Bitcoin, blockchain, and now DLT (distributed ledger technology): technological advances result in the need to incorporate new, highly impactful terms into modern vocabulary. Occasionally, the introduction of such changes can lead to confusion and misunderstanding. One of the most common of which is to think that blockchain and DLT are the same.
What is the difference between blockchain and DLT? It is simpler than it might appear. A blockchain, a chain of blocks, is a type of DLT. Meaning, this is a case of a common phenomenon of name recognition causing confusion: when the success of a specific service, product, or application overtakes the “umbrella” to which it belongs and ends up devouring its namesake. In the same way not all sticky notes are Post-it, not all DLTs are blockchain.
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From a more technical perspective, a DLT is simply a decentralized database that is managed by various participants. There is no central authority that acts as arbitrator or monitor. As a distributed log of records, there is greater transparency – making fraud and manipulation more difficult – and it is more complicated to hack the system.
All of this could well be familiar because it’s written about in articles like this one, about the features of blockchain. Blockchain is nothing else but a DLT with a specific set of features. It is also a shared database – a log of records – but in this case shared by means of blocks that, as the name indicates, form a chain. The blocks are closed by a type of cryptographic signature called a ‘hash’; the next block begins with that same ‘hash’, a kind of wax seal. That is how it is verified that the encrypted information has not been manipulated, and that it can’t be manipulated. Blockchain owes its fame, among other things, to the fact that it is the technology behind the famous Bitcoin cryptocurrency.
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Industry analysts and experts believe that digital ledger technologies can have a significant impact on different areas within the financial sector. For example, on compliance policies or regulatory compliance. Banks manage a huge amount of data under strict regulations, and distributed registries – whether blockchain or not – could help immensely with cost savings and the elimination of inefficiencies. A study by Accenture asserts that investment banks can reduce their compliance costs between 30% and 50% by 2025 using DLT.
The world’s main financial institutions are researching and developing collaborative projects to fully exploit the potential of DLT and blockchain. The most important consortia – BBVA participates in them – are R3, Hyperledger and Ethereum Enterprise Alliance. Their general objective is to develop common standards and efficient, safe platforms for the application of these technologies, although there have already been specific lines of work and proof of concepts developed. BBVA has participated in various pilots using this technology to improve and streamline different internal and transactional processes such as using “smart contracts” in international trade.
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