Distributed Versus Decentralized Tech and Why You Should Care About the Difference

Distributed ledgers—digital records stored on many computers at the same time—are everywhere. VISA, Walmart, and IBM are only a few of the companies using this technology to check your credit balance, process payments, keep track of what’s stored in warehouses across the country, and digitize transaction workflows. Even though consumers hardly interact with them, computerized, distributed records have become integral to the successful operations of most businesses.

As with any database that stores potentially sensitive data, security is a central issue for distributed ledgers. Especially for applications in banking and finance, we want the ledger to be immutable, one that cannot be changed once created. Surely you don’t want your credit card company to be able to change your balance independent from your credit card use!

Distributed ledgers have made our lives much easier. They’re why you can use your credit card seamlessly in a bar in downtown San Francisco as well as a grocery shop in Hastings, Nebraska. But is that all distributed tech can do for you?

More and more, people are claiming that the blockchain revolution is coming to finance. That distributed, decentralized ledgers have even greater benefits. To understand what the hype is about—and why we really should care—it is time to lean further into this technology; to explore some weaknesses of conventional distributed systems and how decentralized systems can mitigate security risks and even reduce costs.

What exactly is a distributed ledger?

Distributed ledger technology (also known as DLT) is essentially a database that is updated, maintained, and validated on many computers, in many places, at the same time. The computers, referred to as nodes, are all plugged into a large network and pick up data as it is submitted to the ledger to keep their own records. When you swipe your credit card, the little machine is able to take the information it gathers—like what your account number is, how much you spent, etc.—and send it to VISA, where the record is updated.  

In such a system, there isn’t one server holding all records that presents an obvious target for hackers. In this way, DLT provides better security compared to conventional, centralized systems. With DLT, if one computer is destroyed or hacked, the complete record is still preserved elsewhere. Reliable financial and supply chain management services as we know them today could not exist without DLT.

All distributed ledgers are not created equal

In most mainstream implementations of DLT, however, not all computers on the network have the same level of authority to edit the ledger. The system is ‘centralized.’ Only select nodes are allowed to update the information. This is what VISA and other credit card firms are using.

In systems like these, we—the users—have to trust the company to act appropriately and not mishandle or change our data. We don’t have to look any further than Wells Fargo and its repeated fake account scandals for an example of a central authority letting its consumers down.

So, who should decide what the truth is and what is recorded on the ledger? In other words, how is consensus reached across a distributed system? With centralized DLT, consensus is easy, because only a limited number of users are able to edit the ledger and this information is distributed across all nodes. There’s an obvious drawback, though: If someone infiltrates this authority, the ledger can be altered in any way the bad actor chooses.

Decentralized distributed ledgers are directly addressing this problem. In such a system, no single entity (or limited group) holds complete authority. All users have equal permissions on the ledger, and the majority decides what’s true and what isn’t.

With a decentralized ledger, a single bad actor is unable to achieve the consensus necessary to alter the ledger. By democratizing recordkeeping and removing centralized middlemen from a position of power, decentralized systems can eliminate an ever-lingering threat to consumers.

Add in a ledger that’s kept public, where everyone is free to look up any past transaction (in appropriately anonymized form, of course), and you have a system that is secure, transparent, and immutable—an ideal technology to build a financial system upon. Such systems exist today, and they are called public blockchains.

Better bang for your buck

Don’t get me wrong, I’m not saying banks and other financial institutions are inherently untrustworthy. They employ strict audit procedures consisting of checks and balances to create their own immutable system. Unfortunately, all of the overhead costs associated with these measures are passed straight on to consumers.

Blockchain technology can bring the same benefits, but at a lower cost. Transactions on a decentralized distributed system are inherently immutable, transparent, and secure. Compared to standard audit practices, implementing decentralized DLT on a blockchain can substantially reduce the overhead of maintaining an immutable, distributed ledger.

Knowledge is power

At the end of the day, as users, we are concerned with ease-of-use, security, and out-of-pocket expense. While distributed systems have brought convenience and more security, there’s still room to grow.

Decentralized distributed systems have clear advantages—both in terms of security and cost. With a better understanding of decentralized tech, we can finally get what the hype is about and maybe even save a buck.

