Decentralization is a core concept you’ll hear about frequently when you’re reading and learning about cryptocurrencies and blockchain technology. Not only is it a core concept, but it is a key concept to know about when you happen upon articles discussing other concepts such as disruptive technologies like Bitcoin.
Before we consider decentralization, let’s examine centralization briefly.
Most industries and institutions as you currently know them are centralized. Banks, insurance companies, governments and credit reference agencies are good examples of centralized structures.
Banks act as a trusted third-party in transactions between two or more businesses or individuals. If Bob in the U.S. wants to send Alice some money in Australia, there must be an international bank transfer. You are most likely aware that this process can take up to a week or more to complete.
The reason it takes so long is that Bob’s money must pass through the hands of multiple parties to arrive in Alice’s bank account. Each step of the way, fees are taken, which reduces the amount of money that will finally arrive in Alice’s bank account. Having a multi-step process allows the banks and foreign exchanges involved plenty of playtime with Bob’s money before it becomes Alice’s.
So, centralization is the need for a trusted third-party to handle transactions between two or more parties. It doesn’t matter whether you actually trust the third-party.
Decentralization is the exact opposite of that and allows for individuals and businesses to freely transact between themselves without interference from another party.
Blockchain technology offers a way to cut out so-called ‘trusted’ third-parties or middlemen by offering peer-to-peer transactions at nearly instant speeds and without the extortionately high fees traditionally associated with them. In that way, it is a decentralized technology.
This article gives a somewhat simplified view of decentralization, which is certainly useful to the blockchain and cryptocurrency novice. If you would like to know more about how decentralization is involved in the concept of disruption, you should read A Quick Guide to Disruption.
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Chronic crypto nut and freelance writer/editor for longer than I care to remember. Have finally found a home here at Crypto Disrupt.