Advantages of Decentralization
Decentralization is the core feature of blockchain technology. In a decentralized network, all network participants share control over the network and make joint decisions through consensus.
For example, decentralized financial networks eliminate the role of intermediaries, removing the complexity and expense often encountered in traditional finance – think about all the fees required to open a credit card or hire a real estate agent.
Decentralization has the power to eliminate intermediaries, increase accessibility, and create an internet that is open, trustless, and secure.
What Is Decentralization?
When we talk about decentralization, we’re essentially talking about control and decision-making. Decentralization is a governing framework in which authority is distributed to all users.
The concept of decentralization was made popular by Bitcoin, a blockchain-powered cryptocurrency, and the first tangible, real-world example of a decentralized network.
The internet as we know it today - Web 2.0 - is centralized. A few entities dominate the internet and determine how consumers interact with it by using their products or services. The benefits of centralized networks include speed and affordability, while risks usually manifest in security and privacy.
Decentralization aims to take power out of the hands of the few and place it into the hands of many.
One real-world example of this concept is a co-op. Cooperatives or co-ops are businesses where ownership is shared by employees, customers, or both. A housing co-op, for example, is a residential building jointly owned by all of its tenants, versus one landlord or property management company. The responsibility to make decisions about the building is shared.
Advantages of Decentralization
There are numerous technical advantages of decentralization that have far-reaching implications for positive social impact.
Open and transparent
Blockchains are open-source ledgers that make it easy to inspect activity taking place at any point in time. While the data on the blockchain is transparent and anyone can view transaction history, it’s also cryptographically hashed to protect the identity of the person who made the transaction.
Impact: Decentralized networks provide unparalleled privacy, while still being fully transparent. A decentralized blockchain provides new ways to safely store information, make secure transactions, and redefine trust between two or more parties. This is especially pertinent if we think about how we store or share sensitive personal information online, like birth certificates, passports and ID cards, property deeds, court documents, and more.
Trustless environment
Trustlessness is one of the most significant advantages of decentralization. In Web 2.0, users rely on third-party intermediaries to facilitate interaction or verify the information for access. In a blockchain, the code provides the assurances, and interactions are peer-to-peer.
In blockchain networks, users don’t have to trust or rely on the intent of a third party to settle a transaction. Instead, both parties trust the technology to verify and complete the transaction based on a consensus algorithm.
Data consensus is a key differentiator between decentralized and centralized networks because it requires agreement from multiple network participants with equal decision-making power.
In a centralized finance model, your money is held by banks and other third parties. For example, every time you make a purchase using your credit card, the charge goes from the merchant to your bank, then to the credit card network, then back to your bank which approves the charge. This process usually takes a few days to complete and each instance usually incurs a fee.
In a decentralized finance model (DeFi) on a blockchain network, you can send money to your friend anywhere in the world in seconds, without unnecessary transfer fees or long processing times, because the transaction doesn’t have to be approved by multiple intermediaries.
Impact: Transacting in a trustless environment alleviates the reliance people have on centralized authorities like banks, and the high fees associated with them. Additionally, trustless environments have implications for eliminating the bias that many traditional institutions use to determine who gets access to a bank account, and who does not.
No single point of failure
Centralized networks rely on centralized servers. When these servers fail, websites like Facebook and software that powers critical services like ATM machines, shut down until the issue is fixed.
Decentralized networks, on the other hand, rely on many connected servers and computers called nodes. Nodes share, transact, and verify information on the network. Even if the majority of these nodes fail, the remaining nodes absorb that workload so users can still access the network and its applications.
In short, decentralization means the network can be rebuilt even in the case of system failure, which is vital to maintaining undisrupted access to these networks at all times.
Impact: If access to networks and systems is secure and dependable at all times, money, goods and information can move faster, which is productive for the global economy.
Increased security through data immutability
From a technical standpoint, the blockchain is an immutable database, meaning the information in the database cannot be altered after it has been entered. How does this work?
The blockchain is made up of unique blocks of data, that are chained or connected to each other by their hash value. A hash value is a unique identifier each block uses to reference the block before it in order to complete a transaction or verify information.
If someone tries to change the content in a block, the hash value also changes. This renders the old hash value obsolete and breaks the connection.
As mentioned earlier, blockchains also use consensus mechanisms to determine the truthfulness of data. Consensus refers to a group of anonymous nodes coming to a common agreement which becomes the source of truth for the blockchain. Once these transactions are verified by consensus, records are permanent and extremely difficult to modify.
Impact: No one can change data after consensus has been reached, meaning all users on the network can trust it. There’s no probable chance that someone can falsify past records for their benefit, and it is easy to identify fraudulent activity. This is important to combat current issues like identity theft that have become rampant in a digital world.
Disadvantages of Decentralization
While there are numerous benefits of decentralized networks, the technology is still in its infancy. As a result, there are challenges in applying it to mainstream use cases at scale, and widespread user adoption is slow.
Adoption is low
While many might be familiar with terms like decentralization, blockchain, and Web3, user adoption is still low. Blockchain technology is highly complex, and the user experience is still clunky, which can discourage new participation.
Technology is not mature
Blockchain networks offer many benefits, like decentralization, scalability, and security. However, in its current state, all three are difficult to achieve at the same time, hindering operational efficiency.
More nodes contribute to a network that is slower but more secure, while fewer nodes power a faster, less secure network. With fewer nodes running consensus, the blockchain becomes vulnerable for hackers to infiltrate.
High cost and energy consumption
Many blockchain technologies utilize a proof of work (PoW) consensus mechanism to secure transactions. This consensus mechanism requires members of a network (called miners) to essentially solve a mathematical puzzle to arrive at a consensus. PoW requires a lot of computational power, and as a result, it’s resource- and energy-intensive.
Conclusion
Blockchain technology enables people to build a censorship-resistant, digital history that can be accessed anywhere, at any time, no matter their background or socioeconomic status. This is possible because a blockchain is decentralized and users are pseudo-anonymous. There is no central authority acting as the gatekeeper to accessing our own information, or determining how we use it.
The trust within the network is achieved through decentralization: every user always has access to the most current version of the blockchain. If someone tries to alter the data, the majority of participants will reject those efforts. In a decentralized network, users have full control over their identity and data, in a transparent, open and secure environment.
To see an example of decentralization in action, read our article on decentralized finance. Have any questions? Join us in our Discord community or subscribe to the newsletter below.