About the author:

Pramod Madabhushi is the VP of Engineering at BlockRules, the blockchain fintech company developing the first comprehensive blockchain securities platform. BlockRules envisions a world where all investments and financial instruments are tokenized and traded globally by anyone. To realize this vision, BlockRules has created a decentralized distributed platform that can enforce securities regulations for primary and secondary market transactions. BlockRules technology sets a new standard for the 21st century public offering, bringing traditional securities offerings to a globally connected investor base.

Ampleforth Seeks to Become the Perfect Digital Asset for Portfolio Managers

A new token is seeking to change up the existing paradigm in the cryptoasset market.

Billing itself as “smart commodity money” - a token that has the benefits of commodity-monies like gold and silver, but can respond efficiently to changes in demand - Ampleforth is keen to emphasize that its token represents a new kind of asset in the space.

The Evolution of Money 

Money has been reinvented many times over: for many centuries mankind did without it, instead simply assigning value to particular goods in exchange for other goods. Then gold and silver formed the basis of money, whether coins were made directly out of these precious materials or "stamped" as a standard into baser metals.

Indeed, gold as a standard for global money transfer lasted for many centuries: the official gold standard was dropped by Britain and the US in the early 1930s and by 1971 the system was abandoned completely to be replaced fully by what we now call the fiat money system where global currencies (to a large degree) freely float against each other on foreign exchange markets.

The Crypto-Evangelists

Niall Ferguson is an expert in this field and, as an Oxford and Harvard lecturer, has written and spoken about money and capital many times. He may be a little late to the crypto party but is none-the-less evangelical about it: in a Bank of England seminar last year he called cryptocurrencies "the financial system of the future".

Ferguson has now thrown his weight behind the Ampleforth Project, which - on June 13 - raised $4.9 million in 11 seconds in its initial exchange offering (IEO) of its "Ample" (AMPL) tokens.

The digital asset explains in its white paper that it’s a "synthetic commodity" that aims to become truly uncorrelated from both traditional assets, stocks and currencies as well as from Bitcoin, other cryptoassets and other synthetic commodities. The problem with existing synthetic commodities, the paper explains, is that they have so far failed to do both. 

Ampleforth Explained

While Ampleforth seeks the price target of $1 for the Ample, instead of pegging directly to the dollar - like Tether - or to a basket of fiat currencies - as Facebook's Libra intends - the Ample will allow the quantity of assets a user holds to fluctuate, in addition to price, as it seeks a price supply equilibrium.

The system's protocol will actively seek this equilibrium by either proportionally increasing the quantity of tokens every user holds when prices climb, or proportionally decreasing the quantity of tokens every user holds when prices fall.

This is called money supply and has been one of the tools used by central banks to control inflation for many years. But Ferguson's criticism of this - in his book The Ascent of Money - is that it reflects human sentiment too much:

Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong. Booms and busts are products, at root, of our emotional volatility.

Ampleforth seeks to overcome these problems algorithmically by applying countercyclical pressures that dampen volatility, encouraging markets to self-correct. Supply updates will be freely visible in the market ahead of any changes, allowing the market to anticipate these changes and respond accordingly.

Ferguson explains his enthusiasm for the project:

The ingenious thing about Amples is that this they are not stablecoins, pegged in some way to existing fiat money. They are a special kind of digital asset, the quantity of which varies in response to the behavior of investors and traders.

Crypto Rivals

Ampleforth is unlikely to challenge Bitcoin any time soon as the number one crypto investment, but offers a compelling three-stage plan for the use of Amples. 

In the near-term, the token’s lack of correlation to both traditional assets and Bitcoin, will make it a useful portfolio diversifier. 

In the more medium-term, Amples may be used as reserve collateral in decentralized banks, such as Maker DAO.

Ultimately, the long-term goal however, is that Amples will serve as an independent alternative to central bank money. The team describes it as a “macroeconomically friendly” Bitcoin that averts the deflationary problems associated with fixed supply commodities when used as reserve collateral by banks.

Ampleforth Moves Forward

Such was the success of its first token sale on Bitfinex, that Ampleforth is conducting a second round of funding on the same exchange on Thursday.

The company aims to raise close to $7 million in this IEO, with a maximum contribution per investor of $7,060 and a minimum of $28, with each Ample token worth $0.98.