Why decentralization matters
Before you dwell on how cryptocurrencies use decentralization and the enormous benefits it brings, it’s important to understand the concept of decentralization. In this way, let’s take a look at how data or money is usually managed.
Let’s take a bank as an example. The bank keeps its customers’ money for them. All of this is in a single place: inside the bank, with the vast majority of it in a vault. There is also a single entity that is responsible for all this money, namely the bank. Since there is a single storage space or a single entity that is responsible, this is considered centralized.
Decentralization is on the exact opposite side of the spectrum. With decentralization, there is not a single storage space, nor a responsible body. Cryptocurrencies are currently the only form of decentralized money. Another well-known decentralized platform would be the Internet: no company or individual is responsible for this. Anyone can access the internet and create their own content on it. Definitely, the Internet is considered “the largest decentralized communication system that humanity has ever seen”.
How are cryptocurrencies considered decentralized?
Now, before we get into that, note that not all crypto assets are decentralized by definition. The most famous ones like Bitcoin and Ethereum are, like the vast majority of others. We recommend that you first do a little research on the cryptocurrency you are interested in.
Most cryptocurrencies are indeed decentralized because they use Blockchain technology. In short, a blockchain is a decentralized network, in which many participants from around the world can register and verify the validity of the data on it. Unlike a centralized network, there is no single an individual, company, or other entity responsible for the data. Instead, it’s a huge team working together to keep it on a so-called peer-to-peer network.
The advantages and disadvantages of decentralization
In the case of money, decentralization brings significant advantages to the table. Let’s take a look at some of them.
At the beginning, we mentioned that the bank is responsible for the money they manage. This does indeed mean that the money you leave in their hands is no longer in your control. The simplest example is if the bank had any kind of downtime, you wouldn’t have access to your own money. On the other hand, cryptocurrencies like Bitcoin and Ethereum are decentralized. Therefore, you have full ownership and control of your own money. Since there is no one else responsible for your money, you cannot be censored to do what you want.
On the other hand, decentralized systems do not have a single entry point and therefore not a single point of failure. If you could compromise a node on a blockchain, you can’t do anything harmful because there are too many others providing the right information. Instead, a centralized system has individual failure points that could become a target something we’ve covered in great detail in this article.
Decentralization also tends to promote transparency, as anyone can connect to its systems. The internet, for example, brings accessible data to everyone. For cryptocurrencies, you can view each account’s balance and transaction history in a completely public storage file. This kind of transparency brings what is known as verifiable trust which means you can always check everything yourself.
Since anyone can participate in these decentralized, public networks, decentralization tends to be extremely inclusive. For cryptocurrencies, there is no idea which country you are from or what age you are. Everyone is welcome to register on the network, regardless of anyone’s background.
Now as for the disadvantages, there is one that comes to mind: efficiency. Indeed, when looking at cryptocurrencies, the Proof-of-Work mechanism may work well, but it’s not, say, the most efficient way to handle transactions. In fact, one point of discussion for Bitcoin was how to scale when mass adoption is possible. Fortunately, there are ways to deal with it like the lightning network.