Back to Basics: Distributed Ledger Technology and Blockchain 101

You have probably heard the terms “blockchain”, “distributed ledger technology”, “bitcoin” and “NFTS” being thrown around a lot recently.  But what do these terms mean, why are they important, and what advantages does this technology actually have?

The purpose of this article is to introduce you to these concepts and technology, to explain what they are, and how they fit in the blockchain landscape.

Key terms

Before we dive in, it is first important to understand some of the key terms relevant to this type of technology:

  • Distributed Ledger: At a high level, a distributed ledger is a database, e.g. a digital record of transactions, that can be shared instantly with multiple participants across a network. The distributed ledger can be updated by multiple participants accessing the database and the records are stored in a continuous ledger.
  • Blockchain: This is a component of distributed ledger technology that is created and maintained by a peer to peer network of nodes. Data on a distributed ledger is grouped together into what are called “blocks”, which are then linked together to form a “chain” of blocks.[1]
  • Cryptocurrency: Cryptocurrency is a form of digital asset or digital money that is enabled by blockchain technology.
  • NFT: This is a unit of data stored on a distributed ledger that certifies a digital or physical asset as unique and therefore not interchangeable.
  • Node: A participant on a blockchain network that communicates with other nodes to validate transactions to ensure integrity, accuracy and security of the blockchain.

What is a distributed ledger technology?

Distributed ledger technology is a specific configuration of technology components that records and tracks information in a ‘distributed’ (as opposed to a ‘centralised’) way.  The technology allows multiple participants of the network to a consistent view of the information on the ledger at any point in time.

Each of the individual participants has access to an identical copy of the database and any changes are reflected simultaneously across the ledger network, this is why it is referred to as “distributed”.  The accuracy of the database is confirmed by all participants verifying the information is correct.  This allows information to be shared securely as there is an audit trail of information.

The key elements of a distributed ledger technology are:[2]

  • a distributed ledger;
  • a network of participants;
  • a consensus mechanism; and
  • cryptography (to ensure secure storage and privacy).

It is very difficult to tamper with distributed ledgers as the accuracy of the database is confirmed by reconciling each individual version of the ledger against all other versions of the ledger to ensure that a transaction is accurate.  For this reason, it is considered more secure than traditional ledger technology.

Distributed ledgers can be public or private.  A public ledger, e.g. bitcoin, has no central owner or controller and does not restrict who can access it.  Comparatively, a private ledger has limited participants and cannot be freely accessed, e.g. the intranet of a business.

What are the benefits of distributed ledger technology?

The benefit of a distributed ledger is that it is decentralised, which in theory eliminates the need for a central authority, such as a bank or government.  This can be differentiated from traditional ledger technology, which is controlled via a single source.

Having centralised control can be problematic for a number of reasons, and the most obvious reason is security.  If there is unauthorised access of a centralised ledger, all the data on that ledger is vulnerable.  The other major issue with centralised ledgers is transparency.  Generally, participants do not have immediate access to the centralised ledger to verify the accuracy of data.

What is blockchain?

As noted above, blockchain is a database that is created and maintained by a peer-to-peer network of nodes, wherein data is grouped in “blocks” and each of the blocks are linked together using cryptography.  Each new block is connected to the previous block, creating a chain of blocks which acts as an audit trail.

As data is verified using the relevant consensus protocol, the distributed ledger is updated simultaneously across all nodes and a new block is added to the blockchain.  This change is permanent and is generally very difficult to tamper with.

Blockchain technology is being used in many areas including contracts, cryptocurrency, intellectual property, physical assets (e.g. houses or art), digital assets and more.

What is cryptocurrency and bitcoin – are they the same thing?

bitcoin is a form of cryptocurrency.

Cryptocurrency is a digital asset or digital form of money.  Cryptocurrencies are used as payment systems, to execute smart contracts and to run programs.[3]  Anyone can create a digital currency, so at any given time there can be thousands of cryptocurrencies in existence.

Crypto-assets such as tokens that fall within the definition of a ‘financial product’ may be subject to Australian laws, including the requirement to hold an Australian Financial Services Licence.[4]  At present, the regulation of cryptocurrency in Australia is very limited and largely relies on existing regulatory frameworks.

What are NFTs?

NFT stands for “non-fungible token”.  A ‘non-fungible’ asset, is unique and therefore not interchangeable.  For example, an original Picasso is non-fungible for this reason: it is one of a kind.

NFTs can create unique digital assets or can be linked digitally to tangible assets.  NFTs are ‘minted’, i.e. created, using smart contract protocols on a suitable blockchain.  Subsequently, NFTs are stored in blockchain-based wallets.  Each NFT is comprised of metadata which makes it non-fungible.  Each time an NFT is transferred, that transaction is recorded on the blockchain.

If you want to learn more about NFTs, you can refer to our earlier article.

What is next?

Distributed ledger technology and blockchain is reaching maturity, and it is likely that practitioners will continue to encounter them in more and more matters going forward.  We will release further updates to provide you with greater insight into the current regulation, benefits and detriments of distributed ledger technology, and how law will need to continue to evolve in order to align with emerging applications of distributed ledger technology.

[1] Collective Shift, What is Blockchain Technology? <https://collectiveshift.com.au/knowledge-centre/what-is-blockchain-technology/> (accessed 18 October 2021).

[2] Australian Securities and Investments Commission, Information Sheet 219 Evaluating distributed ledger technology <https://asic.gov.au/regulatory-resources/digital-transformation/evaluating-distributed-ledger-technology/> (accessed 18 October 2021).

[3] MoneySmart, Cryptocurrencies and IPOs <https://moneysmart.gov.au/investment-warnings/cryptocurrencies-and-icos> (accessed 18 October 2021).

[4] Australian Securities and Investments Commission, Information Sheet 219 Evaluating distributed ledger technology <https://asic.gov.au/regulatory-resources/digital-transformation/evaluating-distributed-ledger-technology/> (accessed 18 October 2021).