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Ask CryptoVantage: What’s the Difference Between Decentralized, Centralized Crypto?

There are decentralized exchanges and centralized exchanges, decentralized finance and centralized finance, but what is the difference? Why do people like to point out a cryptocurrency’s decentralization or lack thereof?

Decentralization is one of the biggest tenets of cryptocurrency, the central control overseeing the network undertaken by the participants in the network rather than a small group of people or whales who control most of the supply. But what is the difference between a decentralized and centralized crypto and why does it matter if a digital asset is decentralized or not?

These are the questions we will answer in this edition of Ask CryptoVantage.

Central banks have started to introduce their own cryptocurrencies

The Issues and Benefits of Centralization

While centralization is generally considered a bad thing (at least among the crypto community), there are reasons it can be useful, such as being able to reverse or cancel transactions. But that same potential benefit can be a huge negative, and that is where all the issues of centralization center.

If someone has the power to stop a transaction that was sent mistakenly or illegally, that can be extremely beneficial, but if that same person decides to freeze the accounts of users on a whim and prevent them from accessing their funds, that is extremely detrimental. Similarly, if there are whales who control most of the supply that sort of centralization can lead to price manipulation. This is the crux of the problem, because not only does centralization mean the potential for bad actors, it also creates and bottles points of failure, and incentivizes greed, let’s look at Binance Coin (BNB) as an example.

Binance Coin (BNB) is a decentralized cryptocurrency in the sense that control of the asset itself is fairly widespread, however, the Binance Smart Chain (BSC) network is not, as it is only controlled by 21 validators, meaning just 21 accounts verify and process the transactions on the network.

This created a ton of issues when the network became congested, as the validators could not keep up, and the network fell behind by almost a whole day, with many transactions by users simply failing with no way to process them or even verify that they had been sent to the blockchain.

Also, because there are only 21 validators it is easier for hackers to pick their targets. If the network was spread across more validators it would allow for the network to be less congested, while also making it less vulnerable to malicious attacks, meaning further decentralization would help alleviate all the issues the BSC has been facing.

The Benefits of Decentralization

As you might expect, decentralized cryptocurrencies aim to solve these issues, and helping prevent points of failure is a huge benefit. In addition to making it less likely a hacker can target the network.

Decentralization also tends to allow for a greater transaction throughput and more transactions per second. The end goal of decentralized cryptocurrencies is to create a network where all participants can contribute to the infrastructure of the network while also ensuring its security. Let’s look at Cardano (ADA) as an example.

Cardano (ADA), has reached the point of full network decentralization, meaning that all of the blocks processed on Cardano are produced by random nodes/validators around the world, and none of them are produced by the creators. This was done over time, as originally Input Output Hong Kong produced a portion of the blocks, but it was always designed to reduce over time until they were no longer producing any of the blocks, a goal that was reached in early 2021.

Cardano now has over 1000 nodes being run around the world by stake pool operators, and with the Hydra layer of Cardano that scales as nodes are added, it means that Cardano is already able to process a million transactions per second, and do so through a completely decentralized network.

In order to attack Cardano you would need to have 51% of the network stake, but the caveat to that is that over a certain threshold you receive diminishing staking rewards, meaning that users are incentivized to not join a pool with a large stake already there. It would require a ton of coordination by thousands of people, and the reality is what would be the incentive to attacking your own investment? That is what makes decentralized cryptos attractive for the future.

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About the Author

Evan Jones

Evan Jones was introduced to cryptocurrency by fellow CryptoVantage contributor Keegan Francis in 2017 and was immediately intrigued by the use cases of many Ethereum-based cryptos. He bought his first hardware wallet shortly thereafter. He has a keen and vested interest in cryptos involving decentralized backend exchanges, payment processing, and power-sharing.

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