Decentralization is one of the main benefits of cryptocurrency over traditional currencies. Decentralization is also a key feature of cryptocurrency. It removes intermediaries and allows two parties to transact with each other without the need to trust third parties. Decentralization allows trustless, tamper-proof transactions without relying on any single intermediary.
These same principles are being applied to crypto markets and financial services by decentralized autonomous organizations (DAOs) and decentralized finance (DeFi). It is crucial that crypto enthusiasts and investors understand the concept of decentralization as it becomes more common.
What is decentralization?
Decentralization is a term that refers to the transfer and management of decision-making power from a central entity (individual or organization) to a distributed network. Decentralized networks aim to lower the trust participants place in each other and to prevent them from exercising authority or control over each other in ways that compromise the network’s functionality.
Why decentralization matters
Decentralizing access and management of resources within an application can lead to better and more equitable service. There are some tradeoffs to decentralization, such as lower transaction throughput. However, they can be worth the increased stability and better service.
Decentralization has many benefits:
Trustless Environment – Each member of a decentralized Blockchain network has a copy of a distributed ledger. This makes it possible to verify transactions without having to trust a central intermediary (e.g. a stranger on the internet).
Tamperproof – Each blockchain transaction is recorded on a distributed ledger, and verified by the network. This makes it impossible to alter transactions or create corrupt data. It also ensures that cryptocurrency’s value will not be affected by inflation.
Robust – Decentralization increases robustness by decreasing reliance on any one member. This makes networks less likely to fail and secures them against all attacks. This means that there is less chance of data breaches.
Optimizes resource distribution – Decentralization can help to optimize the distribution and performance of resources, ensuring promised services with a lower failure rate and greater consistency.
Decentralization is not without its limitations. Decentralized networks have the biggest disadvantage of being slower as they depend on consensus among many members. However, there are many innovative solutions to these limitations, including Layer-2 Blockchains.
Decentralization Comparison
The table below shows how decentralized networks compare with the more commonly used centralized and dispersed networks.
Centralized | Distributed | Decentralized | |
Data | Controlled by central entity | Controlled by a solutions provider | Controlled by group consensus |
Fault Tolerance | Low | High | Very High |
Security | Controlled by central entity | Shared responsibility of solutions provider and customers | Increases as the number of network member increases |
Performance | Controlled by central entity | Increases as resources scale up | Decreases as the number of network member increases |
Single Point of Failure | Yes | No | No |
Components | Controlled by central entity | Controlled by a solutions provider | Each member has exact same copy of distributed ledger |
Example | ERP system | Cloud computing | Blockchain |
Source: Amazon AWS
Trends toward Decentralization
The crypto community is pushing decentralization to new and exciting uses. The community is looking to use decentralized blockchain and smart contracts concepts in financial services, as well as governance. Organizations of all sizes and industries are exploring and adopting decentralized blockchain solutions. Applications that offer immediate emergency or foreign aid without the intervention of any bank, government, or other entity are some examples. Applications that allow users to manage their digital identities and data.
These are the two most important innovations:
Decentralized Exchanges (DEXs) – DEXs allow transactions to be made directly between traders, rather than through intermediaries. They use smart contracts to create prices based on supply and demand.
Decentralized Autonomous Organizations – DAOs have no central leader and can take all decisions. Instead, they use smart contracts and governance tokens to make decisions. These tokens are often used to determine the management and spending of token supply or project infrastructure.
The cryptocurrency project is also continuing to look for ways to increase performance and compete against conventional centralized networks. Sidechains and other offchain transactions, for example, can increase transactions per second, lower gas costs, and help to compete with centralized services. This allows decentralization to be applied in more cases.
Closing Thoughts
Decentralization is fundamental to crypto principles and their underlying technology. Decentralization in the blockchain is an information platform that stores a library and trades over a peer-to-peer network. The “resource” may not be limited to transactional or cash data. However, it could also include additional information about ownership, agreements, products, and other data. The community is continually working to decentralize everything, from crypto trading to governance.
