Decentralization is the process of distributing and dispersing power away from a central authority. Most financial and governmental systems, which are currently in existence, are centralized, meaning that there is a single highest authority in charge of managing them, such as a central bank or state apparatus.
There are several crucial disadvantages to this approach, stemming from the fact that any central authority also plays the role of a single point of failure in the system: any malfunction at the top of the hierarchy, whether unintentional or deliberate, inevitably has a negative effect on the entire system.
Bitcoin was designed as a decentralized alternative to government money and therefore doesn’t have any single point of failure, making it more resilient, efficient and democratic.
Its underlying technology, the Blockchain, is what allows for this decentralization, as it offers every single user an opportunity to become one of the network’s many payment processors.
Since Bitcoin’s appearance, many other cryptocurrencies, or altcoins, have appeared, and most of the times they also use the Blockchain in order to achieve some degree of decentralization.
Benefits of decentralization
· Provides a trustless environment
In a decentralized blockchain network, no one has to know or trust anyone else. Each member in the network has a copy of the exact same data in the form of a distributed ledger. If a member’s ledger is altered or corrupted in any way, it will be rejected by the majority of the members in the network.
· Improves data reconciliation
Companies often exchange data with their partners. This data, in turn, is typically transformed and stored in each party’s data silos, only to resurface when it needs to be passed downstream. Each time the data is transformed, it opens up opportunities for data loss or incorrect data to enter the workstream. By having a decentralized data store, every entity has access to a real-time, shared view of the data.
· Reduces points of weakness
Decentralization can reduce points of weakness in systems where there may be too much reliance on specific actors. These weak points could lead to systemic failures, including failure to provide promised services or inefficient service due to the exhaustion of resources, periodic outages, bottlenecks, lack of sufficient incentives for good service, or corruption.
· Optimizes resource distribution
Decentralization can also help optimize the distribution of resources so that promised services are provided with better performance and consistency, as well as a reduced likelihood of catastrophic failure.
What Is Decentralized Currency?
Decentralized currency, peer-to-peer money, and digital currency all refer to bank-free methods of transferring wealth or ownership of any other commodity without needing a third party. Most centralized, and some decentralized, markets use fiat currency — or physical money issued by a central bank, like U.S. dollars. Decentralized currency is used primarily in the virtual markets. Two examples of decentralized currency are bitcoin — the “coinage” used on the Bitcoin platform — and ether — used on Ethereum.
Advantages and Disadvantages of Decentralized Markets
- Some believe that decentralized markets can greatly reduce hackers because there is no single data resource that they can attempt to infiltrate; though recently this has been proved untrue.
- Decentralized markets can allow for transparency between parties, especially if they use technology that ensures all parties share mutually agreed-upon data and information.
- Many users of the decentralized virtual markets perceive their lack of regulatory oversight as a benefit — or, freedom from third-party handlers.
- The absence of intermediaries could result in lower transaction costs than in markets that are regulated.
- A disadvantage of this lack of oversight, however, might be that there are no governing authorities to monitor transactions, offer assistance, or provide a legal framework.
- As more financial transactions are conducted via decentralized markets, they can pose challenges for regulators and legal enforcement. In comparison, centralized markets give regulators a clear path for taking action, if necessary, regarding trades that might be suspect.