Distributed Ledger Technology (DLT) and Blockchain

12 February, 2018

Original source:  World Bank

The financial sector is currently undergoing a major transformation, brought about by the rapid development and spread of new technologies. The confluence of 'finance' and 'technology' is often referred to as 'Fintech', typically describing companies or innovations that employ new technologies to improve or innovate financial services. 'Fintech' developments are seen across all areas of the financial sector, including payments and financial infrastructures, consumer and SME lending, insurance, investment management, and venture financing.

This note on distributed ledger technology (DLT) and blockchains is part of a series of short notes that explore new trends and developments in Fintech and analyze their potential relevance for WBG activities. Forthcoming notes in this series will cover marketplace lending, 'InsureTech', and other topics. This note outlines the mechanisms, origins, and key characteristics of DLT; the difference between 'public' and 'private' DLT; the technology's main advantages, challenges, and risks; relevant examples of DLT applications (with a focus on financial sector applications); and a brief overview of activities by governments, multilateral organization, and other stakeholders in this space. Finally, this note proposes next steps for the World Bank to study and evaluate areas where DLT could potentially be integrated into World Bank financial sector operations.

What is DLT? What is a blockchain?

DLT refers to a novel and fast-evolving approach to recording and sharing data across multiple data stores (or ledgers). This technology allows for transactions and data to be recorded, shared, and synchronized across a distributed network of different network participants.

A ‘blockchain’ is a particular type of data structure used in some distributed ledgers which stores and transmits data in packages called ‘blocks’ that are connected to each other in a digital ‘chain’. Blockchains employ cryptographic and algorithmic methods to record and synchronize data across a network in an immutable manner. For example, a new digital currency transaction would be recorded and transmitted to a network in a data block, which is first validated by network members and then linked to an existing chain of blocks in an append-only manner, thus producing a blockchain. As the linear chain grows when new blocks are added, earlier blocks cannot retrospectively be altered by any network member (see figure 4 for a graphical representation of a blockchain’s structure).

Note that not all distributed ledgers necessarily employ blockchain technology, and conversely, blockchain technology could be employed in different contexts.

Access the full Fintech Note by the World Bank here.

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