The 2007-2008 prominent financial crisis started in the U.S. and later spread globally. This crisis and various other loopholes in centralised banking system lead to the birth of decentralised system.
Cryptocurrency, which operates on a decentralised network, was introduced to the financial sector with an aim to bring radical solutions — trust, transparency and speedy transactions, with the ideology of adoption as a global legal tender.
What is Decentralisation?
Decentralisation in the crypto market is distributing control to numerous computer systems across borders, recording and validating transactions through complex algorithms. Unlike the traditional financial sector that depends on the centralised system, cryptocurrency eliminates intermediaries.
Understanding decentralisation through different scenarios
Scenario 1: Centralised System
The centralised banking system is a system in which all banking functions are concentrated on one entity or institution.
Think of a conventional bank, where an authority handles all money transactions simultaneously. And one day, a hacker compromises the bank’s security or a rogue employee alters customers’ account statements. Out of nowhere, millions of people have lost their hard-earned money.
One single institution has all the power and it fails to stop the fraud or the entity may invest their money anywhere with uncalculated risks involved, without even getting prior approval from the customers.
Scenario 2: Decentralised System
Now imagine a system where every single transaction is recorded and verified by thousands of independent computers around the world at the same time. If someone attempts to make any amendment/fraud in the transaction, the network responds immediately to the tampering. The system is not controlled by any single authority.
It is an internationally distributed ledger, where all the participants can see and verify every transaction, but they cannot change anything. Even if one computer gets hacked, the network continues to operate efficiently. This technology enhances accountability and security.
Technical Mechanics of Decentralisation
Blockchain
Blockchain, of course, is one of the technical mechanics of decentralisation in cryptocurrency. Blockchain is a type of distributed ledger that facilitates digital records of transactions across a number of computers. Bitcoin operates on a peer-to-peer network, which is transparent, immutable and verified.
Block
When a transaction occurs, it gets combined with other related transactions to form a ‘block’. This block then goes through verification constraints. When validated, the block gets incorporated into a chain of blocks that already exist, thereby creating a time-stamping technique that provides high-level security.
Node
A crypto node is a computer connected with other computers that collectively run the blockchain network. The nodes occupy a sensitive position and can be considered the guardians of the network. When a new transaction is initiated, these nodes employ consensus methods such as ‘proof of work’ or ‘proof of stake’ to confirm it.
All the nodes have their own set of validations and work by cracking codes for each of the transactions.
Difference between Centralisation and Decentralisation
| Centralisation | Decentralisation |
| The fact that entire data is kept under one central authority makes centralised network more susceptible to data breaches and cyber attacks. Hackers can target and steal sensitive information easily. | On the other hand, decentralised network stores data on number of nodes. Because of this, hackers find it impossible or more difficult to crack the entire network. |
| In general, the centralised systems are more costly to install and maintain. This is because they need a sizable staff to oversee the network. | Decentralised system uses a network of nodes to carry out operations. It reduces the requirement to keep a sizable crew at one location. It is more flexible. |
| Centralised networks are slower. Even with heavy user activity, centralised system is concentrated on a single authority. | Decentralised networks, however, have the potential to be quicker. This is because, in a decentralised network, multiple network administrators can establish master nodes if user activity is high. |
Advantages of Decentralisation
Security
Cyber attackers find it difficult to attack or take control of a decentralised network, making it less susceptible to data breaches. The nodes can guard the network, allowing the system to continue functioning effectively.
Fairness and transparency
Clarity and transparency are guaranteed by the decentralised system. Blockchain is a distributed open ledger that operates on a peer-to-peer network which helps in preventing fraud and corruption.
Moreover, it guarantees that every participant has equal access to the system which is unlikely in the centralised system.
Growth
As decentralisation is a distributed network, it allows an autonomous approach to decision-making and management, which can lead to increased innovations and opportunities.
Disadvantages of Decentralisation
High Cost
Because decentralisation involves duplication of resources and efforts, it may result in increased cost. Organisations must set aside funds for technology, hiring of trained personnel and availability of physical facilities.
Regulatory challenges
Decentralised system can span multiple legal jurisdictions which can result in regulatory challenges.
Conclusion
In the crypto world, decentralisation refers to transfer of control and decision-making from a centralised entity to a systematic digital distributed network so that nobody can meddle with the transactions.
All the data in a blockchain is accessed in real-time by miners and investors, thus leaving no space for data loss or incorrect data.
This means that, over time, it reduces the risk of frauds, and hence increases the network’s security. Innovations, flexible regulatory policies and user education can boost the acceptance of decentralised cryptocurrencies globally.
Also Read: What is Bitcoin? Creation and Working
