Centralization vs. Decentralization: What's the Difference?
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Decentralization is one of the most important benefits of using blockchain, so it's critical that you understand the benefits it can bring to modern society.
In this guide, I'll start by explaining what centralization is as well as a list of its drawbacks. After that, I'll explain what decentralization is and how it's different. To make things easier for you, I'll give you some examples of different industries that can benefit from switching to peer-to-peer networks.
By the end of reading the article, you'll have all the information you need to decide which system you think is best.
What does Centralization mean?
Before explaining the exact meaning of centralization, I want you to think about some of the systems you use every day. Whether it's Facebook, YouTube, Twitter, your bank account, or pretty much anything else you use – it's all controlled by a centralized authority.
This means that in order to confirm a data transaction, a third-party intermediary must do so on your behalf. Let me explain this further with the example of Yahoo...
Imagine you want to send your friend a private message with funny photos from the party. You log into your Yahoo account, enter your email, upload photos, and then send them to your friend. At this point, think about what information Yahoo knows about you.
When you first signed up for an account with Yahoo, you were required to provide your personal information such as your full name, nationality, and date of birth. After that, every email you send is stored internally on Yahoo's centralized servers.
This means that you have to trust that Yahoo will keep all your data private. In addition, you should also trust that they will not use this data to their advantage, such as selling it to advertising companies.
Which, as we now know, can often be the case. In 2015, Yahoo experienced one of the biggest hacks of all time. A group of hackers was able to gain access to centralized servers, allowing them to view private emails on millions of accounts.
The reason why they were able to access all this information was that Yahoo uses centralized servers. If this central point is compromised, then the entire network is in danger.
To clarify, I have identified three main questions:
1) You have to trust that a centralized organization will keep your data safe.
2) They have complete control over the system and your data.
3) If core servers are compromised, data is at risk.
What is Decentralization?
Before giving you some real-world examples of the definition of decentralization, I thought I'd explain some of its main features. First, decentralization is made possible by the use of blockchain technology.
The world's first blockchain was the Bitcoin client, which was created in 2009. When someone sends Bitcoin to someone else, the transactions are not verified by a centralized authority. Decentralization allows you to do this.
Instead, anyone can connect their computer to the Bitcoin system to check the movement of funds. Each device connected to the system is called a "node," and in total, there are thousands of independent nodes that help manage the network.
This means that in order to breach the network, hackers need to take control of every node – this is almost impossible. This also means that blockchain is the safest and most secure way to send and receive funds.
However, it's important to remember that decentralization isn't just for financial transactions. As I'll explain below, decentralized systems can be used in almost any industry in the world!
The second thing to remember is that people don't need to identify themselves in order to interact with a decentralized system. They simply use a private and public key, meaning they can remain anonymous.
Third, the decentralized system (peer-to-peer networks) that runs on the blockchain is not controlled by any single group of individuals, nor is it supported by any centralized government or nation-state. Instead, control is fairly extended to anyone who wants to use the system. This makes society more just, as it takes control away from powerful corporations. The Yahoo server attack in 2015 might not have happened if the servers had been decentralized. Decentralization would make this impossible.
Centralization and Decentralization: Examples
Payment systems
An obvious starting point would be to talk about a global payment system, as this was the original idea of the world's first decentralized cryptocurrency, Bitcoin. Every bank in the world runs on centralized servers. This means that they have access to all of your financial activities.
They know how much you get paid, where you spend your money, who you send your money to, and everything else related to your bank account. Also, if someone is able to get your internet banking password, or worse, hack into the bank's centralized servers, they will have access to all this information. In the event of a centralized server failure (which happens all the time), you may be denied access to your funds.
When we compare centralized and decentralized, a decentralized payment system solves all these problems. When you use cryptocurrency to send or receive payments, you don't have to rely on a third party to confirm the transaction. This is why Bitcoin and some other cryptocurrencies are called "peer-to-peer digital currencies."
Since there is no requirement for a third party, the fees are substantially lower and in some cases practically free. This makes cryptocurrency ideal when sending or receiving a payment from someone in another country, as companies like Western Union charge large amounts.
Decentralized systems have no boundaries, so it doesn't matter if you're sending money to someone in your hometown or to someone on the other side of the world. It will take the same amount of time and the fee will be the same.
Your funds are also much more secure when using a decentralized system. The only person who has access to your money is you because you are the only one who has the private keys to access your funds. If you follow the right security measures, no one will be able to know what these private keys are.
Advantages:
- Lower fees
- More secure transactions
- No boundaries
Voting process
For the following example in this article "Centralization and Decentralization," I'm going to discuss voting. In most countries, governments are elected by their citizens in regular elections. The process must be simple, everyone must be given one equal vote, and it must be carried out in a fair and transparent manner.
However, even in the Western world, this is not always the case.
In the last elections in the United States at the end of 2016, Donald Trump from the Republican Party won, making him the new president. During the election, every citizen over the age of 18 had a chance to vote for the president they wanted, which is, of course, the fairest way to vote.
However, there were soon many media reports and conspiracies that claimed that the vote had been manipulated. There was even a full investigation into whether the Russian government manipulated the process in any way. However, since the public cannot access the voting data, there is no way for people to know if this is true or not.
