Once upon a time, there was a distributed ledger technology (DLT), which virtually no one had heard of because it was not overhyped. Along came Bitcoin, and everything changed as if touched by a magic wand.
Well, not everything. Blockchain consumed most of the spotlight, leaving the more general idea of DLT in the shade. In terms of publicity, things haven't changed much to this day. In terms of technology, they've been evolving pretty rapidly.
Even though blockchain, in a wild variety of implementations, tweaks, and upgrades, still plays first fiddle in the DLT field, other distributed ledgers have also been delivering promising results.
If you're interested in exploring these technologies further, keep an eye out for the Ledger Christmas sale, where you might find special deals on hardware wallets and more.
But before we get to the overview of the most notable DLTs out there, here's a refresher on what the concept is all about.
A brief history of the distributed ledger technology
At the root of the DLT lies the idea of decentralization. In case you were unaware, it wasn't invented by Satoshi Nakamoto, as it dates back to the BC era. The Roman Empire, which spanned a stunningly vast area from present-day Scotland to Syria, based its banking system on a distributed ledger approach. It enabled an individual to deposit money anywhere within the empire and withdraw it anywhere within the empire – even at a very distant bank.
Romans expanded their use of distributed ledger through paper checks, which facilitated a greater number of complex business transactions, simultaneously requiring continuous improvements and accuracy in record keeping. Chinese applied similar complex distributed-ledger-based methods for banking settlements during the Qing Dynasty, but we'll skip this story.
Fast forward to modern times. In 1991, Stuart Haber and Scott Stornetta wrote a paper on how to create tamper-proof digital timestamps in a distributed system using signatures. Six years later, Tim May put forth an idea of a digital money system based on anonymous "remailers" that was similar to how Bitcoin forwards transactions. In 2002, David Mazieres and Dennis Shaha came up with a method of building a trusted file system on an untrusted server which also contributed to the invention of Bitcoin.
Finally, in 2008, a person or group using the pseudonym of Satoshi Nakamoto published the Bitcoin whitepaper. It brought together the aforementioned ideas and designed a system for direct online transactions using a peer-to-peer network and a proof-of-work consensus model to solve the Byzantine Generals Problem. It's worth reminding that Satoshi's white paper mentions the concept of untraceable electronic cash, which was first proposed in 1983.
Distributed ledger technology – how does it work, and what are the benefits?
Now that you're familiar with the historical outline of the DLT evolution, it's about time that we cut to the chase and explain how the technology works. In broad strokes, distributed ledgers are databases shared across a network spanning multiple participants and nodes in various geographical locations. They are collections of financial accounts managed and organized by numerous unrelated parties. Each node has an identical copy of the ledger, and participants of the network can access it anytime. Every change to the ledger is propagated across the network so that every node supporting the copy of the ledger records the modification and stays up-to-date.
Unlike centralized ledgers, DLTs don't have a single point of failure (SPOF). In other words, they won't fail if a part of the network crashes. Not having a central administrator, DLTs operate as peer-to-peer networks based on consensus algorithms. The most famous DLT is blockchain, but there are also other solutions available – some arguably more efficient.
In general terms, DLTs can be classified based on data structure, consensus algorithm, "permissionlessness" (or lack thereof), and the use of mining. In each case, they provide essential benefits over centralized ledgers, such as high security, transparency, and immutability. Everything comes at a price, though. Key arguments against DLTs include high energy consumption, high overhead linked to maintaining multiple data copies, low performance and network throughput (number of transactions per second), limited usefulness and advantage over centralized solutions for most small and medium businesses.
What is blockchain, and what are its limitations?
Blockchain emerged as the most popular DLT and continues to be that way. It owes its popularity to Bitcoin, the first and invariably largest cryptocurrency. The technology quickly rose to prominence and was adopted by big tech corporations for various applications within and outside finance. Blockchain shares the key characteristics of other DLTs, with a few notable differences linked to data structure and their implications.
Blockchain organizes transactions into blocks chained together in a linear sequence. Each block contains a hash of the previous block, a timestamp, and transactional data, typically represented as a Merkle tree. Since the blocks form a chain, each containing information about its predecessor, it is impossible to edit transactional information without modifying all subsequent blocks. Any attempt to tamper with data on a blockchain would require gaining control of more than half of the network, which in the case of Bitcoin is quite improbable to achieve for one party or even an alliance of villains.
Blockchain allows for many variations, which results in diverse implementations of this technology. For example, in addition to public, permissionless blockchains, such as the one underlying Bitcoin or Ethereum, there are private, permissioned blockchains, such as Hyperledger Fabric, tailored for enterprise usage. Blockchains also differ with regard to consensus mechanisms. In 2022, Ethereum switched to Proof-of-Stake algorithm, while Bitcoin continues to operate on Proof-of-Work.
Are there alternatives to blockchain?
Since day one, blockchain technology has been struggling with issues that hamper its growth. They include low scalability, security issues as a compromise for enhancing scalability, low network throughput (transaction speed), low interoperability (lack of universal standards), and high energy consumption. These obstacles have been addressed in many ways with varying results. For example, Ethereum moved from PoW to PoS for energy efficiency, Layer-2 solutions are being developed to alleviate the mainchain and increase scalability, and so on.
