What is Decentralization?

Decentralization is a popular buzzword when discussing cryptocurrency. But do you really know what it means and why decentralization is important?

What does DECENTRALIZED mean?

Decentralization is the degree to which a system does not have central controlling authority. In a decentralized system, decisions are made by the individual participants. In a centralized system, decisions are made by a few.

Traditional companies are centralized. They have a CEO who has overall decision making responsibility for the company. Governments are centralized and concentrate decision making at their capitals by a few people. A human being is a centralized system which is largely controlled by the brain. Centralized systems are generally organized in a top-down hierarchy.

The classic example of a decentralized system is a “free market.” For example, there is no central authority controlling the design, distribution, and sale of shoes. Nike, Reebok, Adidas and countless other companies are free to design and sell shoes however they wish. There are many players involved, but no overarching authority controlling them.

How is this different from Distributed?

The words decentralized and distributed are often confused. While decentralized refers to lack of a controlling authority, distributed refers to how work is done. If work is done by multiple entities then the system is distributed.

Centralized systems can be distributed. Coca Cola’s HQ is in Atlanta but they bottle Coke in locations around the world. If Coke decides to launch a new flavor, that decision is made centrally and then communicated out to locations worldwide to be implemented.

Decentralized systems aren’t necessarily distributed, but usually are. It is possible that a small decentralized system of a limited number of players has no distributed functions and each entity performs a unique function. Lack of distribution could reduce decentralization if it concentrates decision making power. But because decentralized systems are voluntary, additional entities are able to join the system and offer similar or same functionality.

In essence a decentralized system has distributed decision making. Additionally, if functions are distributed (and duplicated) then the system has no single point of failure. A decentralized and distributed system has no single point of failure.

What are key features of decentralized systems?

Decentralized systems can have the following properties compared to centralized systems:

Higher level of redundancy —

Harder to change —

Harder to attack —

More expensive —

Less efficient —

So why does Decentralization in Cryptocurrency matter?

Decentralization is a “good thing” for cryptocurrency (i.e. money) because a controlling authority is a single point of failure / attack and you don’t want your money susceptible to that. Without centralization, it is much more difficult to change the rules of the game, attack the system, or censor transactions.