Decentralization

Decentralization is not a new idea. When designing a technological arrangement, three basic network structures are commonly thought of: centralized, decentralized or distributed. While blockchain technologies often make use of decentralized networks, the protocol running on the blockchain cannot be easily classified.

In blockchain, decentralization is presented as the oversight and management transfer from a centralized association (an individual, corporation, or group of people) to a shared network.

Instead of centralized institutions setting direction and overseeing operations, millions of participants build a cryptocurrency network and manage it from the ground.

Centralization, decentralization, and distribution:
Many people refer to systems as centralized or decentralized, but these two notions are intertwined. For example, distributed systems spread data between multiple data centres owned by a network provider. These systems are decentralized because the data is not in one place, but also centralized because it is owned by a single company.

There are trade-offs between these network architectures. For example, centralized systems are faster and more scalable, while decentralized systems are more secure and anonymous. Ultimately, the right network architecture decision depends on the use case.

How to check decentralization:

You can check decentralization by looking at the number of nodes and the distribution of responsibilities between them. For example, Bitcoin has over 15 000 nodes, with the top five nodes controlling 52 % of the hash rate, making it highly decentralized. This makes it more decentralized than Litecoin with its 1 300 nodes and a 66 % hash rate control across three pools.

Decentralization differs between consensus mechanisms:
Proof of Work (PoW) – PoW decentralization depends on the nodes number, hash rate and hash rate distribution among the nodes. As more nodes join and the hash rate increases, the network becomes more decentralized and harder for individuals to disrupt.

Proof of Stake (PoS) – PoS decentralization depends on the number of stake pools or validators, the distribution of native asset between them and the staked asset supply percentage. As the percentage of staked assetsincreases, the network becomes more decentralized and harder to disrupt.

There are limits to decentralization in both approaches. PoW requires more and more computing power over time, which is more demanding for individuals to maintain. The result is greater centralization over time, as only larger entities can afford the increasing computing power demands.

PoS is not as financially demanding when expanding, but validators receive rewards proportional to their staked amount. As a result, the big players become even bigger over time. As with PoW, this can lead to a reduction of decentralization over time.

PROs

• Faster transactions
• Real-time confirmation
• Improves data recovery
• Reduces network failures

CONs

• High volatility
• Difficult for newcomers

Conclusion

Decentralization is the basis of cryptographic principles and their technologies. While it has its pros and cons, the community continues to work to decentralize everything from cryptocurrency trading to cryptocurrency management. Meanwhile, the crypto world is growing and moving closer to its centralized counterparts (banks, financial institutions).