I. What is Distributed ledger technology ?
Distributed Ledger Technology (DLT) is a term that refers to a technological infrastructure that uses independent computers – called nodes to record, share and synchronize transactions in the ledger. electronically (instead of storing data centrally as in a traditional ledger).
DLT uses cryptography – uses algorithms to encrypt data to ensure that only authorized participants can use the data.
The figure below illustrates a distributed ledger network. In it, all nodes are interconnected, each with a copy of the distributed ledger. The term “Consensus” at the heart of the network represents a consensus mechanism in which nodes agree on new transactions and the updating of the ledger.
DLT is capable of supporting the processing of smart contracts, self-executing computer programs based on terms and conditions pre-determined by the contracting parties.
For example, automatic execution of unexpected claims for derivatives and instant collateral delivery in the event of default.
II. Application of distributed ledger in financial management
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Cryptocurrencies
Cryptocurrencies allow parties to transact in near real-time without intermediaries and it does not exist as cash.
This currency is issued by individuals, companies and other entities. Most of them use open DLT systems, where a distributed ledger is used to record and verify all cryptocurrency transactions.
Cryptocurrencies are not recognized by the government. However, central banks around the world are realizing their potential and working on their own versions of cryptocurrencies.
An initial coin offering (ICO) is an unregulated process whereby companies sell their cryptocurrency to investors in exchange for fiat money or for another type of cryptocurrency. other cryptocurrencies by agreement.
Compared to an initial public offering (IPO), ICOs have lower issuance costs and shorter funding times. However, most ICOs do not have voting rights attached and there have been many cases where investors have lost money due to fraudulent issuers.
- Tokenization
Tokenization is the process of expressing ownership of physical assets on a blockchain or distributed ledger, DLT creates a unique digital record to verify ownership and authenticity, including all activities in the past.
Transactions involving high-value physical assets, such as real estate, luxury goods, will benefit from tokenization. Because these transactions often take a lot of effort and cost because they involve many records and papers between the parties.
- Clearing and settlement of securities transactions
In the financial – securities market, the post-transaction process to confirm, clear and settle transactions is often complicated, laborious and involves many parties (securities companies, Stock Exchanges, the Securities Depository Center, etc.).
DLT participates in the clearing and settlement process by providing information with very little time lag (near-real-time), thereby reducing complexity, time and costs associated with processing. deal.
The synchronization of data in the network will eliminate duplication of information recorded between parties. Reducing the time of settlement will reduce the counterparty risk and failed transactions and increase the liquidity of assets and funds.
- Compliance
Regulators around the world place increasingly stringent requirements on the transparency of companies’ reports.
To comply with regulations, companies need to maintain and process large amounts of risk-related data. The DLT platform can securely store highly sensitive information and detect fraud and money laundering.
III. Difficulty using DLT
Several difficulties exist before DLT can be successfully applied in the financial industry:
- DLT is not standardized and difficult to integrate with legacy systems
- DLT’s processing power is not financially competitive with existing solutions
- Scaling up DLT systems requires significant storage resources
- Aborted transactions can only be undone by creating a similar transaction
- DLT requires a large number of computers so it will cost electricity
- Regulatory bodies will have different approaches depending on their jurisdiction.
Conclusion
The above is general knowledge about Distributed Ledger Technology. Metalion Ventures looks forward to giving you a better overview of this technology. This article is our personal opinion, this is not investment advice at all. Investors should be responsible for their own decisions.
