Centralisation vs Decentralisation

Decentralised technology offers us greater freedom and equal access, but this always a good thing?

Team Luno
Team Luno
Dec 10, 2018 · 5 min read

Many important parts of our world are decentralised. The internet is decentralised. Subcultures and cultural movements are decentralised. Languages are decentralised.

And the Blockchain, arguably the most significant new technology since the internet, is decentralised. That’s one of the reasons why it’s such a significant development.

What is decentralisation?

Decision-making is collaborative, with everyone involved able to vote for their preferred option. By contrast, centralisation means something is owned and controlled by a single authority which makes all the decisions.

Centralisation can be seen as problematic because the centralised authority is incentivised to act in their own interest, not the interest of everyone involved.

That doesn’t mean their intentions are inherently malicious, but it can create problems. When one person or group makes all the decisions, it also means those with different or more creative perspectives aren’t heard.

Decentralisation and Bitcoin

The Bitcoin Blockchain is made up of a network of ‘mining nodes’ (computers that run the software), all connected to each other.

This is known as a peer-to-peer network. You can’t point to a single computer and say that it runs the Blockchain, only that it’s part of it. Together, the nodes form a decentralised network.

Every ten minutes, the network releases a new ‘block’ which contains a cryptographic puzzle. The miners compete to solve it and whichever node gets the right answer first, wins the new Bitcoin contained in the block. At the moment, the reward is 12.5 Bitcoin per block.

Alongside this, nodes also verify and confirm cryptocurrency transactions. Once more than 50% of the nodes in the network reach a consensus about transactions, they’re recorded. After this point, it’s impossible to modify a block.

The Bitcoin Blockchain belongs to everyone who uses it: the cryptocurrency users, miners, developers, companies and shareholders. They all have an incentive to do whatever it takes to protect and grow the network.

Seeing as it’s rarely in the true interest of any participant to attempt to compromise the Blockchain, there’s generally more to gain by playing along. If anything goes wrong, all the participants stand to lose.

Why is decentralisation important?

Decentralisation is one of the most significant features of Blockchain and one reason why it has the potential to have a huge impact on our lives. Not only does it serve as a mechanism for making digital currencies, but it also has the potential to serve other purposes that require data storage.

The way the Blockchain works makes it highly resistant to any form of tampering or modification. It’s not feasible for one node in the network to attempt to edit it.

Seeing as the Blockchain is public (although private Blockchains do exist), it’s also transparent as anyone can look at it. This opens up numerous possibilities for data storage.

For example, it could serve as a mechanism for online voting, free from voter fraud or tampering by corrupt governments.

Decentralised systems have no single point of failure, which makes them highly resistant to attacks and therefore arguably more secure than a centralised system.

Decentralised systems are inherently more secure than centralised ones, which is a big deal considering the high cost and impact of database hacks.

The democratic nature of decentralised systems incentivises everyone involved to support and nurture the network in the most beneficial way possible.

There’s no leader to tell people what to do or to make decisions. Instead, the community makes decisions using a consensus mechanism. A decision is made by consensus if it suits the best interests of everyone in a group, even if it isn’t everyone’s first choice.

Although not every member of the Blockchain network is ever likely to agree on the same solution to a problem, they should ideally consider the chosen option acceptable.

A consensus mechanism is a means of reaching that conclusion. The Bitcoin Blockchain uses proof-of-work for this purpose. Other Blockchains use alternate methods, such as proof-of-stake.

Decentralised systems can be cheaper because they cut out the third parties involved in many areas of our lives. Any fees go to those who run the network, not the middlemen who would normally take a cut wherever and whenever possible. And with fewer intermediaries comes greater speed and fewer delays.

This is especially exciting as a means of international remittance (sending money across borders), which currently can take days or even weeks and is hugely expensive.

That’s not to say decentralised systems are perfect.

One of their main flaws is that it can be difficult to coordinate decision making, leading to conflict between members of the network.

This happens all the time in the Bitcoin network when debates over changes to the software divide the community.

Another issue with Bitcoin is that a small number of mining pools make up the majority of the network. If they were to join together as one organisation, it would effectively centralise control.

In most areas of our lives, we’re used to centralised systems which tend to give each of us little power or influence over what happens.

At Luno, we still believe that cryptocurrencies are currently the best use of Blockchain technology and remain sceptical about many of the proposed uses, for which a traditional database would serve perfectly well at a lower cost.

However, we do see decentralised systems as the future and look forward to seeing new developments in the space.

Do you believe the future is decentralised? What aspects of decentralisation do you find most appealing?

Naspers

Naspers is a global consumer internet group and one of the…

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