Another idea to get rid of blockchain limitations and still keep most of its benefits is to make use of another DLT instead. Read on to find out about some promising candidates.
5 distributed ledger technologies that are a promising alternative to blockchain
Hedera – DAG-based DLT backed by tech giants
Hashgraph is a distributed ledger technology (DLT) that boasts a significant speed advantage over blockchain and low energy consumption. Invented in the mid-2010s by an American computer engineer Leemon Baird, it was released in July 2017 as a proprietary algorithm by Swirlds, a company co-founded by Baird, to quickly draw the attention of the big guys in the IT industry.
Hashgraph utilizes a directed acyclic graph (DAG) data structure which records information in a non-linear way, much different than a sequential order used in blockchain. DAG allows hashgraph to reduce the size of data per transaction, resulting in higher throughput, lower costs, and much better scalability than in the case of blockchain. The data in the network is exchanged based on the gossip protocol. Transactional information is distributed at random, which allows it to proliferate throughout the network at lightning speed. When the information reaches a sufficient number of nodes, the transaction gets validated. Unlike blockchain, hashgraph stores the transactional data in hashes, which translates to a higher processing rate.
Currently, the only hashgraph-based public DLT is Hedera, developed by the namesake company. Hedera, founded by Baird, is co-owned and co-governed by a group of global organizations, including Boeing, Deutsche Telekom, Google, IBM, LG, the London School of Economics, Standard Bank, Ubisoft, and others. In 2022, Hedera bought the IP rights to the algorithm from Swirlds and made it available as open-source code. As noted by the Hedera team, "the open sourcing of the consensus layer will serve to further accelerate its development and expand the number of contributors."
A notable Hedera feature are extremely low fees averaging $0.0001, compared to approximately $20 for Bitcoin and Ethereum. Fees are charged in HBAR, the network's native currency, to pay for smart contract transactions like creating a contract, calling a smart contract function, or returning contract values. Fees also serve to protect the network from malicious actors in a Proof-of-Stake-like mechanism.
With the ability to process up to 10,000 transactions per second, Hedera hashgraph is a promising DLT that offers high transaction speeds, negligible transaction costs, and robust security and decentralization. It has the potential to revolutionize a wide range of industries, including finance, healthcare, online payments, stock trading, and supply chain management.
Below you can find Hedera's HBAR performance in four key categories compared to Bitcoin and Ethereum. Hashgraph-based cryptocurrency outperforms its competitors by a long shot in each regard.
Tangle (IOTA) – a distributed ledger technology for the internet of things (IoT)
IOTA has been touted as the default DLT and cryptocurrency for the internet of things (IoT), enabling fast microtransactions and machine-to-machine automated payments without human intervention. "We actually see the IOTA token as the connective tissue between the human economy and the machine economy – creating interoperability between the two," said Dan Simerman, Head of Financial Relations at IOTA Foundation. Same as hashgraph, IOTA has serious advantages over blockchain, at least for the intended use cases, but is not free from flaws, with the key one being its complexity.
The IOTA protocol was created in 2015 by a group of four developers and launched in 2017. In the following years, the project struggled with a multitude of hacking and phishing attempts, resulting in thefts and a damaged reputation. IOTA's flaws as well as its complex design attracted a lot criticism and led to rewriting the algorithm from the ground up. The update, named Chrysalis or IOTA 1.5, was launched in April 2021.
Currently, the network is governed by a coordinating centralized node run by the IOTA Foundation. The coordinator decides which transactions and data are included in the ledger, making the solution unappealing for crypto aficionados. However, the situation is allegedly temporary. The network aims to get back on track with decentralization in version 2.0 of the IOTA protocol. The event leading to the transition has been given a fancy name of Coordicide (the "-cide" suffix means killing).
By design, IOTA is a DLT based on – similarly to hashgraph – a directed acyclic graph (DAG) data structure. This transactional layer is often called the Tangle, while IOTA denotes the whole project as well as the related cryptocurrency. The latter is listed under the MIOTA ticker symbol derived from the megaIOTA unit equaling 1,000,000 IOTA tokens.
IOTA's "unique selling point" (already not so unique in the DLT area) is the lack of transaction fees – a feature difficult to support yet already solved mathematically and in the process of implementation. Another key trait that sets IOTA apart from blockchains is the protocol's ability to handle data and value exchange separately. IOTA also boasts high transactional speed and scalability unparalleled by blockchains.
Overall, IOTA is a unique DLT that is well-suited for the needs of the IoT. Its scalable and feeless design makes it an attractive choice for device communication and machine-to-machine transactions.
