If you’ve heard of cryptocurrency, then you have likely heard the word decentralized. No matter what you may think, not all cryptocurrencies are decentralized, however, it is an important aspect of cryptocurrency that we think should be prioritized.
So, what is decentralization, and why is it important? Read on to find out more and why you should care about decentralization in the cryptocurrency world.
What is Decentralization?
Decentralization is the splitting of control of a certain aspect between multiple entities. This is the opposite of centralization, in which one company or entity controls all. Decentralization effectively splits the power, ensuring that no one person can make changes based on personal desires.
What is Decentralization in Cryptocurrency?
Before we discuss decentralization in cryptocurrency, we need to discuss what centralization is and what it does for fiat currencies. Centralized currencies are those which are controlled by a single entity, or in the case of fiat, a single government.
While it is nice to leave the printing of money to the government, allowing them to shoulder the costs and distribution, you need to realize that this gives them complete control of the money source, and ultimately, your life. The centralized body governing your cash can do whatever they wish with it. They can print more (cause inflation), remove some from circulation, or even seize it from your possession.
This means that even if you have legally acquired currency, it doesn’t belong to you, in fact, it can be taken away or frozen at any time. In previous centuries, this was less of a concern, as governments had less control over everyday life. But in recent years, thanks to technology, the government has begun to pry into the lives of citizens, condemning them for actions that were once considered harmless.
As a result, the power of the everyday citizen has diminished. Even with the right to vote in some countries, the average individual is at the whims of their local government and there is nothing they can do to secure their future other than hope the government always acts in their favor.
Because of these increasing problems, individuals in the early 2000s want to create a currency that wasn’t controlled by the government. This would give them the power to secure their future and prevent the government from being able to take their funds on a whim.
In cryptocurrency, this decentralization is usually established by using a consensus mechanism, meaning instead of having one individual making decisions, everyone who uses the currency gets to vote on changes made to the blockchain.
While this is effective in decentralizing currency, not all cryptocurrencies are decentralized because with increased decentralization come increased security risks and volatility.
Why Is Decentralization Important in Crypto?
Decentralization is critical in cryptocurrency because, without it, all you have is another government-sponsored currency. But, unlike the government, which has checks and balances to keep things fair, a centralized cryptocurrency is usually run by a company or individual who may take away that cryptocurrency at any time, leaving you with nothing.
Because decentralization leads to increased volatility, many people wrongly assume that purchasing a centralized cryptocurrency will bring them some protection. The opposite is actually true. The more centralized a cryptocurrency is, the more dangerous it is (as it could just be deleted or removed from your account). In fact, it is recommended to only buy decentralized cryptocurrencies, because they provide a few protections (not from volatility) but from one person being able to take your crypto away.
That being said, know that not all decentralized cryptocurrencies have these protections, especially new and unproven projects. After you determine a cryptocurrency is decentralized, you need to do some research before you invest, to ensure you trust the platform and the software, as even if a project is decentralized, all it takes is one hacker and you still may lose everything.
The most common centralized cryptocurrencies are BinanceCoin, Unus Sed Leo, and OKB. All these coins are run by a company and don’t necessarily balance the power among the users. Of course, they have their purpose, but it is not advised to invest in these cryptocurrencies unless you are using an associated platform and need crypto to do so.
The most famous decentralized cryptocurrencies are Bitcoin, Dogecoin, Monero, and Litecoin. Now this doesn’t mean that buying these cryptocurrencies is safe, but purchasing all these coins ensures you are becoming part of a decentralized ecosystem rather than purchasing a cryptocurrency owned by a single individual.
Are Stablecoins Decentralized?
This is a bit of a difficult question to answer because some stablecoins can be built on decentralized protocols. But one of the problems is, most stablecoins, even if decentralized, are pegged to a fiat currency. This means as the value of that fiat currency changes, so too does the value of the stablecoin.
Don’t get us wrong, stablecoins have their part in society as they can make it easy to send and receive cash in other currencies. However, we do not recommend them as investment vestibules as they are still highly subject to the fallacies of centralized currencies.
Is Ethereum Decentralized?
Technically, Ethereum is a decentralized blockchain platform. All transactions on the system as governed by a proof of stake consensus mechanism. However, it is important to know that Ethereum is not as decentralized as other coins like Bitcoin and Monero.
This is because Ethereum is a company, and changes made to the blockchain are dictated by Vitalik Buterin or others in the company. While this provides some increased innovation capabilities to Ethereum, it does remove a bit of the decentralization aspect.
For example, we consider Bitcoin to be a truly decentralized platform. All changes to the blockchain must be voted on by miners and users, and the changes cannot take place without receiving a majority vote. As a result, Bitcoin is truly decentralized.
This doesn’t mean Ethereum is bad, as it is still an excellent program, just be aware that it isn’t fully decentralized, and changes will not be made in the same way as on a fully decentralized platform.
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