Updated: Jun 3, 2020
Distributed ledgers are a new form of technology used to track various physical and digital assets. Distributed ledgers aren't original in and of themselves, but before 2009 all distributed ledgers required some form of a central authority or checkpoint system to validate the integrity of the ledger, thereby ensuring all parties were in accordance with one another (1). This central point of control did little to differentiate distributed ledgers from other digital tracking systems.
The advent of Bitcoin successfully overcame this limitation in 2009. Bitcoin became the first distributed ledger to remove the need for a central authority or checkpoint system. The enforcement of specific consensus rules ensured that all ledger participants were in sync upon any addition to the ledger. The importance of this innovation is hard to overstate. Rather than trusting a third party, the validity of the ledger assured individual participants using a self-contained ruleset (2). The creator (or creators) of Bitcoin accomplished this feat by adding certain additional conditions to an existing form of asset tracking known as a blockchain.
Since the advent of Bitcoin, there have been several other distributed ledgers that have emerged as viable alternatives to blockchains, depending on the use case. These alternatives are currently less popular than blockchains in terms of distributed system applications. This lack of popularity is primarily due to the newness of the industry and the disproportionate media attention on blockchain technology, in no small part due to the volatile price swings seen in blockchain's poster child, Bitcoin. For these reasons, our discussions on distributed ledger technology will focus near exclusively on blockchain applications.
Tracking tangible vs intangible assets
Perhaps one of the most critical yet overlooked distinctions in distributed systems is whether the asset that the distributed system is tracking is tangible. On the surface, this may seem like a superfluous consideration, but it strikes at the heart of how a distributed system functions and whether it succeeds or fails in its stated goals. Take, for example, Bitcoin: there is no physical representation of Bitcoin in the marketplace (3). The Bitcoin blockchain tracks data that is self-contained within the Bitcoin ledger: the physical placement of the machines that participate in the Bitcoin blockchain are irrelevant. There is no such thing as a physical Bitcoin.
Distributed systems that have the stated goal of tracking an asset in physical reality are a stark contrast. There is an intrinsic separation between the solid, real-world material that the distributed ledger tracks and the software that comprises the distributed ledger itself. Should, at any point, the two become non-uniform, then the distributed system fails at its stated goal of accurately tracking the physical asset. A discrepancy can arise from an error as simple as a misplaced RFID chip, or an instance of human error.
Endogenous vs. exogenous distributed ledgers encapsulate these differences (4). On the one hand, endogenous distributed ledgers like Bitcoin track only assets that are self-contained within the ledger itself. Recall that there is no tangible representation of Bitcoin associated with the Bitcoin blockchain. On the other hand, exogenous distributed ledgers track physical goods, such as wine bottles, lumber, or industrial parts. An exogenous distributed system has a fundamentally linked physical component. Bitcoin demonstrated a clear use case for endogenous distributed systems with its advent. Exogenous asset tracking using distributed ledgers is still a topic that is still fiercely debated in terms of how to utilize this innovation best and whether using distributed ledgers for accurate exogenous asset tracking is possible.
Challenges and considerations for using DLTs to track assets
Each industry that seeks to use distributed ledger technology for exogenous asset management encounters its own unique set of problems that may or may not be readily apparent. Supply chain management across various industries is itself a complicated and diverse topic with unique challenges Introducing untested technologies to this process presents additional complications with a proportionally high potential reward in the form of cutting-edge optimization. The first companies to successfully apply exogenous distributed ledger technology at scale in their respective industries will surely enjoy a unique first-mover advantage—the more complicated and nuanced the problem, the more valuable the solutions.
In this series, we will discuss how commodities, property, government, and more, all intersect with blockchain and distributed systems. Through that lens, we'll explore some of the companies applying exogenous distributed ledgers to their respective industries and where they stand today. The solutions we will see are as diverse as the industries themselves. While the debates over exogenous distributed ledger technology continue, some individuals and companies prefer to learn through trial and error. Their stories will likely be looked back upon by history as prime examples of the entrepreneurial spirit and the willingness to take risks with unproven but promising emerging technologies. After all, this entrepreneurial spirit is what gave rise to Bitcoin and other viable endogenous distributed ledger technologies in the first place (5). Who is to say that exogenous distributed ledgers won't be the next great technological innovation of our time?
(1) Google Cloud or Amazon Web Services are perfect examples. Google and Amazon have full control over their respective servers and in turn, can edit or remove content unilaterally. In a distributed system, no one entity has unilateral authority. Sustainable distributed systems are difficult to create and delicate to balance for this reason.
(3) This doesn't necessarily lower Bitcoin’s value as an asset. This concept is unique but not unprecedented: for example, a game called Second Life is largely cited as the first successful form of "virtual real estate" https://en.wikipedia.org/wiki/Second_Life
(4) This distinction is credited to Michael Rauchs and a Cambridge team of researches via the paper Conceptualizing DLT Systems (2018)
(5) Some examples include Ethereum, Litecoin, ChainLink, Monero, and DogeCoin.