Holochain – a DLT for scalable, efficient Web3 apps
Holochain is a newcomer to the DLT family. The first release, feature-complete for building applications, was announced on December 15, 2022. According to the project's creators, "Holochain is a full software stack for building scalable and efficient Web3 apps of every kind. You could build a currency, NFT, or DeFi platform with Holochain, but this framework is meant for even more. It's capable of handling the storage and performance demands of the many practical things we want to do with each other online." A wide range of use cases enabled by Holochain Beta-RC includes dapps for social networks, chats, groupware, real-time collaboration, project management, governance and decision-making, accounting, currencies, renewable energy markets, adaptive IoT networks, and more.
Unlike data-centric blockchain, holochain takes an agent-centric approach, making a network participant the basic "ontological" unit. Each agent runs their own copy of the application. Their data and identity exist on their computer and nothing can happen without their permission. Each piece of data an agent creates is signed with their unique key and stored in their journal. In general terms, holochain aims for user control of data and identity, avoiding the need for global consensus. This approach enables massive scalability and empowers users even more than blockchains as well as allows them to steer clear of bottlenecks typical for blockchains.
Key holochain's strengths include:
- high throughput, as the algorithm doesn't rely on universal consensus,
- no cost owing to the lack of transaction fees,
- close-to-infinite scalability, as users only store data for the applications they produce and a small part of the shared database,
- low energy consumption,
- ease of use, as no crypto wallets, network tokens, or even login credentials are necessary.
Holochain's database of all public data is handled by a distributed system called a distributed hash table (DHT). It is a decentralized data store for mapping key-value pairs enabling a fast lookup of information. In the holochain network, DHT serves users to share records of their actions and allows the system to detect corruption. Each node of the network holds only a small shard of the DHT, so individual agents are not troubled with data storage issues.
Overall, Holochain is a promising new DLT that offers scalability, flexibility, and security advantages over traditional blockchains. It is still in the early stages of development but has the potential to revolutionize the DLT industry.
Cerberus (ex-Tempo) – a DeFi-oriented distributed ledger
Cerberus is an invention of the UK-based Radix Foundation. It was built on the remnants of Tempo – an innovative distributed ledger architecture and a consensus mechanism. The latter was a very promising technology with great scaling capabilities. In 2018 it publicly achieved a record 1.4m TPS. Unfortunately, Tempo struggled with security issues which ultimately contributed to its failure. The protocol was unable to prevent an attacker from having actual control over transactions.
In March 2020, Radix released a white paper for Tempo's successor – Cerberus consensus protocol. It is a mechanism underpinning Radix DLT, a DeFi-oriented distributed ledger, developed with a vision to "build a single decentralized network that can scale DeFi seamlessly to every single person on the planet." The company embarked on its mission as soon as in 2013 and tested several approaches, such as blockchain, directed acyclic graphs, channeled asynchronous state trees, and Tempo.
According to Radix, Cerberus is capable of parallel processing massive transactions outcompeting blockchain by a long shot. Such performance is enabled by an innovative approach to sharding. Based on a pre-sharded data structure, the protocol bundles and unbundles related operations across 18.4 quintillion shards, resulting in unprecedented levels of scale for a DLT and virtually unlimited throughput. As opposed to blockchain, Cerberus doesn't need multiple confirmations to recognize a transaction as trustworthy, and it can create an immutable record right after the transaction has been submitted.
Radix DLT, with its new consensus mechanism, is a promising technology and an interesting alternative to blockchain. However, the solution is still fresh and untested in large-scale projects.
Constellation – a big data-focused DLT
Constellation is another DLT project that boasts infinite scalability and "feelessness." It's an open-source, distributed, permissionless layer 0 that provides the framework for building blockchains, cryptocurrencies, and wallets. One way to explain it is by analogy to WordPress, which allows users to build websites or online businesses. Similarly, Constellation provides the basis for developing web3 inventions.
At the project's core lies a DAG-based Hypergraph Transfer Protocol (HGTP) which enables instant and feeless transactions, supports efficient smart contracts, and ensures complete security through its novel Proof of Reputable Observation (PRO) consensus mechanism. HGPT also supports fully secure message transfers between devices and generates a secure audit trail containing retrospective metadata.
Constellation's focus is big data. The company has joined the Mobility Open Blockchain Initiative (MOBI), a global nonprofit smart mobility consortium, and partnered with giants like Ford and GM to develop a common communication standard for the autonomous cars industry. With its high-performing network, Constellation aims to help implement secure and efficient DLT to provide seamless communication between big data infrastructure and blockchain-based technologies used in the self-driving cars industry.
"Constellation fixes the mobility data problem at its root. Our network is designed to offer a neutral standard for hardware-to-hardware communication while giving users control over their own data. In the context of self-driving cars, DLT that is infinitely scalable is simply the only answer to the delicate balance of guaranteeing user privacy while collecting potentially life-saving data," said Benjamin Diggles, CRO of Constellation Network.
In summary, Constellation is a highly scalable and secure DLT that offers a range of features for building peer-to-peer networks and providing immediate value to users.
As DAG-based alternatives to blockchain gain traction, in the following years, we'll see plenty of new DLT projects emerge. They will target specific problems, industries, or whole business areas. For investors, they'll provide opportunities to support cutting-edge technologies with a view to earning potentially massive returns.