Risk glossary

Distributed ledger technology is a decentralised peer-to-peer digital system for recording transactions between parties in multiple places at the same time. DLT deploys cryptography and consensus mechanisms to allow participants to share an immutable replica of the same ledger. It gets rid of the need for a centralised store of data and dispenses with the requirement for a central authority to carry out administrative functions, as is necessary with traditional databases.

Blockchain, a subset of DLT, is a public permissionless ledger open to all interested participants, who may also remain anonymous to one another. All transaction data is shared with and appended by all participants with consensus achieved at the ledger level. The bitcoin blockchain is an example of a public permissionless distributed ledger.

But DLT also includes permissioned private ledgers which are better suited to uses where privacy of transactional data is important, as is often the case with financial services applications. Participants in permissioned private ledgers are universally known to each other and the set of users who have the right to validate transactions is restricted. Information about transactions is only shared with those parties to a transaction and consensus is achieved by appending digital signatures to a smart contract, not by consulting a majority of users of the ledger.

Smart contracts express the terms and obligations of a transaction in a set of computer protocols that enable the execution of the agreement. At a fundamental level, smart contracts are analogous to a series of if-then statements applied to the details of a trade.

In a distributed ledger, data is stored across a series of decentralised ‘nodes’ as opposed to in one centralised system. In the context of derivatives, nodes on a network might include counterparties to a trade, regulators and others.

Click here for articles on distributed ledger technology.