Around the blockchain sphere, one debate keeps coming up: centralized versus decentralized systems, networks, exchanges, you name it. But what do these concepts mean exactly, and how do they apply to blockchain technology and cryptocurrency? We’re going to take them one by one and learn how they work and why they are so important. Let’s not waste any more time and cut to the chase:

What is a centralized network?

Centralized networks rely on a central authority to function. This central authority is the one that governs the entire network and makes sure that it runs properly. Third parties are involved as a way to verify the data, and users are never in complete control of the network, as control always remains in the hands of the central authority.

Most systems and platforms we interact with every day are centralized, from Social Media platforms to streaming services or even the financial institutions we use. The main advantage of a centralized network is that it’s easier to use, but the disadvantages are many and outweigh the benefits. When a central server stores all information, the whole network is vulnerable to a single point of failure. It’s also more prone to hackers and data leaks. Even though centralized systems seem to have more cons than pros, they are still widely used by many companies and organizations.

Decentralized networks - the future

Let’s take a moment to thank blockchain technology for making decentralization possible. Decentralized systems appeared in 2009 together with the launch of Bitcoin and the blockchain tech to support it.

In a decentralized network, there is no need for a third party to validate the transactions or ensure that the whole system works. Users have complete control over the network, and transactions are validated via different consensus mechanisms ( Proof-of-Work, Proof-of-Stake). This ensures transparency and openness, as anyone can verify the transactions if they want to. Data shared through a decentralized network is immutable; it can’t be changed or altered, and it’s very hard to hack. There is no single point of failure like in centralized networks.

Real-life use cases

The easiest way to further explain these two notions is to look at some uses cases for both centralized networks and decentralized systems:

Payment systems

Banking systems all work on centralized infrastructures, meaning they have access to all the data shared with them and control one’s assets. When all the information is stored on one server, it’s easier to hack and manipulate. With traditional financial institutions, you run the risk that you won’t be able to access your accounts if the centralized servers get compromised.

Cryptocurrencies run on decentralized networks on a blockchain, eliminating all the concerns one might have with a centralized system. Such a payment system requires no third party to validate the transactions between two users, thus having lower fees and stronger security features. No one can access your funds, as no one besides you has the private keys required for access.

Energy

Electricity can also be a use case for decentralization. Current centralized systems run on an infrastructure that allows an intermediary between the consumer ( the citizens) and the national electric grid. These third-party entities control the price of electricity, deciding how much to charge people and when to raise the prices.

A decentralized solution is already in the works, one that would allow to remove any third-party involvement and ensure a fair price for both the seller and the buyer. Decentralized energy refers to energy generated off the main grid. It includes micro-renewables, heating and cooling, combined heat and power, and geothermal or solar energy. This system will allow better use of renewable energy, increase eco-efficiency, and cut fossil fuel use.

Distributed networks- the in-between

Decentralized and distributed networks are not the same thing. A distributed network does not rely on a single central server. The data and decision-making is split equally between servers.

The main difference between the two networks is that distributed systems can become centralized networks. If a quick system administration must be done from a single server, that is possible within a distributed network. Another example of a distributed network can be a physically and geographically dispersed network with a top-down node power scheme.


Decentralized systems seem to be the future solution, here to solve the issues that their current counterparts encounter. We are still in the early days of decentralization, so it’s not a concept widely implemented, but we are fairly certain that more and more institutions will adopt it in the upcoming years.


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