Is Crypto really Decentralized?
Decentralization is one word that pops up most times when we talk about cryptocurrency. The term has almost become synonymous with cryptocurrency to the point that it is usually one of the first advantages usually accrued to cryptocurrency. But what exactly does decentralization mean in cryptocurrency? In this post, we dissect the notion of decentralization in blockchain technology and how it specifically applies to cryptocurrency. The highlight of the article is broken down below:
- What is Decentralization in Cryptocurrency?
- Is Decentralization good for Crypto?
- Why does decentralization matter in the crypto space?
- Final thoughts
What is Decentralization in Cryptocurrency?
Decentralization in cryptocurrency simply refers to the manner in which transactions are executed on the chain. It refers to the transfer of control from a central authority into a distributed network. This distributed network then ensures that users can easily transfer value directly with each other without the need for a third party that plays the role of a mediator or regulator. Transactions on the blockchain are recorded on a distributed ledger that keeps track of all exchanges and prevents fraud, manipulations, and double-spending. The decentralized nature of blockchain technology is the reason it is often referred to as a Distributed Ledger Technology (DLT). Through decentralization, no single entity or individual is capable of single-handedly controlling the system as changes can only be made through a consensus mechanism powered by several validating nodes, and in some cases, a community of users who must vote before certain changes can be activated on the network.
Is Decentralization Good for Crypto?
Cryptocurrency and the blockchain are the responses to a long-existing system of a centralized and controlled financial architecture. Blockchain technology further came up as a viable alternative to this ailing structure, epitomized by the global financial collapse of 2008. The failings of a centralized economic structure led to the blockchain and crypto boom that created a new architecture free from the control of government agencies and regulatory systems. Hence, decentralization is good for cryptocurrency for the following reasons:
Removes the Constraint of Central Authorities
To begin, decentralization liberates the financial system from the constraints imposed by centralized authorities. Due to the fact that cryptocurrency is not controlled by a single authority, it is less susceptible to manipulation. The cryptocurrency market has a sizable impact on price fluctuations. Though it has demonstrated volatility, the element of freedom from control represents a significant departure from the established traditional financial system. Decentralization, on the other hand, increases the security of cryptocurrency for users. In a traditional financial system, the government can easily track users and punish dissidents by freezing their accounts, monitoring their expenses, or imposing spending restrictions. This is not possible in cryptocurrency, as no single entity has the ability to dictate or control blockchain activity. This is yet another demonstration of the financial liberty that cryptocurrency provides.
Decentralization also helps cryptocurrency to scale in adoption. The decentralized nature of cryptocurrency ensures that its adoption is not confined to any country. Cryptocurrency has global user access and it can facilitate transactions from one part of the world to another in the twinkle of an eye. Just as its user base is global, so also is its validators and miners. Anyone with the right resources can become a crypto miner or validator and rewards do not vary from location to location. As more developers join the validation process, cryptocurrency further becomes decentralized and more open to all.
Due to the global network of crypto validators, it is becoming increasingly difficult for any individual to carry out malicious activity on any blockchain. To manipulate transactions, for example, at least half of all validators must reach a consensus, which is highly improbable. To bolster this point, blockchains have been designed to be robust and impenetrable to fraud. The majority of blockchains are open-source software with a large developer community that constantly tests the network to ensure that any potential flaws are patched before they become obvious. A typical example was the discovery of a bug on the Polygon Plasma bridge by Gerhard Wagner in 2021, preventing a loss estimated at $850 million in the process.
No Third-Party Barriers
Cryptocurrency operates in a seamless manner that removes the barriers usually posed by centralized financial institutions and clearing agents. This has further become possible through smart contracts. There are no arbitrary charges on the blockchain. Charges are to the nearest minimum and are made clear during transactions. Cryptocurrency has successfully removed the hefty transaction charges of banks and other similar financial agents, creating a fast, secure, and low-cost means of funds transfer. Decentralization in cryptocurrency has made peer-to-peer transactions possible. Users also benefit from financial services such as insurance, lending and borrowing, savings, among other things, right on the blockchain.
Why does decentralization matter in cryptocurrency?
From the aforementioned benefits, there are a plethora of reasons why decentralization is critical in cryptocurrency. The following are listed:
- Cryptocurrency leverages decentralization to provide financial freedom and access to a global network of users.
- Decentralization eliminates the possibility of a single point of failure on the blockchain.
- Decentralization is the backbone of the blockchain's security. It takes control away from centralized authorities and places it in the hands of a network of individual users.
It's easy to see why decentralization is frequently used interchangeably with blockchain technology and cryptocurrency. It is critical to the system's operation; undoubtedly, all activities on the blockchain rely on the decentralized nature of the network to function. Most importantly, decentralization has created an alternative to the traditional financial system, which is centralized and frequently controlled.