or altered once accepted to the network.
Of course, you’re likely wondering: Couldn’t I just go and update everyone’s ledger with false information?
Actually, a decentralized ledger does not give anyone the ability to falsify a transaction. That’s because the cryptography behind the network will require each change to be verified using a complex algorithm that checks all available data and ensures all numbers line up.
Like a centralized ledger, there are some advantages and disadvantages to this setup. One of the biggest advantages is the security of a decentralized ledger. With this decentralized network, the blockchain does not suffer from a single point of failure, and it’s more resilient overall against a malicious attack for multiple reasons.
Number one, everything is decentralized, which means the entire network would have to be overpowered (which would take a *lot* of computing power) in order for fraudulent transactions to be added to the ledger.
Number two, everything is heavily encrypted. Blockchains like the ones behind Bitcoin and other popular cryptocurrencies are highly secured (while not entirely anonymous), further protecting them from fraud and malicious attacks.
Furthermore, every user within a network is able to trust that each transaction is going to be executed just as the protocol commands. Thanks to the decentralized ledger managing itself, automatically checking the legitimacy of each transaction across the entire network, this negates the need for a third-party.
What many people aren’t yet aware of is that Smart Contracts (agreements written using a decentralized ledger) are set to revolutionize many industries, including the banking and insurance industries. That’s because, thanks to the decentralized ledger, two parties are capable of completing an exchange without the need for oversight of a third party.
This eliminates the need for escrow companies in real estate transactions and countless other middlemen who are currently desperately needed in many markets. This is set to greatly lower transaction fees as it eliminates the need for third-party intermediates and overhead costs.
Understanding The Difference
A good way to picture the differences between the centralized ledger and the decentralized ledger is to think of it like this.
A Centralized Ledger
Imagine a physical record book sitting in the back office of your local bank. That’s where all of its financial transactions are going to be written down (let’s pretend it’s a *very* small town for the sake of the bank’s accountant).
This is a centralized ledger, and it’s just waiting for a disaster to happen. With a centralized ledger, the bank is in total control of it and everything it contains. Even more so, the accountant is in total control of its contents too.
Maybe the accountant has absolutely no malicious intent, but all it takes is for this centralized ledger to be accessed by someone who does and, suddenly, the only record of transactions has suddenly been compromised. A person with malicious intent can add fraudulent transactions, with staff being unable to distinguish legitimate from illegitimate, or they can tear out pages and erase entries entirely.
Imagine the confusion and chaos this would create if you walked into the bank one day to find that the centralized ledger had been compromised. That’s how mass data breaches happen–because companies keep all their information and data in one place.
A Distributed Ledger
A distributed ledger is a bit different than a decentralized one, but still very important to understand. Let’s have a look.
Continuing with the analogy above, there may be one ledger in the back office of the bank still, let’s say that 12 other staff members also have an identical copy at home.
Instead of using a physical book, the bank has upgraded to a cloud computing software like Google Sheets. This means, when a change is made to the ledger in the back office, all other 12 copies of the ledger are instantly updated. This is what makes it a distributed ledger: there are multiple copies.
To be a decentralized ledger, more security and protections must be added (with the complex concept of cryptography).
A Decentralized Ledger
To turn the distributed ledger (which instantly updates as one copy has a change made to it) into a decentralized one, security protocols and complex algorithms must be used.
Using the same analogy as before, multiple copies of the ledger can be found. However, with a decentralized ledger, one copy doesn’t just instantly have the ability to update all the other copies.
Instead, if the back-office ledger is updated at the bank, the other staff will take their ledgers and go in to verify the information before updating their ledgers too.
Through a system of checks and balances (which, thank goodness for the staff, is entirely automated), the bank will verify the new entry before updating all their other ledgers.
So, if the janitor came in and tried to falsify a transaction on the back-office ledger by saying there was a deposit of $500 into his account, the staff would first check that a deposit had truly been made before adding it to all the ledgers.
This keeps the decentralized ledger accurate, and more secure than the centralized alternative.