Although the nature of blockchains is to be decentralized. Not all blockchains are. Some are centralized and some are decentralized. With a lot of debates going on these days about whether or not some blockchains are decentralized enough. And if that will cause some problems along the way.
What is Centralization
Centralization simply means that the control of any system or organization lies in the control of one entity or person. This gives a control point of control which might sometimes be useful to make fast decisions.
For example, the decision of what you will have for dinner tonight might be better taken by you alone than by everyone in your neighborhood. Because if you would actually ask everyone about what you should eat that night. The probability that you will eat that night will be very very small as it will take too much time. Centralization is simply good for fast and efficient decision-making.
What is decentralization
When it comes to more important decisions we might want to decentralize a bit more. This means we want that decision to not be made from one central point. The benefit is that you would not have one point of failure and you also include more people.
A democratic government for example is decentralized decision-making with a centralized form of control. When it comes to serious things like our money for example we would not want this to be controlled by one single organization that could make mistakes, like printing so much money that we have super high inflation.
Having a decentralized money type would prevent this as everyone in the system would have to agree to high inflation before that would happen. But no one would likely vote on high inflation. So it wouldn’t really occur.
Different levels of Blockchain decentralization
There are many different blockchains already that all have their own purpose and also their own unique blockchain-based system under them. Because each of these blockchains has its own properties, they also have their own level of decentralization.
Decentralization with POW
Let’s first look at a POW (Proof of Work) blockchain like Bitcoin. Bitcoin makes its system decentralized by giving everyone the option to put in the work (electricity) to validate transactions. This is nice as it brings in a profit for miners if done right. Mining BTC however becomes more and more difficult making it not a profitable thing for everyone anymore.
However, besides mining, the Bitcoin network also allows its users to be part of the network in another way. This is by holding a copy of the public ledger and sharing this with all others on the network. Holding a copy like this gives you control of all the transactions and will allow the node (node is a copy of the ledger that is online) holder to have a copy of all the data saved on the Bitcoin network.
Nodes are essential as they hold the data that makes up the network. So having a node also equals having a vote in the network as they can choose whether they support this network or another.
The last thing how users decentralize Bitcoin is by holding coins themselves. As the whole system uses encryption it is not possible to just take coins out of one account without owning that account (having access to the private key). Even if a transaction would be denied by a certain miner they would not have the option to take the funds. The control over the funds will always be in the hands of the owner.
Decentralization with POS
POS (Proof of Stake) is another consensus mechanism that some blockchains use. Ethereum for example will move or might already have moved to POS when you read this.
POS uses a blockchain but does not mine. POS uses a staking validation method. This means that people that want to validate the network’s transactions and store the data need to lock up a large number of the network’s tokens. This will reward them with transaction fees and sometimes also some token inflation (depending on the network).
A POS network can be very decentralized but it could also not be. This really depends on the number of validators the network has. For example, many blockchains like BSC only have 21 validators. Although they are trying to increase this at the moment. Having a low number of validators, however, makes a blockchain network more centralized and thus more at risk of being shut down. Besides that, the number of tokens one holds will function as a vote in the network. Making it so that large token holders could take control if they would like.
Can Bitcoin move to POS?
How decentralized should a blockchain be?
Although there are different levels of decentralization for blockchains. Some models might be better for one use case and not for another. As each model comes with its own benefits like speed, decentralization, cheap transactions, etc.
When it comes to a blockchain that needs to represent a currency and store of value. A model like Bitcoins might be the best. But in cases like other more smart contract focussed blockchains, this might not be necessary. As it is more important to make the network more advanced faster and thus a little less decentralized.
Are crypto tokens decentralized?
We do have a lot of different blockchain networks that all have their own level of decentralization. But what about the crypto tokens?
Well, crypto tokens are tokens that live on top of another blockchain. How centralized that token is, depends thus almost fully on the underlying blockchain. But besides that many tokens are also controlled by the contract creator. Making it so that they can freeze transactions etc.
Check out how to find Ethereum contracts here!
This is the case for many stablecoins like USDC and USDT. Their contracts are controlled by the creators of both stablecoins. In this situation, it is actually good, as they need to be able to abide by the law and interfere in transactions whenever needed. But for other tokens, it might be better if the control is held in a different way.
Some tokens do this by having a DAO (Decentralized Autonomous Organization). These are basically the owners of the token contract and make it possible for token holders to vote on proposals and upgrades to the token. For now, this is the most decentralized it gets when it comes to crypto tokens.
Looking out with centralized tokens
Whenever you’re using a centralized token, always be sure who is behind it. As you do not want to risk holding a token that can be inflated like crazy by the contract creator. This has happened before to many people. And is one of the most common ways people get scammed in the crypto industry.
Luckily, we can solve this with DAOs and on-chain governance. So always make sure that the contract is either created by a trusted party or has a way of decentralized governance attached to it.
Final word
I hoped this blog has taught you something more about the centralized and decentralized nature of the blockchain. And how both POS and POW have a different few on and take on decentralization. If you like this blog please check out our others and give us a follow-on Twitter.
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