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27.08.2019

What is Decentralization?

Many investors believe that decentralization is a key feature of all cryptocurrencies. And, when you look at it, the principle of decentralization has made Bitcoin the safest, most reliable and sought-after currency on the market. Even despite this, a very small number of people now truly understand what decentralization is, what its main features are and what goals it offers.

What is decentralization

Decentralization in a term of blockchain is an equal distribution of a database around many participants that have a complete copy of this blockchain.

In principle, this is the main feature of decentralization. Here we have a common database with the entire history of financial transfers, user account numbers and other information that isn’t stored on any single server but is located on millions of PC systems that are constantly synchronized with each other.

In general, Blockchain can be compared with the system of downloading files via torrent trackers, which is now used by many people. The file from the torrent tracker can be downloaded only if at least one of the seeds will be active and connected to the Internet.

The same goes for the decentralized cryptocurrency system. The network will function correctly and safe only if the computers storing Blockchain are currently connected to the Internet.

One PC isn’t able to correctly confirm the transaction since only a few network participants accurately verify the operation, process it and put it into a shared blockchain.

Reasons for decentralization

As mentioned earlier, the principle of a decentralized distributed base in the Blockchain system was developed with one exceptional goal — to create a universal independent payment network with the most secure and quick financial transactions.

If we compare this development with the work of banks or any electronic payment systems where each of them has its own control center, it will be completely different.

Due to the equal nodes’ distribution, and the repeated duplication of platform files, it’s possible to achieve a system immune to blocking, deletion, alteration, and any hacker attacks from the side.

The fact is that multiple Blockchain data duplication doesn’t allow fraudsters to substitute it to reach users’ crypto assets or to change the recipient final address during the transaction.

Since Blockchain consists of a set of consecutive blocks in which all network data is stored, then, in theory, you can change a block and redirect all your sent cryptocurrencies directly back to your account.

In practice, this cannot be achieved, since every second Blockchain blocks are carefully checked by several nodes at once, and if you try to shift the “modified block”, the system will simply reject it.

Besides, you can’t delete information from Blockchain because even if several tens or hundreds of computers containing information about the Blockchain cryptocurrency are confiscated, many copies of the database will remain on many other PC’s.

These copies will always be available for free download and can be transferred on a media without any problems at any time of the day.

Decentralization as a cause of uncertainty

Like a lot of things in the industry, differences in decentralization aren’t always black and white. While one person can determine the decentralization of the network, where everyone runs their node, another can see it like several competing groups of developers who are working on the protocol or determine it through the power distribution among miners. 

This is the problem: since there is no coherent standard for decentralization, the cryptocurrency community cannot agree on which projects are decentralized. Consider, for example, the role of decentralized exchanges (DEXs). While most trading platforms serve as intermediaries for efficient trading between users, DEX can remove this intermediation by simply connecting the buyer and the seller for conducting cryptocurrency transactions between them. There are clear advantages to this:

  • Elimination of depositary risk, which allows each user to control their funds;
  • Providing wider access to the exchange for any person;
  • Ensuring confidentiality through the absence of KYC requirements;
  • Providing wider access to any cryptocurrency asset.

While some decentralized exchanges can do all of the above, they have to make huge trade-offs in terms of user experience, speed, and cost. For example, the most common problem with centralized exchanges is the security risk of digital user assets. But while some DEXs can solve this problem, they still need KYC and a limited listing of assets. As a result, these DEXs are criticized for being “not decentralized”.

If we expect growth in the industry, crypto projects must be prepared to accept a balance of centralization and decentralization to achieve society ultimate purposes. This means that people in the wider blockchain community must stop using their understanding of decentralization as a litmus test for the success of other projects.

100% decentralization doesn’t exist. There will always be a certain degree of compromise that will allow you to create a fully functioning and scalable project or platform.

