- 4 days ago
‘Decentralization’ is one of the most used terms in the crypto world and is usually not fully understood. So let’s take a look at what the term ‘decentralization’ actually means and how this ties with ‘blockchain’.
Before we start, let’s just remind ourselves of what cryptocurrency is. Cryptocurrency is a digital currency that people use for transactions on a digital ledger. This system is the blockchain. The system uses codes to keep itself secure. Using this system, is it possible to transfer cryptocurrencies between two people without the need for a third medium such as a central entity. The concept of a form of payment that has no central authority governing it is a ‘decentralized currency’. The term ‘decentralization’ shares the same essence as a cryptocurrency; the removal of a governing body when dealing with payments.
What is Decentralization
The term ‘decentralization’ is the transfer of power from a central entity to multiple local authorities. When integrating decentralization into the cryptocurrency world, we understand this as the transfer of power from the bank managing economic matters to an economic system managed collectively by the population. Bitcoin, the first cryptocurrency, had its design intended to create a decentralized system of payment. Where payment is directly between two parties, without a governed medium.
Most financial systems in today’s world are centralized; a single entity known as the bank is the backbone for all economic matters. In a decentralized system, the actualization and validation of transactions happen without the need for a centralized body. In this system, the validation of any transaction is through a network of computers (nodes). Each node holds the same data and has involvement in the verification process of a transaction. In other words, in a decentralized system, the economy runs on a peer-to-peer system. This is opposite to a centralized system, where a central authority governs the economy.
How can a decentralized system run on a peer-to-peer system?
In a decentralized network, every computer holds the same data. The network receives an update with any piece of infrotamtion at the same time. The fact that all data storage is collective along with maintaince, means there is no need for a single governing entity. A decentralized system runs on a consensus mechanism. Computers in the system collectively validate transactions, rather than a single entity having the power to do so.
What facilitates a decentralized system, is blockchain technology. In a centralized system, singly governed entity oversees validation of all transactions. In a decentralized system, the blockchain, is the technology that verifies, updates and stores transaction data. This involves the cooperation of thousands of computers. As such, the blockchain can be referred to as the technology that fuels and maintains the decentralized system. Just like the bank is the source of storage and security in a centralized system, the blockchain provides the security and is the database for a decentralized system.
It is important to note, however, that the blockchain protocol is often not totally decentralized. Many decentralized platforms online have third party services that they need to carry out transactions between two parties.
Advantages of Decentralization:
In a decentralized system, there is a lower risk of systematic failure and thus these systems are more reliable. If a node experiences some sort of error, it does not affect the system as a whole as the other nodes in the network all hold the ‘correct’ information and as such any application of some sort that runs on blockchain technology can survive. Furthermore, any attempt at fraudulent activity would not go without notice as every node would detect the change.
Decentralized networks are significantly reliable. Thousands of computers, which all maintain the same information, are less likely to fail at the same time rather than the one single one failing.
Another advantage is that in a decentralized system, blockchain technology enables cross-border transactions. With the same information updated at the same time for everybody.
Trust in governed institutions are hitting all time lows. Major organizations have announced their concerns in national headlines, in putting crucial data and money under the control of a single governed entity. Facebook’s chief executive for example, Mark Zuckerberg, shows support for the future of decentralization and has stated that he hopes the same benefits that have evolved from Bitcoin could “take power from centralized systems and put it back into people’s hands”. Decentralization to many, solves the ‘trust’ issue by encouraging a collective management to a system.