Difference Between Centralized and Distributed Ledgers

The article focuses on discussing the differences between Centralized Ledger and Distributed Ledger.

What is Centralized Ledger?

A centralized ledger is a database that is administered and controlled by a single entity, such as a business, government body, or financial institution. All data is stored in a single location in a centralized ledger system, and access to that data is controlled by authorized individuals or institutions.

• Centralized ledgers are commonly employed in traditional financial systems, where a central authority is in charge of keeping and maintaining financial transaction data. 
• A bank, for example, might employ a centralized ledger to maintain customer account balances, transaction histories, and other financial information.
• While centralized ledgers can provide high levels of security and accountability, they can have some downsides. 

Pros of a Centralized Ledger

• Control and security: Because a centralized ledger is administered and controlled by a single entity, data access can be tightly regulated and monitored. This makes it easier to maintain the data’s security and integrity, while also lowering the chance of unauthorized access or modification.
• Data that is consistent and dependable: Because all data is stored in a single location and is managed by a single body, centralized ledgers can give data that is consistent and reliable. This is especially crucial in industries where precise data is required, such as finance, healthcare, or government.
• Cost-effective: Centralised ledgers are more efficient and cost-effective than decentralized ledgers, especially for smaller organizations or those with limited resources. This is because the ledger can be managed and maintained by a single entity, eliminating the need for additional infrastructure or personnel.
• Easy to connect with existing systems: Because centralized ledgers are commonly used in conventional businesses, they may be easier to connect with existing systems and processes. This can help organizations embrace new technology or procedures without interrupting their current operations.
• Greater data control: Centralised ledgers provide organizations with greater data control, which can be beneficial in areas where data privacy and security are vital. This can also make it simpler to meet regulatory obligations.

Cons of a Centralized Ledger

• Cyber attack vulnerability: Centralised ledgers are more vulnerable to cyber assaults than decentralized ledgers. A hacker who gains access to a centralized ledger may be able to compromise all of the data contained in it.
• Lack of transparency: Because centralized ledgers are maintained by a single institution, it might be difficult for outsiders to verify the data’s correctness and completeness. This can be a problem in industries that value transparency and accountability.
• Single point of failure: If the centralized ledger fails or is compromised, the organization or industry that relies on it may suffer substantial disruption. Decentralized ledgers, on the other hand, are designed to be more durable and can continue to work even if one node fails.
• Political or economic constraints: Centralised ledgers are vulnerable to political and economic forces, which might compromise their trustworthiness or correctness. A government agency, for example, may falsify data on a centralized ledger to further its own goal.
• Limited accessibility: Because centralized ledgers are frequently managed by a single party, data access might be restricted. Outside parties may be restricted from using the data or developing new apps that rely on it as a result.
• Prone to cyber assaults: While centralized ledgers can provide strong control, consistency, and efficiency, they can also be prone to cyber assaults, opaque, and subject to political or economic pressure. Because of these disadvantages, decentralized ledger solutions such as blockchain have emerged.

Distributed Ledger

A distributed ledger is a database that is distributed over a network of computers or nodes rather than being held in a single location. Because all data in a distributed ledger system is shared and synchronized across the network, no single entity has control over the data.

• In blockchain technology, distributed ledgers are frequently employed, where the ledger is maintained by a decentralized network of nodes.
• Each node has a copy of the ledger, and any modifications to the ledger must be validated and approved by the network before they are saved.

Pros of Distributed Ledger

Decentralization: Because distributed ledgers are not controlled by a single body, no single party can modify the data or transactions recorded on the ledger. This increases transparency and accountability, as well as security and resilience.

• Security: Distributed ledgers secure data using cryptographic techniques, making them resistant to hacking and other forms of cyber assault. This is because the network verifies and approves each transaction on the ledger, making it incredibly difficult to alter or tamper with the data.
• Transparency: Transparency is provided by distributed ledgers by making all transactions accessible to all network participants. This is especially vital in industries that require transparency and accountability, such as banking or government.
• Immutability: Once a transaction is recorded on the distributed ledger, it cannot be changed or erased, ensuring the data’s integrity and accuracy. This is especially significant in businesses where record-keeping accuracy is critical, such as healthcare or supply chain management.
• Efficiency: Because distributed ledgers eliminate the need for intermediaries and allow for faster, more secure transactions, they can be more efficient than centralized ledgers. This is especially significant in areas that require speed and efficiency, such as finance or logistics.
• Flexibility: Distributed ledgers may be tailored to match the specific requirements of many industries and use cases, making them highly adaptable and flexible. This has the potential to enable new business models and processes that would not have been achievable with existing centralized systems.

Cons of Distributed Ledger

• Immutability: Once a transaction is recorded on the distributed ledger, it cannot be changed or erased, ensuring the data’s integrity and accuracy. This is especially significant in sectors with centralized ledgers. DLT can be complex and difficult to understand, making it difficult to deploy and manage. It necessitates specialized technical knowledge and expertise, which might impede adoption.
• Scalability: DLT can struggle to scale to serve large-scale applications or networks, limiting its utility in some circumstances. As the number of nodes in the network rises, so does the complexity and time necessary to establish consensus, potentially slowing down the network.
• Energy Consumption: Because they rely on a large number of nodes to validate transactions, some DLT systems, such as blockchain, can be energy-intensive. This can be an environmental concern because the network requires a substantial amount of energy to maintain.
• Regulation: Because DLT is frequently decentralized and not controlled by a single body, it can be difficult to regulate. This can pose difficulties for authorities who must verify that the technology is used safely and securely.
• Privacy concerns: While DLT enables transparency, it can also bring privacy concerns. In other circumstances, the ledger’s transparency makes it difficult to protect sensitive information, which might be a risk in industries such as healthcare or finance.

Centralized Ledger vs Distributed Ledger

Below are the differences between centralized ledger and distributed ledger:

Parameter	Centralized Ledger	Distributed Ledger
Control	Governed by a single person, group, or organization.	Controlled by a network of participants.
Permission	Requires permission to access and modify the ledger.	Possibly needs the authorization to view and make changes to the ledger.
Transparency	Limited transparency since the ledger is only accessible to the central authority.	High transparency since everyone can see the ledger.
Trust	Participants must have faith in the central authority to keep the ledger up to date.	Trust is dispersed among all network participants.
Security	Attacks are possible if the central authority’s security procedures fail.	Because the ledger is duplicated across numerous nodes, it is more secure.
Efficiency	Can be more efficient as there is only one central authority updating the ledger.	It may be less efficient since all parties must reach an agreement before updating the ledger.
Cost	Generally less costly to maintain.	It may be more expensive since it needs more infrastructure and resources.
Scalability	It may not be scalable enough to manage a high volume of transactions.	Because the network can manage a high volume of transactions, it can be more scalable.
Flexibility	Changes can only be made by the central authority, limiting flexibility.	More flexible as changes can be made through consensus among participants.
Examples	Traditional banking systems, government records.	Blockchain, cryptocurrency networks.