Decentralization cons

Let’s consider a decentralized market like OpenBazaar and such an online store as Zappos. The last one is selling shoes and has become known for its high level of client service before Amazon has taken this niche. Consumers were pleased with the high speed of delivery, great call-center work, and the company’s obsession to satisfy any customer needs. Nick Swinmurn managed to create a business with a good reputation by coordinating actions and reinvesting profits. On the contrary, OpenBazaar offers decentralization where users can participate in a trade directly without intermediaries. This approach has nothing to be compared with Zappos’ experience in client pleasure.

Now let’s take a look at cryptocurrency exchanges. DEXs (mentioned above) have a fairly good reputation. Should Coinbase, Kraken, and Poloniex worry about this? Anyway, not very soon. Of course, DEXs are more stable than centralized exchanges. (However, it cannot be argued they are safer. Many centralized platforms are now using a decentralized architecture, having an advantage in the form of private source code. When the code is publicly available (it’s so with DEXs), the assets will be safe until the algorithm detects an error that the attacker can use for personal gain. Moreover, Coinbase and Kraken provide user support, they have managers at corporate clients and provide insurance. Can a DEX offer such services? It’s unlikely. At this stage, the advantages of centralized exchanges are enough to keep a large number of traders on them.

When to deeply analyze the process, you will understand that the decentralization of decision-making and management is difficult. It’s still hard to precisely measure other people’s contributions remotely, and also to control the work of a distributed team. Ethereum, the second one after Bitcoin, has always acted as a sample app on a distributed platform. However, we must not forget that despite the decentralized architecture of the app, it has a governing body, in this case, a specific leader — Vitalik Buterin. Decentralization can provide big incentive structures, but, unfortunately, it’s not particularly useful in the issue of team management, and it’s unlikely that cryptocurrency economics can somehow influence this.

Nevertheless, the development of technology has allowed people to work independently, and the blockchain is likely to develop this trend. Great blockchain-based applications will evolve as the user interface, performance, technology base, and public understanding are improving.

Minimum decentralization point

When it comes to one owner, he can run several nodes in different places. The decentralization degree is minimal, and the system requires complete trust. But even in this case, the use of blockchain makes sense. Unlike a regular database, blockchain allows:

  • conduct database integrity checks;
  • synchronize data and create backup copies in real-time;
  • audit the entire transaction history on the fly;
  • eliminate a single point of failure of the accounting system.

An example would be a digital property rights platform. Such a value accounting system requires full confidence in the organization that supports it. But the owner can distribute several nodes with auditor rights, which can verify that all changes are carried out correctly. If something goes wrong, the auditors will notice.

Also, end-state data can be efficiently synchronized across multiple servers, and backups can be done in real-time. Thus, the accounting system becomes more resistant to equipment failures.

Since transactions contain timestamps, there are no problems with the order confirmation and the decision takes place quickly.

Blockchain properties in case of decentralization

To get a deeper understanding of the question, it’s necessary to describe what important properties the blockchain technology can give to the accounting system.

As you can see, there are three degrees of decentralization, which are fundamentally important for the operation of accounting systems using blockchain:

  • maximum decentralization;
  • decentralization with restricted access;
  • minimal decentralization (centralization).

It’s noteworthy that in each case, the level of user confidence in the accounting system may be different. First of all, it depends on the total number of validators and their motivation for autonomous work. Since it’s the presence of a large number of independent validators that can reduce the need to trust to zero.

On this basis, it can be noted that the accounting system achieves maximum benefits in conditions of a high-level decentralization and public participation. But blockchain also gives unconditional properties (regardless of the decentralization level). Let’s repeat:

  • the ability to check the integrity of the database;
  • data synchronization and real-time backup;
  • the ability to instantly audit the final state of the accounting system.

Conclusion

Now you know what decentralization is, why the Blockchain system needs it and what advantages/disadvantages it has.

In the digital market, virtual coins are mostly decentralized assets that were made for the financial freedom of ordinary users from commercial organizations.

However, now we can see the appearance of cryptocurrencies made on a centralized basis. The most striking example here is Ripple coin with their system of gateways owned by the founders, or USDT stable coin.

It’s quite profitable to invest in them, but the reliability of such investments is questionable. That is why a huge number of independent market users advise buying decentralized blockchain-based cryptocurrencies that can bring a revolution to the current financial system.

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