Various aspects play into the success of cryptocurrencies, such as multiple use cases, network effects, marketing, underlying technology, and currency decentralization. The latter is important because it relates to the credibility of the network. Is Cryptocurrency Really Decentralized?
Therefore, many cryptocurrency investors make the decision to buy a currency based on the rate of spread of the currency.
But what exactly does decentralization mean in encryption? In this article, I will explain some of these things and show you which key indicators can use to analyze coins. Let’s explore further!
What is Decentralization and Why Is It Important?
Decentralization means that no single entity or only a few entities can control a system or process. Instead, control was distribute among all participants. Decentralization is important because it prevents central authorities from abusing power.
Decentralized Cryptocurrency, What Is Mean?
According to Vitalik Butlin, cryptocurrency device is place under:
- is there no single point of failure (decentralized construction).
- There are also individuals or individual organizations that control the entire system (political decentralization).
- The network can cut in half, and each half functions like a separate unit (decentralized logistics).
But. Is the system working properly?
Is Encryption Really Decentralized?
This depends on the situation and conditions in the market. While most of the currencies and applications in Crypto have run decentralized systems to some extent, there are also some coins that are more centralized or exist in closed systems.
If you want to evaluate the centralization or decentralization of cryptocurrencies, you have to consider many aspects: coin consensus mechanism, mining, distribution, and leadership structure.
I will use the following 4 cryptocurrencies as examples to explain these points in detail: Bitcoin, Ethereum, Litecoin, and Dash. I chose them because they are a large and mature network that can provide a lot of data for reference. But the following points also apply to other coins. And this discussion is not entirely correct.
1. Currency distribution
To get more rewards through PoS, validators don’t need to collect resources. Instead, they increase their shares and deposit more cryptocurrencies.
Why is this a PoS problem?
Depending on the nature of the PoS algorithm, a number of different validators are require to verify the new block. In theory, the largest stakeholders could join forces to launch an attack on the network. In the case of Ethereum, 67% of validators (roughly equal to the first 1,000 Ethereum wallets) must agree to complete the block. While this situation is unlikely to happen, nothing is impossible in the world of cryptocurrencies.
However, wealth distribution in Crypto is gradually becoming more really decentralized cryptocurrency. This is a good sign for users.
2. Node distribute
Node, among other things, maintain a consensus on the network and verify transactions most in demand blockchain technology. In other words, nodes guarantee the credibility of the network. But this is not all. To have a decentralized and robust blockchain, you want to have as many nodes as possible in as many different geographic locations as possible. This is to ensure that some players don’t gain too much control.
Obviously, mature cryptocurrencies have an edge here. The image below shows the approximate number and distribution of national nodes on the network Bitcoin, Ethereum, Litecoin, and Dash.
Therefore, investing in such cryptocurrencies will carry additional risks. Does this mean you only need to select coins with multiple knots?
Not really. Even if there are many nodes, it does not automatically mean that the blockchain is a truly decentralized cryptocurrency.
Pining Bitcoin and many other coins depend on the mechanism Proof of Work (POW). This means that in exchange for economic returns, miners run nodes on the network to verify new blocks.
However. Tasks that used to run on laptops now require some serious hardware.
Various mining pools form and combine mining resources to verify blocks more effectively and earn rewards. This results in the removal of many individuals and small miners. As a result, a small number of large pools control most of the hash rate.
4. Leadership structure
One of the most criticized aspects of the encryption project is leadership. This is because the core developer or CEO sets the direction for cryptocurrencies. Among other things, these leaders define the vision, roadmap, and token functionality to be implement. Famous examples are Vitalik Buterin from Ethereum or Charlie Lee from Litecoin.
To further illustrate this point, let’s take DeFi (decentralized finance) as an example. Other financial institutions Banks and hate DeFi for completely change the financial system. It decentralizes data storage, increases transparency, no permissions and no boundaries. Therefore, users are treated more fairly and receive faster service.
Although DeFi is architecturally decentralized cryptocurrency, when we look at the leadership structure, this is not the case. The DeFi project relies on the CEO and core team for a variety of reasons:
- Programmers and software engineers need to be paid for their work.
- Even if volunteers can contribute to a project on Github, they need capable people to assemble and test the code.
- Others with specialized skills and knowledge, such as marketers, are needed to move the project in the right direction.
- As projects develop, so do the needs for planning, coordination, and management. All of this needs to be coordinate.
For all this, relying on the community alone is not enough. Some form of centralized power is require. But the need for a leadership structure also opens the door to problems.
Although Crypto is far from ideal in terms of decentralization, it is already one of the important alternatives of choice for traditional and centralized solutions. It brings many interesting opportunities for users and investors.