August 2018 DISTRIBUTED LEDGER TECHNOLOGY SYSTEMS A Conceptual Framework Michel Rauchs Andrew Glidden Brian Gordon Gina Pieters Martino Recanatini François Rostand Kathryn Vagneur Bryan Zhang The Cambridge Centre for Alternative Finance (CCAF) is an international and interdisciplinary research centre based at the University of Cambridge Judge Business School. It is dedicated to the study of innovative instruments, channels, and systems emerging outside of traditional finance. This includes, among others, crowdfunding, marketplace lending, alternative credit and investment analytics, alternative payment systems, cryptocurrencies, distributed ledger technology (e.g. blockchain) as well as related regulations and regulatory innovations (e.g. sandboxes & RegTech). TABLE OF CONTENTS FOREWORD .........................................................................................................7 RESEARCH TEAM ...............................................................................................8 DISCLOSURES ................................................................................................... 10 ACKNOWLEDGEMENTS .............................................................................. 10 EXECUTIVE SUMMARY .................................................................................11 SECTION 1: INTRODUCTION ..................................................................... 15 RATIONALE .....................................................................................................................................................15 OBJECTIVES ................................................................................................................................................... 16 METHODOLOGY ......................................................................................................................................... 16 REPORT STRUCTURE ................................................................................................................................ 17 SECTION 2: DLT SYSTEMS - SETTING THE SCENE ...............................19 2.1 DLT SYSTEMS IN THE LITERATURE .............................................................................................. 19 2.1.1 Definitions ...............................................................................................................................................19 2.1.2 Existing Frameworks ..........................................................................................................................20 2.1.3 Limitations Of Prior Work ...............................................................................................................21 2.2 WHAT ARE DLT SYSTEMS? ............................................................................................................... 21 2.3 CLARIFYING TERMINOLOGY.........................................................................................................25 The ‘Ledger’ Concept .....................................................................................................................................25 The ‘private key’ concept .............................................................................................................................28 2.4 ACTORS .....................................................................................................................................................28 2.4.1 Developers ..............................................................................................................................................29 2.4.2 Administrators ......................................................................................................................................30 2.4.3 Gateways .................................................................................................................................................30 2.4.4 Participants .............................................................................................................................................30 SECTION 3: INTRODUCING THE FRAMEWORK ................................. 33 3.1 PROTOCOL LAYER ...............................................................................................................................34 3.2 NETWORK LAYER ................................................................................................................................35 3.3 DATA LAYER ............................................................................................................................................36 Reference/Value Linking ..............................................................................................................................37 3.4 PUTTING IT ALL TOGETHER ...........................................................................................................37 SECTION 4: SYSTEM INTERACTIONS .......................................................41 4.1 WITHIN THE SYSTEM BOUNDARIES .......................................................................................... 41 4.1.1 Layer Interdependencies .................................................................................................................41 4.1.2 Layer Hierarchy ....................................................................................................................................41 4.1.3 Trade-offs: There Is No ‘One Size Fits All’ ................................................................................43 4.1.4 A Note On ‘Decentralisation’ .........................................................................................................44 4.2 BEYOND THE SYSTEM BOUNDARIES ........................................................................................ 47 4.2.1 Systems Perspective ..........................................................................................................................47 4.2.2 Exogenous And Endogenous References ................................................................................48 SECTION 5: A DEEPER DIVE INTO THE FRAMEWORK ..................... 53 5.1 PROTOCOL LAYER ...............................................................................................................................53 5.1.1 Genesis Component ...........................................................................................................................53 5.1.2 Alteration Component ......................................................................................................................55 5.2 NETWORK LAYER ................................................................................................................................58 5.2.1 Communications Component........................................................................................................58 5.2.2 Transaction Processing Component ..........................................................................................60 5.2.3 Validation Component ......................................................................................................................63 5.3 DATA LAYER ............................................................................................................................................66 5.3.1 Operations Component ....................................................................................................................66 5.3.2 Journal Component ............................................................................................................................68 SECTION 6: APPLYING THE FRAMEWORK - CASE STUDIES ...........71 6.1 BITCOIN .................................................................................................................................................... 71 Protocol ................................................................................................................................................................71 Network ...............................................................................................................................................................72 Data ........................................................................................................................................................................73 6.2 COMPARATIVE ANALYSIS ............................................................................................................... 74 6.2.1 Case Studies ...........................................................................................................................................74 6.2.2 Are These DLT Systems? ..................................................................................................................75 6.2.3 Protocol ....................................................................................................................................................77 6.2.4 Network ...................................................................................................................................................80 6.2.5 Data ............................................................................................................................................................84 6.3 COMPARING KEY DIFFERENCES ACROSS DLT SYSTEM CASE STUDIES .................86 6.3.1 Summarising Framework Results ................................................................................................86 6.3.2 Differences