11. Distributed Ledger Technology

The term “distributed ledger technology” (DLT) is notoriously difficult to define and often is used by institutions, ranging from private to public organisations, in inconsistent and contradictory ways. For example, the World Bank, the European Central Bank, and the Bank of England each propose different definitions of the term. The lack of consensus on a coherent definition “has resulted in misconceptions and the widespread formation of unrealistic expectations as to what this technology can achieve” (Rauchs … Zhang, Distributed Ledger Technology Systems: A Conceptual Framework, University of Cambridge, 2018). Lack of consensus also has resulted in making discourse about “distributed ledger technology” virtually impossible given the myriad and diverse conceptions held by institutions and individuals. However, in 2018, the University of Cambridge published a seminal paper (Cambridge Report) establishing a conceptual framework to deconstruct and to define a DLT (Michel Rauchs et al., Distributed Ledger Technology Systems: A Conceptual Framework, University of Cambridge August 2018). The Cambridge Report, and its proposed definition of distributed ledger technology, provides an unparalleled and logically compelling framework to classify a distributed system as “distributed ledger technology”. In essence, “A DLT system is a ‘consensus machine’: a multi-party system in which participants reach agreement over a set of shared data and its validity, in the absence of a central coordinator” and in an adversarial environment (Rauchs). This chapter restates the conceptual framework of DLTs as defined by the Cambridge Report. Subsequent to explaining the architecture of a DLT, the chapter then uses the Bitcoin Network as a case study to demonstrate an application of the Cambridge DLT framework to an existing system. Following the Bitcoin case study, the chapter explains the mechanics of Bitcoin, and then discusses cursorily Ethereum and “Hyperledger”, as they present important and complex variations on Bitcoin. The aim is to provide readers with foundational concepts of DLT especially as used in the context of financial services.