A distributed ledger is a database that each participant (or node) in a vast network maintains and updates independently. Rather of having a central authority, each node constructs and maintains its own records (computer).
Each node is capable of processing a transaction and reaching a conclusion. After that, all of the nodes “vote” on the conclusion. The transaction is completed successfully if the majority agrees with the conclusion, and all nodes keep their own identical copy of the ledger. As opposed to a typical ledger, there is no requirement for a centralized databank.
What Makes DLT So Efficient?
DLT has a number of characteristics that make it a popular choice among investment managers:
Cryptography
This is algorithmic data encryption that renders data useless in the hands of an unauthorized party. Some machines on the network must solve a cryptographic puzzle before any transaction can be accepted. DLT has a high level of security and integrity as a result.
Smart contracts
These are self-executing computer programs that are based on pre-specified terms and conditions agreed to by the contracting parties. For example, in the futures market, the system could be set up so that daily settlements are performed automatically in response to market moves throughout the day. If a counterparty defaults on a payment, collateral can be instantly transferred to the appropriate party.
Blockchain
Blockchain is a type of digital ledger in which information, such as changes in asset ownership, is progressively recorded within blocks that are subsequently linked together and safeguarded using cryptography. Each block is made up of a collection of transactions that are linked to one another. Blockchain allows information to be distributed while also preventing it from being copied.
Investment Management Applications of Distributed Ledger Technology
Cryptocurrencies
A cryptocurrency is an electronic currency that allows users to send payments to each other without having to go through a central authority like a bank or payment gateway. Cryptocurrencies enable near-real-time transactions between parties, with cryptographic verification.
The majority of cryptocurrencies use open DLT systems, in which all transactions are recorded and verified on a decentralized distributed ledger. Despite the fact that most central banks around the world have been hesitant to incorporate cryptocurrencies into the mainstream monetary transaction framework, there are indicators that this may alter in the future.
Tokenization
Tokenization is the act of transforming rights to an asset, such as stocks, bonds, or even a building, into a blockchain-based digital token. DLT simplifies this procedure by generating a single, digital record of ownership that can be used to validate ownership title and authenticity, as well as all relevant historical transactions.
Clearing and settlement of post-trade transactions
Because they need many contacts between counterparties and financial intermediaries, post-trade transactions are known to be complex and time-consuming. By offering near-real-time trade verification, reconciliation, and settlement, DLT has the power to streamline the entire process.
Compliance without a hitch
DLT can assist organizations assure compliance in the face of ever-increasing norms and regulations in the sector of investment by allowing near-real-time examination of transactions. Large post-trade monitoring teams would be unnecessary, and operational efficiency would be achieved.
