What is decentralization?
Decentralization is the distribution of functions, control and information instead of centralizing them in a single entity. The term is used in numerous sectors and industries, from information technology to retail and government. It also denotes a system that has multiple paths for information to flow.
A centralized system is often known as a hub-and-spoke model, patterned after a bicycle wheel. Everything on the endpoints travels down the spokes to the hub, or central system. This is the essence of the mainframe computer design. Whether it's a green terminal or a PC, they all connect into the mainframe, which creates a single point of vulnerability. If the hub (in this case, the mainframe) goes down, the entire network goes down and no work can be done.
The ultimate example of a decentralized network is the internet itself. When its predecessor, ARPANET, was built for the U.S. Defense Department in 1969, it was designed to survive a nuclear attack, so if one portion of the network went down, traffic would be rerouted through other parts of the network.
That design remains in operation to this day. Even though local outages are fairly frequent, it is virtually impossible to take down the entire internet.
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Now let's look at how this applies to blockchain and its most popular application, cryptocurrency.
What is centralization and decentralization in blockchain?
Centralized and decentralized structures are polar opposites. A centralized structure implies control of the central entity by people who have the power to manage, control and oversee it. One example would be a nation's currency, which is managed by a central bank. Decentralization is the opposite of that, where no one person or entity owns, manages or controls the network or structure.
Not all cryptocurrencies are decentralized, although the most popular ones like Bitcoin and Ethereum's ETHER are. Unlike centralized currencies, decentralized cryptocurrencies are not regulated by central banks, but by their programming code and the monetary policies are regulated by their respective communities.
How does decentralization work in blockchain?
So how can cryptocurrencies operate without a governing authority to keep order? Bitcoin's peer-to-peer public blockchain offers a solution by using a cryptographic protocol known as proof of work (PoW).
A blockchain consists of blocks of data with information about transactions that is used to prove the validity of the next block. Bitcoin users can add blocks to the blockchain through validation by PoW. Since the blockchain is public, it can be viewed by everyone, and anyone can add a block by providing PoW for a transaction.
Why are blockchains decentralized?
The main reason blockchains are decentralized is to avoid putting control in the hands of a few, or a country's central bank. That's the main motivation behind the embrace of cryptocurrency in the first place: to take banks out of the equation and have true peer-to-peer transactions.
Decentralized blockchains are designed to be unalterable, and once the data is entered it is irreversible. New data can be tacked on, but the old data can't be edited or changed in any way. For Bitcoin, this means transactions are permanently recorded and viewable by anyone. Think of it as feedback on eBay taken to the next level.
Not all digital currency is decentralized. There are also cryptocurrencies that use private, centralized systems, where only a select few people have the power to add new blocks and check the validity of transactions. These tend to be used in privacy-oriented industries like healthcare and finance.
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Types of decentralization in blockchain
A blockchain usually exhibits one of the following levels of decentralization:
- Fully centralized. Entirely controlled and managed by a single, central authority.
- Semi-decentralized. Controlled and managed by multiple authorities.
- Fully decentralized. No middlemen or central authorities to manage or administer the network.
There are several subcategories of decentralization, including the following:
- Physical decentralization involves the geographical dispersion of blockchain servers across the globe as much as possible, so no single party will own the network, and the loss of physical servers -- for whatever reason -- won't impact the network.
- Transactional decentralization is specifically to improve the efficiency and transparency of B2B networks. Through the use of unalterable ledgers and smart contracts, a decentralized transactional system can provide a more secure, consensus-based environment for executing, verifying and recording transactions.
- Political decentralization is more concerned with how many people or organizations control the system rather than the number of servers. The fewer people or organizations controlling the network, the less decentralized it is.
Benefits of decentralization
The benefits of decentralization are numerous. They include the following:
- Trust is a given. From a bank to an eBay seller, knowing and trusting the other party in a transaction is essential. But no one needs to know or trust the other party in a decentralized blockchain network because the distributed ledger technology used to record the transaction can't be tampered with, in theory. If anyone tries, the majority of network members will reject it.
