Why Decentralization Matters

When discussing cryptocurrencies, a characteristic that is often mentioned is that they are decentralized. What does that even mean though and how is it beneficial? Today, we’re taking a closer look at why decentralization is an absolute game-changer.

What is decentralization?

Before getting into how cryptocurrencies use decentralization and what huge boons it brings, it’s important to understand the concept of decentralization. By doing so, let’s take a look at how data or money is usually managed.

Let’s take a bank as an example. The bank is holding its clients’ money for them. All of this is held in a single place: inside the bank, with the vast majority of it being in a vault. There’s also a single entity in charge of all of this money, namely the bank. Since there’s a single place of storage, or a single entity in charge, this is considered centralized. 

Decentralization is on the exact opposite side of the spectrum. With decentralization, there is not one single place of storage – and not a single entity in charge. Cryptocurrencies are currently the only form of decentralized money. Another well-known decentralized platform would be the internet: not a single company or person is in charge of it. Anyone can access the internet and create their own content on it. Sure enough, the internet is seen as “the biggest decentralized communication system humanity has ever seen”.

How are cryptocurrencies decentralized?

Now before we get into this, please note that not all crypto assets are by definition decentralized. The most well-known ones such as Bitcoin and Ethereum are, as well as the vast majority of others. We do recommend doing a bit of research into the cryptocurrency you’re interested in first.

That said, most cryptocurrencies are indeed decentralized because they use Blockchain technology. In short, a blockchain is a decentralized network, where many participants from all over the world can join and verify the validity of the data on it. Unlike a centralized network, there’s not a single person, company or other entity in charge of the data. Instead, it’s a huge group that works together to maintain it in a so-called peer-to-peer network.

The Pros and Cons of Decentralization

In the case of money, decentralization brings major advantages to the table. On top, they are quite diverse as well. Let’s take a look at a few of them.

In the beginning, we’ve mentioned that the bank is in charge of any money that they manage. This indeed means that any money you leave in their hands is not in your control anymore. The simplest example is if the bank would have any kind of outage, you’d not have access to your own money. On the flip side, cryptocurrencies like Bitcoin and Ethereum are decentralized. As such, you have full ownership and control of your own money. Since there’s no one else in charge of your money, you cannot be censored in doing what you want.

For another, decentralized systems do not have a single point of entry – and thus not a single point of failure. If you’d be able to compromise one node in a blockchain, you can still not do anything harmful because there are too many others providing the correct information. On the contrary, a centralized system has single points of failure that could be targeted – we’ve covered this in great detail in this article.

Decentralization tends to promote transparency as well, since anyone can connect to its systems. The internet, for example, brings accessible data to everyone. For cryptocurrencies, you can see the balance of each account and their transaction history in a completely public ledger. This kind of transparency brings what is known as verifiable trust – meaning you can always double check everything yourself.

Since anyone can join these decentralized, public networks, decentralization tends to be highly inclusive. For cryptocurrencies, there is no notion of which country you are from or what age you are. Everyone is welcome to join the network, regardless of anyone’s background.

Now as for the cons, there is one that comes to mind: efficiency. Indeed when looking at cryptocurrencies, the Proof-of-Work mechanism may work well, but isn’t per say the most efficient way to handle transactions. As a matter of fact, a point of discussion for Bitcoin has been how it’ll scale once mass adoption is within reach. Thankfully there are ways to work around that – such as the lightning network – though it is something to consider.

At Ledger, we strongly believe in the decentralized prowess of cryptocurrencies. We see how it’s a catalyst for bringing power and financial freedom back to individuals. Indeed, thanks to the decentralized nature of crypto assets, you can take back control of your own, hard-earned money.

Keep learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block video Can We Go Decentralized?