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When Bitcoin introduced the world to blockchain technology, it started a global revolution. Blockchain technology provided a way to create decentralized systems for storing and transferring data.
Centralized and decentralized networks

Decentralization is seen as blockchain’s ultimate attribute as it has many advantages over traditional centralized systems for storing information. As Ethereum’s co-founder, Vitalik Buterin, once wrote: “it is extremely common for proponents of one protocol (or protocol extension) to claim that the opposing proposals are ‘centralized’ as the ultimate knockdown argument.”

Why is that so? And what does it even mean, if we say that a system is centralized or decentralized?

Centralized and decentralized network essentials

  • Centralized networks are controlled by a central authority.
  • Decentralized networks are usually controlled by the community or the users themselves.
  • Blockchains can be public (decentralized), private (centralized), or permissioned (a mix of the two).
  • Decentralization has safety benefits as well as ideological benefits

Differences between centralized and decentralized networks

In essence, if something is centralized, that means that there is a single entity with complete authority over the whole system.

Let’s take Facebook as an example. If you write a post, upload a photo, or share a video from a page, the data will go from your device to the Facebook server where it will be stored and redirected back to your followers. There is a central authority – in this case, Facebook – responsible for storing, processing and transmitting all data.

Decentralized, by contrast, means that there is no single entity controlling the system. Instead, the work and responsibility are shared by many entities. An example of this can be found in torrents. Torrents are based on a peer-to-peer principle. This means that if you download a torrent, you don’t download it from a single central server. Instead, you download it from other torrent users who have the file on their computers.

The major difference between centralized and decentralized networks is who controls the network. With centralized networks, one central authority has total control. Because of this, they can essentially run the network however they like. Decentralized systems are controlled by multiple entities, and no single person can tamper with and do what they want with the network.

Types of blockchains

Blockchains provide a mechanism for open systems to be stable and resilient. This is the basis that allows us to build reliable decentralized networks. It is important to note, however, that blockchains are not necessarily decentralized.

The technology can and often is used to build private blockchains. These blockchains are controlled by a single individual or company and are, therefore, centralized. A popular alternative to private blockchains are public blockchains, which are decentralized and open to anyone. These are the ones everyone is familiar with through Bitcoin and most other popular cryptocurrencies. There is also a third category with functionality that falls somewhere between the two, called permissioned blockchains. These are used because they make it possible to grant specific permissions to individual participants.

Most of the biggest cryptocurrencies use public blockchains. These benefit from decentralization in three main ways:

  1. Fault tolerance: Decentralized systems are unlikely to fail due to an accident because they rely on many independent components. It is unlikely that all these components would fail at once.
  2. Attack resistance: Decentralized systems are much more expensive to compromise or manipulate. This is because they lack sensitive central points that can be attacked. Attacking multiple points at once is much harder than hacking a single server.
  3. Collusion resistance: It is hard for participants in a decentralized system to act in ways that benefit them at the expense of others. A large group of them would have to band together (collude) in a sort of conspiracy.

These attributes make public blockchains a safer and more reliable way to store data than centralized systems. Beside these benefits, decentralization is an exciting concept for ideological reasons. It protects the rights of the majority of the network's users. This is important in modern society, where the majority of resources are controlled by a relatively small group of people.

To sum up, traditional currencies are controlled by a central bank. Cryptocurrencies, like Bitcoin, are controlled by everyone who is involved in the system. If you want to exchange some of your centralized money for decentralized cryptocurrency, you’re making a move that not only has security-related benefits, but also an ideological high ground.

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