- Increased data accuracy. Businesses frequently silo their data, and it often has to be reconciled one way or another. Every time data is manipulated, there is the possibility of an invalid entry or data loss. In a decentralized blockchain, data isn't siloed and is copied from one ledger to the next, thus ensuring its integrity.
- Downtime is reduced. Decentralization can help to mitigate failures because there is no single point of failure. Everything is distributed, so if one source is unavailable or there is a system bottleneck, others can pick up the slack.
- Transparency. Decentralized blockchains are available to the public, so they are transparent and everyone can see them.
- Full control. The blockchain's members or users -- not a central, sometimes faceless authority -- are in control of their information and who can see or access it.
- Immutability. This is the common term used to describe the fact that data contained in a decentralized blockchain is hard to alter because each alteration must be confirmed by each node in the blockchain network.
- Security. Proponents say decentralized blockchains are far more secure than centralized blockchains because they employ encryption to protect data. They use either symmetric (secret key) encryption or asymmetric (public key) encryption.
Downsides of decentralization
Everything has a downside, and that includes decentralized blockchains. The negatives include the following:
- Cost. A decentralized network can often be more expensive than a centralized one because of the need for more systems and people to run them.
- Lack of consensus. There's something to be said for a single voice of authority. In a decentralized blockchain, anyone can have their say on an issue, and they often do. The democratic process can be a messy one and consensus hard to reach sometimes.
- Lack of clarity. This goes hand in hand with the consensus problem. When many people have their say on an issue, it is important that they are clear and articulate their position. A lack of clarity can lead to paralysis.
- Lack of discipline. It is easy to get lazy when you don't have a boss to report to, which is often the case in a decentralized network. These networks operate somewhat on an honor system where everyone involved is expected to do their job. If they don't, the network can suffer.
Comparing centralized vs. decentralized approach
Here's a quick breakdown of the pros and cons of each approach to blockchain.
- There's a single or small point of control.
- Requires less expensive hardware, smaller network.
- Has a more transparent chain of command.
- Leaders provide clearer vision.
- Decision-making is simple.
- Can exchange crypto for real cash, such as dollars or euros.
- Vulnerable to effects of poor leadership.
- Has higher exchange fees than decentralized exchanges.
- Users are not anonymous.
- Trust issues, especially if the network is corporate-owned.
- Creates a single point of failure.
- Users are in full control of transactions.
- Data generally cannot be altered or deleted.
- Use of cryptography to secure the ledger is mandatory.
- Easy to add nodes and expand the network.
- There can be conflict among users if the network isn't well maintained.
- Decentralized networks require more equipment and therefore cost more.
- Due to their anonymous nature, decentralized blockchains like Bitcoin are a magnet for criminals.
- Decentralized cryptocurrency is much more prone to price volatility.
- Can't trade in real currency.
Examples of a decentralized blockchain
As a basic rule of thumb, any blockchain network that is not corporate-owned is likely a decentralized network. Blockchains with corporate ownership behind them, like Coinbase, Kraken and Binance, are centralized around the company. The most popular cryptocurrencies, Bitcoin and ETHER, are decentralized.
In addition to cryptocurrencies, decentralized blockchain applications (dApps) are a fast-growing sector in the blockchain space. DApps are applications that are developed on a blockchain ecosystem. They cover a variety of industries, including trading exchanges, finance and online games.
Ethereum, one of the oldest and most established blockchain platforms, has also been considered the most decentralized blockchain. as well as secure, immutable and permissionless.
Ethereum allows anyone to create and deploy smart contracts and dApps without requiring a third party. Ethereum has recently migrated from the PoW consensus mechanism to proof of stake (PoS), which is more energy friendly. PoW requires significant computational effort to obtain the proof and can be expensive. PoS uses much less power and is reportedly much faster than PoW. However, critics say the change has made Ethereum more centralized.