On the road to decentralization – from centralized databases to public distributed ledgers

People who are not familiar with the Distributed Ledger technology ask me how it is different from a good old database? And what is the difference between a private distributed ledger (DL) that banks are seemingly experimenting, and a public DL such as the Bitcoin Blockchain?

The key to understanding: the network characteristics.

In a network with a limited number of participants, where trust is almost a given (participants belong to the same organization), a centralized database is the most efficient data management solution if you want to record an history of transactions.

In a network involving a large number of participants who don’t trust each other, you need a secure solution allowing shared read-write access to the database: a public distributed ledger such as the Bitcoin Blockchain must be used as a “distributed trust system”, allowing all users have access to the history of transactions and to issue transactions securely.

In between, well… you can build intermediary solutions such as a private distributed ledger for which the access to the shared database is controlled by a predefined list of validators. It looks like a good solution at industry level: financial services could implement such a secure solution without the energy intensive mining process, and with a better control of the transactions (with anti-laundering controls, etc.).

But private distributed ledgers introduce vulnerabilities (single points of failure) and don’t fully leverage the potential of decentralization, so the best compromise for banks could be between a private and a public distributed ledger: public ledgers based on open standards, maintained and controlled (validation process) by known entities. It will depend on the use-cases: when you need to involve customers (corporates, individuals) vs you stay between Financial Institutions.

Here is a summary of the different options, on the road to decentralization:

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