Hello awesome people, how is everyone doing today, weekend is here again and I hope everyone is planning to have a great weekend and prepare for the new week to come. I’m greatly excited to showcase my knowledge in this week’s topic. Really enjoying these lectures so far because I find it a great way to keep learning new things and expanding my knowledge on cryptocurrency-related topics. This week’s topic is mainly about decentralization and centralization.
Decentralization and Centralization
Decentralization is basically one of the key aspects of blockchain technology and cryptocurrency. When it comes to decentralization, there is no central entity that controls what happens or makes decisions. There are various types of decentralization as it relates to blockchain. One of the types of decentralization in blockchain is architectural decentralization which simply means the number of physical computers or nodes that runs a blockchain. Another type of decentralization in blockchain is political decentralization – which is where no central entity, governance or decision making comes into play. Here, there is no central authority or entity that governs the network or makes decisions in the network, rather, the people or users make the decisions in the network. A clear example of true decentralization is bitcoin because is all the characteristics and attributes of true decentralization.
Since we already know what decentralization is, it is important to also know what centralization is as well. Centralization is basically the opposite of decentralization. In centralized networks, there are entities or authorities that make the decisions and have control of what happens in the system… While a lot of person associate blockchain technology with decentralization, it is not always the case as a blockchain can be centralized. In centralization, everything passes through the central to decide what happens and the decision to make.
Decentralized System vs Centralized System
In a decentralized system, there are no central authority or entity that makes decisions in the network. While in a centralized system, there is a central authority or entity that makes the decisions.
In a decentralized system, users have full control and ownership in the system, giving everyone in the system their rights equally. While in a centralized system, the central authority or entity has full control and ownership.
In a decentralized system, data is transparent and it is difficult to manipulate or alter data that is stored on the blockchain, which increases integrity and trust. While in a centralized system, data can be manipulated and altered at will because it is controlled by a central entity that can decide what to do at any time.
In a decentralized system, let’s take a decentralized exchange, for instance, the users have full control of their keys and assets and can decide what to do at any time. While in a centralized system, let’s take the centralized exchange, for instance, the exchange has full control of the keys and the assets are in control of the exchange.
In a decentralized system, the security of user assets is high because users have control of their keys and assets. While in a centralized system, the security is much lower because the assets are in full custody of the central entity.
In a decentralized system, for example the bitcoin blockchain or other decentralized blockchain, there is no downtimes or interruptions in the network because of the multiple nodes or computers that run the decentralized blockchain. While in a centralized system, there can be downtimes or interruptions in the servers or computers of the central entity.
- In a decentralized system, let’s take finance, for instance, users can decide what to do with their funds in terms of lending, borrowing, staking, at any time and is open to anyone at any time. DeFi is a clear example of a decentralized system in blockchain and finance. While in a centralized system, in finance, the banks or other financial institutions make the decisions and control user’s funds and is not open for anyone at any time. The regular banking system and financial institutions are clear examples of a centralized system in finance.
Advantages and Disadvantages of a decentralized and centralized system.
Advantages of decentralized system
- Higher security
- Increased transparency, like in decentralized blockchains, data and information are transparent for everyone to have access to.
- Increased trust and integrity because stored data cannot be changed or altered.
- Users have full control of their assets
- Equal rights and Users take charge of governance in the system
Disadvantages of decentralized system
- Decision making can be slow since consensus has to be reached and reaching consensus can take time.
- Increase rate of malicious activities which is a big drawback in a decentralized system because bad actors in the network cannot be caught and punished, it increases the rate of malicious activities.
- Increased in the level of disorganization because there are no rules to follow and anyone can do what they like anytime they want.
- Some level of technical knowledge is required to run nodes or participate in the network.
- Cryptocurrency price manipulation because users who have gained so much power and influence in the network can manipulate the price of cryptocurrency asset at will.
Advantages of centralized system
- Faster decision making since the central entity makes the decisions and not waiting for consensus to be reached.
- The central entity can increase growth and improve results by taking bold steps and making better decisions rather than relying on general consensus which can lead to bad results.
- Reduced rate of malicious activities because bad actors can be banned from the system.
- Increased level of organization because there is order and authority and rules to follow.
- No technical knowledge is required since the central entity handles the technical side of things.
Disadvantages of centralized system
- The central entity can decide what they do with user data and data is prone to leaks.
- Less transparent because the central entity can lock access to data or information.
- Reduced trust and integrity because data can be altered without any trace by the central entity.
- Equal rights are not given because there is a hierarchy in the system.
- Users don’t have full control of their assets and user assets are in the custody of the central entity or organization. For example, centralized exchanges, banks and financial institutions.
Which one is better for business/trading and why?
The centralized system is the better option when it comes to business in my opinion. This is because as a business owner, you can make decisions quickly and you hold the mantle to make the best decision for your business. Look at some of the most successful businesses in the blockchain space like Binance, they are all centralized and have achieved tremendous growth in a short time because they made clever, bold and best decisions for their business rather than waiting for the slow process in reaching consensus which can be a bad decision because since the decision making is based on majority, the majority can make bad decisions.
From the users' standpoint, I would say both decentralized system and centralized system have their pros and cons.
A decentralized system is better for trading in my opinion. This is because as a trader, you want full control of your trading activities and full control of your assets. Like we have seen in DeFi and DEX, it is permissionless, traders like to have full control of their assets and trading activities.
How do you know if a blockchain is decentralized or not?
Some persons usually confuse the word blockchain with decentralization. While this is correct most of the time, not all blockchain project is decentralized and the good news is that there are ways to know if a blockchain project is decentralized or not. To know if a blockchain project is decentralized or not, let’s use a popular project called uniswap.
- To check, visit https://etherscan.io
- On the search bar, input the uniswap contract address and search for the blockchain platform
- Next, you will see the details and information of the blockchain platform.
- At the bottom, look for contract and click on the contract tab
- Under the Contract Source Code (Solidity), you will look at whether there is any line that writes function destruct in the code. For uniswap, it is a fully decentralized exchange.
When it comes to making good decisions in the blockchain and cryptocurrency space especially when it comes to cryptocurrency investments or trading, it is very important to have a very good understanding and knowledge of decentralization and centralization as they both play a big role in the blockchain and cryptocurrency space. Having this knowledge helps to make better decisions. For example, it can help in deciding which exchange is better to trade like centralized exchanges or decentralized exchanges. Also, when it comes to investing in cryptocurrency and blockchain projects.