There have also been times when governments have fraudulently won elections by manipulating votes.
One such solution to these threats is voting in a decentralized system. This system is transparent and will allow all voters to see where each vote is coming from and the legitimacy of each vote. This would ensure that people only get one vote and there would be no way to manipulate the decentralized government's voting system.
There is one cryptocurrency called VoteCoin that has created a cryptocurrency that will allow people to vote on a safe, secure, and anonymous platform, ensuring that the result is fair and transparent. I wonder how long it will be until the first vote on a decentralized government takes place on an application like this one.
Advantages:
- Transparent
- Secure
- Fair
Power engineering
Electricity is a human right that all citizens should have. Whether it's lighting a house, powering a stove, or just heating water, electricity is essential for all of us.
However, the current centralized system is anything but fair and peer-to-peer networks solve this problem.
The standard process works as follows: a private centralized organization acts as an intermediary between the citizen and the national network. The national grid is the infrastructure that connects people's homes to the electricity supply.
However, these centralized third parties choose how much they charge people, which means they make huge profits from something that should be classified as a basic human right. I'm not saying that electricity should be free, but there's no need for a centralized third party to charge us ridiculous prices.
One solution is currently being created – a decentralized organization called PowerLedger.
Using blockchain technology, they have developed a system that cuts out intermediaries. Here's how it works:
John has solar panels in his house and uses the electricity he needs.
John has extra electricity left which he plans to sell.
Usually, he has to sell it back to the electric utility company, but with the help of PowerLedger, he can sell it directly to someone else at a fair market price.
Its readings are published on the blockchain, ensuring that the process is fully transparent and secure.
As you can see, no centralized intermediary is needed.
This means that people with extra electricity can sell it to people who don't have electricity directly without using a third party. If PowerLedger is successful, people will get access to cheaper and cleaner energy and it will reduce the centralization of power.
Advantages:
- Cheaper energy
- Transparent transactions
- Reduced centralization
Internet of Things
The Internet of Things (IOT) is a new and exciting term that has emerged as a result of cryptocurrency and blockchain technology. In its simplest form, IOT is used to describe devices connected to the Internet.
In the early years of the Internet, only desktop computers could connect to the World Wide Web, followed by laptops and then mobile phones.
However, IOT takes it one step further, making it possible for almost any device to be connected to the Internet. Whether it's a washing machine, a car, a TV, or a bathtub, every physical device can be improved by being constantly connected to data.
All of the examples above currently exist in a centralized system. For example, you can now buy a car that drives itself. These driverless cars connect to the internet and can take you to your destination without you having to do anything.
However, this data is controlled by a centralized system. This means that if the system ever crashed, or worse, was hacked, the data that is sent to the vehicle could be corrupted. As you can imagine, this can be life-threatening.
Not only that, but the centralized company that manages the data also has access to all your information. They know where you've been, where you live, where you work, and what time you go. That's a lot of personal information that the centralized system has about you. Think about what they could do with this information... Sell it to advertising companies? Share it with insurance companies? Or, worse, give it to the government?
Moving IOT to a decentralized system will eliminate all these possibilities. All data can be stored on the blockchain and it will never reveal any personal information or be at risk of being hacked.
The driverless car example can be applied to every device in the world. This can make decentralized broadband, decentralized GPS, decentralized communications, and more! Here's a summary of the benefits that decentralization can offer the Internet:
Advantages:
- Increased security
- Greater privacy
- Reduced risk of data corruption
- Improved transparency
Impact on the Future
If you have read the guide on the subject, then you should now have a good understanding of the benefits of decentralization. Ultimately, it is about taking control away from the few (corporations and centralized governments) and transferring it to the masses.
Thus, decentralization will make everyday life safer, fairer, faster, cheaper, more transparent, and more anonymous. It is for this reason that I think in the next 10 years we will see more and more organizations become decentralized. However, it is very important to remember that if this happens, large corporations will fight back.
Inevitably, they will not want to lose what control they have, because if they do, they will not only lose money but also power.
This is where things get more complicated. First, centralized governments may try to enforce strict regulations on decentralized organizations, which means they may demand access to personal data. However, since decentralized systems are not controlled by a single entity, decentralized organizations may find it difficult to comply with their requirements.
Then, when it comes to large institutions, they may decide to implement their own technology that competes with their decentralized competitors. Since they have the financial resources, they can quite easily create a system like this that still gives them an element of control.
Some people are also concerned about quantum computing, which is an advanced computer that is being researched by NASA and the CIA. These quantum computers are expected to be so powerful that they will one day be able to control decentralized systems.
If this is the case, then decentralization may fail. However, various blockchain projects are already aware of this and are creating new protocols that could potentially prevent a “quantum attack.
Conclusion
And that concludes the article on “Centralization and Decentralization”! I hope you now possess a comprehensive understanding of how centralized networks operate and the drawbacks they entail.
Moreover, I trust you grasp the concept of decentralization and its capacity to address numerous global challenges. Although decentralized technology is still nascent, its potential benefits for contemporary society are vast.
One sector I believe stands to gain significantly from decentralization is government voting. Elections represent pivotal events globally, and empowering people with full control over them signifies a triumph in the centralized versus decentralized debate.
