Some of blockchain's most ardent proponents aren't as passionate about the benefits of decentralisation as regulators. Every blockchain has its own architecture, rules, and members, which makes it difficult to regulate in a massive network of independently controlled nodes. When you consider that most government bureaucrats have a serious crypto-knowledge deficiency, it's easy to see why blockchain experts are now worth their weight in Bitcoin.
But the decentralisation of cryptocurrency is for far more than the headaches it causes regulators.
Cryptocurrency decentralisation vs. centralization
A cryptocurrency is a form of digital currency that employs cryptography to protect and validate transactions in a decentralised and immutable ledger known as blockchain. Decentralization is one of the most lauded characteristics of cryptocurrencies. The degree of decentralisation varies among cryptos. Decentralisation refers to the fact that the currency is not controlled by a single individual.
The majority of our society's institutions revolve around a central figure. Let's stick with central banks for a moment to stay on familiar ground. A country's currency can only be printed by its central bank. As a result, it is in charge of monetary policy, and although it often collaborates with the government, there is no guarantee of its infallibility. Central banks, like all human entities, are susceptible to errors and poor decisions.
Such problems do not exist in a decentralised cryptocurrency. They don't have a single body in charge of the network because it's decentralised, and it's run by consensus protocols that all participants agreed to follow.
It's easy to see why hackers like it when a device is controlled by a single person because it typically means there's a single point of failure.
A distributed system is similar to a decentralised system, but it has the additional advantage of replication across many machines to keep the network operational. These distinctions, however, are relative.
Stellar, a highly decentralised, blockchain-based alternative to conventional banking, is available in the cryptocurrency industry. However, you can have Ripple, which is also seen as a viable alternative to current banking infrastructure, but with a network that is relatively centralised, with Ripple Labs controlling the majority of nodes.
Types of cryptocurrency decentralisation
Vitalik Buterin, the creator of Ethereum, one of the most common decentralised cryptocurrencies, has defined three decentralisation paradigms to consider when dealing with this grey area.
There are three types of decentralisation: architectural, political, and logical. Architectural decentralisation refers to the physical aspect of a network; political decentralisation refers to who controls the system; and logical decentralisation refers to the network's design and efficiency.
Cryptocurrencies come in a variety of forms, but the blockchain technology that underpins them is primarily political yet architecturally decentralised and logically centralised. The ledger is spread through the network's nodes, and no one party has power over it; however, all nodes must follow the same protocols.
What are the advantages of cryptocurrency decentralisation?
The perfect deterrence is decentralisation. There is no single point of failure in a network that does not have a single controlling body. The higher the cost of hacking a network, the more decentralised it is, as gaining control of more than half of the machines will be extremely expensive. It also uses security protocols to prevent collaboration among potentially malicious nodes.
However, imagine for a moment that a decentralised network might be hacked logistically. If a well-funded group of the world's most skilled hackers took control of a cryptocurrency's blockchain, the value of that cryptocurrency will instantly collapse because it would no longer be regarded as a reliable store of value.
A common blockchain-based cryptocurrency has a network made up of thousands of (mostly) independently owned computers, all of which have the same version of the decentralised, distributed ledger of transactions. This built-in safety mechanism means that a computer can theoretically be removed from the network without causing any damage.
Proof-of-work blockchains, on the other hand, are more vulnerable to the centralisation of nodes in mining pools controlled by a single party, while proof-of-stake blockchains guarantee that all managing nodes have a vested interest in behaving well.
Last but not the least,
It's worth noting that the principle of decentralisation, as well as its many different implementations, is still being tested. While the advantages are clear, there is no denying that there are issues, both in terms of regulatory threats and technological advancement.
Which means the challenges that decentralisation poses must be resolved in order for the sector to flourish with institutional investment and renewed faith in blockchain and cryptocurrency's technological potential.
