In the blockchain, decentralization refers to the transfer of control and decision-making from a centralized entity or authority, such as a government or corporation and to individuals or smaller groups. Decentralized networks aim to reduce the level of trust that participants must place in one another, and prevent any one person or group from having too much power and negatively affecting how the network operates.
What is an example of decentralized?
One example of a decentralized system outperforming a centralized one is the distributed ledger technology behind cryptocurrencies like Bitcoin. In a centralized system, there is a single point of failure, such as a central bank controlling the currency. However, in a decentralized system like Bitcoin, the network is spread out among many users and there is no single point of failure. This makes the system more resilient to attack and less susceptible to censorship.
Another example is the peer-to-peer file-sharing network, BitTorrent. In a centralized system, a single server would be responsible for distributing large files to many users. However, in a decentralized system like BitTorrent, the file is divided into small pieces and distributed among many users, making the network more efficient and resilient.
Finally, decentralized autonomous organizations (DAOs) are another example of decentralized systems outperforming centralized ones. DAOs are decentralized organizations that use blockchain technology to create a transparent, trustless system for decision-making and execution of transactions. This allows for more efficient and democratic decision-making, as well as a more transparent and auditable system.
What is centralized vs decentralized?
Just because it is a blockchain application does not mean it needs to be 100% decentralized. To better understand decentralized networks, the table below compares decentralized networks to the more common centralized networks.
| Centralized | Decentralized |
Network/hardware resources | Maintained & controlled by a single entity in a centralized location | Resources are owned & shared by network members; difficult to maintain since no one owns them |
Solution components | Maintained & controlled by a central entity | Each member has exact same copy of the distributed ledger |
Data | Maintained & controlled by a central entity | Only added through group consensus |
Control | Maintained & controlled by a central entity | No one owns the data & everyone owns the data |
Single Point of Failure | Yes | No |
Fault tolerance | Low | Extremely high |
Security | Maintained & controlled by a central entity | Increases as network members increase |
Performance | Maintained & controlled by a central entity | Decreases as # of network members increase |
What crypto is decentralized?
To answer this question let's talk about a most famous and also last standing cryptocurrency:
Bitcoin:
Bitcoin [BTC] is the most recognized and important decentralized blockchain although there are some opinions against it.
Most Bitcoin nodes use software called Bitcoin Core, which makes the system centralized. Only a small group of developers can update and make changes to the network. Although there are nodes all over the world, there are many in the USA and Germany.
Bitcoin uses a system called Proof-of-Work to verify transactions, which uses a lot of energy and requires special hardware.
Mining, the process of creating new Bitcoin and processing transactions, is competitive and difficult for small miners. They often have to join larger mining pools, which concentrate power in the hands of a few giants. This can make the network vulnerable to attacks and manipulation, as it did in 2014. Despite more miners joining the network, the high entry barrier questions its decentralized nature.
Ethereum
Ethereum is the second-largest cryptocurrency and has been around for almost 7 years. It has a very active developer community that is more centralized than Bitcoin as it follows the vision of its creator, Vitalik Buterin.
There is no consensus mechanism to approve changes to the protocol, making the coin centralized in terms of development. Ethereum nodes are also centralized, with the USA having 41% and Germany having 15%. Ethereum uses a geth codebase to run its blockchain, making it vulnerable to compromise.
Ethereum is a proof-of-work coin like Bitcoin, which fosters large mining pools that control significant hash power. However, it is transitioning to a proof-of-stake algorithm with the launch of Ethereum 2.0 in 2022, which will make the blockchain significantly more decentralized.
To become a full validator node, one must stake at least 32 ETH, which is a significant investment. The process is open to all, making the entry barrier lower and the network more decentralized
Monero
Monero (XMR) is a cryptocurrency that focuses on anonymity and privacy. Its transactions are completely private, and the details of every transaction, including the sender, receiver, and amount, are hidden using three technologies: Stealth Addresses, Ring Signatures, and RingCT.
While Monero has a global network of nodes, its developer community is more centralized compared to Bitcoin or Ethereum. Running a Monero node requires connecting to a client called deamon, as there are no other options available.
Monero is a Proof of Work (POW) coin like Bitcoin and Ethereum, which means mining is required to validate transactions and create new ones. However, unlike Bitcoin and Ethereum, mining Monero does not require highly specialized equipment and can be done using regular computers, making it more accessible.
But, independent miners have less chance of minting a new block than large mining pools, making the mining process highly centralized. About 74% of Monero's hash rate is controlled by only 3 mining pools, making it more centralized than Bitcoin and Ethereum.
While the total XMR addresses currently stand at 5.5 Million, with a constant increase since its inception. However, a significant portion of XMR is concentrated in only a few addresses.
Benefits of decentralization
Increased security: Decentralized systems are less vulnerable to attacks and single points of failure since there is no central authority or point of control. This makes them more secure and less prone to hacking or cyber-attacks.
Transparency: Decentralized systems are transparent, and every transaction is recorded and verified by a network of nodes. This means that users can trust that the data is accurate and reliable.
Privacy: Decentralized systems can offer increased privacy and anonymity since there is no central authority controlling the data. This means that users have greater control over their data and can choose what information they want to share.
Accessibility: Decentralized systems are accessible to anyone with an internet connection, and users can participate in the network without needing permission from a central authority. This makes them more inclusive and democratic.
Innovation: Decentralization fosters innovation since developers can experiment with new ideas without needing to seek approval from a central authority. This leads to more experimentation and a faster pace of innovation.
In conclusion, decentralization is the process of transferring control and decision-making from a centralized entity or authority to individuals or smaller groups. Decentralized systems outperform centralized ones by being more resilient, efficient, and transparent. Examples of decentralized systems include cryptocurrencies like Bitcoin, peer-to-peer file-sharing networks like BitTorrent, and decentralized autonomous organizations (DAOs). When comparing centralized and decentralized networks, it is clear that decentralized networks offer several advantages, including fault tolerance, increased security, and more democratic decision-making.
Although some of the most popular cryptocurrencies like Bitcoin, Ethereum, and Monero have centralized aspects, they still offer the benefits of decentralization. The move towards a more decentralized future is ongoing, and it is exciting to see how it will shape the world in the coming years.
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