When you think of cryptocurrencies, one of the buzzwords you hear being thrown around is likely to be decentralized. All cryptocurrencies are a form of decentralized currency. But what exactly does this mean, and how does it affect you?
The Problem with Centralized Networks Picture our current system for money. All our transactions go through banks, financial institutions and payment gateways, which sign off on them and give them legitimacy. These are centralized points where records and transaction data are stored in centers or servers. The result is a centralized network where all transactions must pass through a financial authority in order to be verified.
There are several issues with this. Firstly, it allows the authority, in this case, banks, to charge fees to oversee the transactions. Secondly, your transaction speeds are limited by the institution verifying the transaction. Say the bank you use is closed on the weekends, a transfer you made on Friday might only be processed or approved by the following Monday. Lastly, having all your data in one area is inherently risky as a target for cyberattacks.
Decentralized Networks, Defined Unlike centralized networks, cryptocurrencies distribute, verify and record transactions on public ledgers. Instead of a single financial authority that makes all the decisions, users collaborate with each other to help witness and verify each other’s transactions. Security and prevention of fraud is handled by complex consensus protocols that review and confirm each piece of information.
These consensus algorithms are what ties the network together and makes cryptocurrency possible. They allow us to transact with each other on a peer-to-peer basis by fully validating and authenticating our transactions without the need of a central financial authority like a bank.
The difference here is that rather than putting your trust into a bank or third-party to handle your money and get it where it needs to go, you’re trusting the underlying technology behind cryptocurrency.
How does a Decentralized Network Solve The Issues of Centralized Networks? There are several benefits to decentralized networks that address some of the issues faced by centralized systems. The removal of a middleman like banks greatly speeds up transactions, as algorithms can process transactions without the limitations of working hours or work days. No middlemen also means lower fees for users.
Decentralized networks are also more secure, the nature of the network mitigates against cyberattacks by spreading data across its users rather than storing it in a central location.
At its core, a decentralized network is about removing the need for a central decision-making authority. Outside of the realm of money and finance, decentralized networks have great potential to shake up the way we work in other industries as well as our daily lives.
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