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Ask CryptoVantage: Why is Decentralization So Important to Crypto?
Even though decentralization has become a buzzword of the decade, there is no denying that it is one of the biggest factors driving crypto adoption. Even the invention of Bitcoin is a result of the many frustrations inherent in the centralized financial systems of the world.
Simply put, decentralization is the idea that there is no central governing body or authority in any organization or system. Instead of a single administrator running the show, everything is built on a platform whose participants operate on an equal footing. In theory in replaces the top-down corporate structure of something like JPMorgan or Wells Fargo with a more democratic solution.
When it comes to cryptocurrencies, decentralization is important as it enables the realization of three main benefits: security, equality, and freedom from censorship. But first, how does decentralization work?
How Decentralization of Cryptocurrencies Works
Instead of having a central server keeping records of every transaction, cryptocurrencies depend on a distributed network of servers controlled by disparate and independent individuals.
These servers are called nodes, and the distributed ledger platform they operate on is called the blockchain. The blockchain, therefore, ensures every server or participant in the distributed network has possession of an identical ledger of transactions.
The servers or participants in the network communicate with one another on an ongoing basis to agree on a system they can use to update the ledger as more transactions occur on the network. All this happens on an interconnected network of servers distributed across various geographical locations instead of a single server.
Security
When it comes to anything finance-related as is the case with crypto, security should remain a top priority. For this reason, the fact that cryptocurrencies operate on a decentralized framework means that there is no central point of failure as is the case with national currencies that are protected by centralized banks.
Essentially, a decentralization ledger of crypto transactions on the blockchain works to preserve data integrity such that even if one node or computer in the network gets hacked, the other nodes connected to the network can quickly identify the flaw and ignore the compromised transactional ledger.
In a centralized system, bad actors can easily corrupt the data on the centralized database and succeed in manipulating the entire system to their advantage as long as they gain control of the central server.
However, just because decentralization adds to the security of cryptocurrencies does not mean it works the same in facilitating data privacy and anonymity. The fact that transactional data is stored on a decentralized network means that every node on the network has access to that data, as is the case with public blockchains. Centralized ledgers, on the other hand, can achieve data privacy much easier.
Equality
Bitcoin and the crypto industry at large emerged as an alternative to traditional finance, which has grown to marginalize most people who lack capital.
Decentralization sought to solve this problem by promoting inclusion and equality. If the world’s finance system is controlled by a few powerful individuals at the top, then the system will work to the advantage of the few.
Decentralization breaks this status quo with a financial system built for the people where the community of participants gets a vote on how the platform should evolve. Bitcoin, for instance, is built on a decentralized ledger technology that allows anyone anywhere with an internet connection to be their own bank.
Freedom from Censorship
Power corrupts, and absolute power corrupts absolutely. This is true for centralized financial institutions as well. For instance, banks and centralized payment platforms such as PayPal can reject or withhold your transaction as long as it violates their rules.
The rules they formulate are based on their policies and points of view. For instance, if you receive funds from another user who lives in a region that does not adhere to the rules of a centralized payment platform, your funds can be withheld for various reasons with no recourse on your side. Bitcoin and other cryptocurrencies, on the other side, operate on a censorship-free platform where every user is in total control of their wallet and funds.
Conclusion: Crypto Runs on Decentralization
Decentralization is a critical part of cryptocurrencies and what makes them tick. With increased adoption, even traditional centralized institutions are starting to realize the benefits of decentralization, especially through blockchain technology.
Decentralization ensures that there is no central point of failure, no single authority with total control over user funds, no censorship of transactions, and most of all, equal opportunities for every participant on the network.
