Lesson 1 of 7 · 13 min
Distributed ledgers, blockchains and their financial uses
A distributed ledger is one shared database that every participant holds a matching copy of; a consensus mechanism and cryptography keep it accurate, which can make record keeping, ownership transfer and post-trade processing faster and more transparent, at the cost of energy use and some security and privacy risk.
In short
- A distributed ledger is a database copied across a network of participants (nodes); each copy is a verified record of all current and past transactions.
- Three building blocks: the digital ledger, a consensus mechanism to confirm new entries, and a participant network.
- Consensus = validating a transaction, then agreeing on the ledger update. The result is a record that is close to immutable, yet visible to participants in near real time.
- Cryptography protects identities and data; smart contracts are programs that self-execute when pre-agreed conditions are met.
- A blockchain records transactions in blocks, each linked to the previous one by a cryptographic hash.
- Financial uses: creating digital assets, tokenization of real assets, faster post-trade clearing and settlement, and compliance. Drawbacks: high energy use and possible security and privacy breaches.
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