We always talk about how crypto space enables decentralization. Many of us have heard this decentralization word so many times. In this article, we’ll be talking about crypto decentralization. It’s the basis of the blockchain and many cryptocurrencies directly benefit from it, but what is it? What are the benefits and how does it apply to the crypto space? Keep reading to find out!
In general, the most appealing aspect of cryptocurrencies and blockchains is their tendency towards decentralization. The main idea involving all decentralized systems is that they cannot be controlled by any authority. This makes them more democratic, and it means you don’t have to worry about one organization stealing your money or the system being shut down by outside influence. To better understand the decentralized structure, let’s compare it to distributed and centralized architectures.
Centralized vs. Decentralized vs. Distributed Networks
In order to distinguish between these three categories, let’s look at an example. Imagine that Company X is a large U.S. online retailer that has decided to handle its own warehousing and distribution. It starts with one warehouse in the state of Missouri. This would be considered a “centralized” distribution model. It has one central location from which it ships products. One benefit of this model is that it’s easier to coordinate logistics, but this may lead to longer customer wait times and increased shipping costs. Further, if the warehouse has a significant problem, there isn’t a backup option at the ready.
Let’s say the company decides to expand. It establishes warehouses in Texas and Minnesota; later, it adds warehouses in other states. This could now be considered a “distributed network” of — in this case — distribution warehouses. The more warehouses, the more distributed it would be considered. While this may make coordination a little more complicated, it also comes with some advantages. In addition to likely delivering shorter wait times for customers, a distributed network is more robust. If one warehouse experiences a natural disaster or a warehouse fire, there would be another warehouse that could pick up the slack.
Let’s say Company X ends up having warehouses in every state and then expands internationally. It doesn’t matter how many warehouses it controls — this collection of warehouses will never be considered decentralized. This is because the ownership and/or control of the network is controlled by a single entity, which in this example is Company X.
Advantages of cryptocurrency decentralization
Decentralized crypto services have several advantages, including the fact that cash or information cannot be confiscated by authorities. Blockchain systems are self-managing and trustless.
This enables parties to transact without worrying about whether they can rely on the other party to profit from the transaction. The blockchain manages the trust aspect without the need for a third party to ensure that everything runs well.
One of the most obvious disadvantages of a decentralized system is a crime. Nobody can be banned from using cryptocurrencies or decentralized blockchain systems, and that means that there will be criminals trying to take advantage of people and the system itself whenever they can. Combating these issues is near impossible if you want to have true decentralization.
There are also some issues for individuals who aren’t tech savvy or even for those who have made an honest error. In a decentralized system, you can’t just call up your service provider to revert things on your account. If you lose your wallet information then you’re out of luck.
What Does Decentralized Mean in Crypto?
Decentralization offers similar benefits to online networks, such as digital payment systems. Unlike credit card networks, which are distributed but not decentralized, adequately decentralized blockchain networks do not suffer from downtime. Likewise, decentralized, blockchain-based payment systems offer censorship resistance because no single entity controls the chain, no one can censor transactions.
Bitcoin’s Decentralized Structure
Let’s look at the first successful crypto network the Bitcoin blockchain. The Bitcoin network is widely distributed — and decentralized. The network is run by a large network of nodes; each node stores a copy of the Bitcoin blockchain’s transaction history. There are over 15,000 Bitcoin nodes spread throughout the network as of April 2022. Even if the vast majority of network nodes were to go offline simultaneously — the Bitcoin network would continue to function as designed. In addition, Bitcoin introduces the concept of a trustless payment network. There is no central entity that you need to place trust in when you make a bitcoin payment. Even the pseudonymous creator of Bitcoin would be unable to shut down the network.
Other Decentralized Blockchains and Use Cases
These decentralized characteristics hold true for other blockchains as well, with more nodes making a blockchain more decentralized. Other public blockchains that are considered to be some of the most decentralized include Ethereum, Cardano, and Polkadot. Other use cases for these blockchains include decentralized finance decentralized cloud storage and computing, and various web3 applications. It is important to note that, generally, only public blockchains benefit from the advantages of decentralization. There are a variety of other blockchain designs that do not have these variations, including permissioned, private, and consortium blockchains. While these blockchains are, in some cases, widely distributed, they are not decentralized, as they can be controlled by a single entity or a very small number of nodes or validators.
Decentralization is an important feature of public blockchain networks like Bitcoin. Though “distributed network” and “decentralized network” are often used interchangeably, the terms are not strictly equivalent.
Decentralized systems can work without a third party to manage them. A centralized system is managed by a central authority such as an exchange owner. Centralized systems are also in danger of being shut down by governments if they don’t play following the rules, but that’s much harder to do in a decentralized environment. The term “decentralized” is concerned with who controls the network. It means that no single entity owns or controls the network. Instead, choices are reached by a consensus approach.