Mensholong is an experienced crypto and blockchain journalist, now a full-time writer at Techopedia. He has previously contributed news coverage and in-depth market analysis to…
Decentralization is the transfer of power, authority, control, and decision-making away from centralized entities to a larger distributed network.
Decentralized networks aim to create a trustless system where the level of trust needed between network participants is minimal. A trustless system is fostered by distributing decision-making and resources among numerous participants, averting the risk of a small number of bad actors taking control of the network.
The concept of decentralization is a complex multifaceted one. It can come in various forms:
Here, we will be focusing on the definition of decentralization in blockchain and cryptocurrencies.
Decentralization is a core philosophy in the blockchain and cryptocurrency world. To learn why decentralization is important to public blockchains and cryptocurrencies, we need to understand why Bitcoin was created.
Bitcoin is the oldest and the most valuable public blockchain network in the world. It was created by the pseudonymous Satoshi Nakamoto to be a decentralized peer-to-peer (P2P) payment network powered by blockchain technology. The Bitcoin whitepaper was released in October 2008 in the midst of a recession that was blamed on banks for giving out and repackaging subprime loans.
Users can transfer funds and make payments without going through a financial institution via the Bitcoin network. The blockchain is not owned or operated by a single entity. It is kept decentralized via a network of operators called ‘miners’ who run the network by processing and validating transactions. There is no recruitment process to become a miner. Anyone with Bitcoin mining hardware and operating funds (mostly to pay for electricity) can choose to become a miner.
Core principles of decentralization – autonomy, transparency, censorship-resistant, and privacy – are at the heart of Bitcoin, Ethereum, and most other public blockchains. These public blockchains operate as open networks. Anyone with an internet connection can access the network and its ecosystem of applications built on them.
Public blockchain networks aim to keep their operations decentralized via:
Decentralized finance (DeFi) is a revolutionary field of applications of blockchain technology that aims to disrupt traditional finance systems. It looks to expand the use of decentralized public blockchains beyond peer-to-peer payments. By leveraging smart contract technology, users can now perform any number of financial actions, such as staking to earn interest, borrowing and lending funds, and more on public blockchain networks.
Ethereum pioneered the technology that enabled DeFi – smart contracts. They are self-executing computer programs that developers use to launch tokens, create NFTs, and build decentralized applications (dApps) that operate autonomously. These applications operate on the principles of transparency, immutability, and trustlessness, giving users full control over their funds and financial activities.
With DeFi, users do not have to go through credit score verifications and other lengthy formalities to take out a loan. Foreign remittances are made quick and easy as users do not have to depend on a network of individual banks and payment systems to send and receive funds. Trading of cryptocurrencies is made available 24/7 via decentralized exchanges (DEX).
The narrative around achieving decentralization via public blockchains and cryptocurrencies has been engraved in our heads over the last decade. But the concept of decentralization is a complex one. Even the top public blockchains like Bitcoin and Ethereum face questions about the extent of their decentralization.
Public blockchains continue to be tormented by the dilemma of choosing mass scale or true decentralization.
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Mensholong is an experienced crypto and blockchain journalist, now a full-time writer at Techopedia. He has previously contributed news coverage and in-depth market analysis to Capital.com, StockTwits, XBO, and other publications. He started his writing career at Reuters in 2017, covering global equity markets. In his free time, Mensholong loves watching football, finding new music, and buying BTC and ETH for his crypto portfolio.
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