What is decentralization ?
Decentralization in the context of blockchain describes the transfer of power and decision-making from a centralized entity (an individual, an organization, or a collection of such entities) to a dispersed network. Decentralized networks aim to limit the amount of trust that participants must place in one another and to prevent them from interfering with one another in ways that would impair the network's performance.
Why decentralization matters
The idea of decentralization is not new. Three main network designs are often taken into account when developing a technological solution: centralized, distributed, and decentralized. Although decentralized networks are frequently used in blockchain technology, a blockchain application itself cannot be categorised as either decentralized or not. Instead, decentralization should be applied to all facets of a blockchain program and is a sliding scale. Greater and more equitable service can be accomplished by decentralizing an application's resource management and access. Decentralization frequently has certain drawbacks, such as decreased transaction throughput, but in an ideal world, these drawbacks are justified by the gains in stability and service levels they bring about.
Benefits of decentralization
creates an atmosphere of distrust
None of the participants in a decentralized blockchain network need to know or trust one another. A distributed ledger that contains identical data is shared by every member of the network. The majority of the network's members will reject any member whose ledger has been altered or corrupted in any way.
makes data reconciliation better
Data exchange between businesses and their partners is common. Each party's data silos normally transform and store this data, which is then only brought to light when it has to be transferred further down the pipeline. Every time the data is transformed, there is a chance that some of the data will be lost or that some inaccurate data will enter the workstream. Every entity gets access to a real-time, shared view of the data thanks to a decentralized data store.
reduces vulnerable areas
When a system relies too much on a few key people, decentralization might lessen its weak spots. These vulnerabilities could result in systemic failures, such as inability to deliver on promises or inefficient service as a result of resource exhaustion, recurrent outages, bottlenecks, a lack of enough incentives for effective service, or corruption.
optimizes the allocation of resources
Decentralization can also aid in resource allocation optimization, improving the performance and consistency of promised services while lowering the risk of catastrophic failure.
Comparison of decentralization
Where it makes sense, decentralization should be implemented. It's not necessary for a blockchain application to be completely decentralized. Any blockchain solution's objective is to meet the needs of its customers, which may or may not involve a certain degree of decentralization. The table below compares decentralized networks to the more prevalent centralized and distributed networks so that you can better comprehend them.
Every network architecture has advantages and disadvantages. Decentralized blockchain solutions, for instance, often put security above performance in contrast to distributed systems. Therefore, as a blockchain network grows or expands, it becomes more secure, but performance suffers since each member node must verify each piece of data that is added to the ledger. A decentralized network can become safer but not always faster by adding members.
Who is building blockchain applications leveraging decentralization
Different degrees of decentralization are adopted by every blockchain protocol, decentralized application (dApp), decentralized autonomous organization (DAO), and any blockchain-related solution. The maturity of the solution, the time-tested dependability of its incentive models and consensus procedures, and the founding team's ability to strike the proper balance are often the determinants of adoption level. Many DAOs, for instance, have a variety of components that are at various stages of decentralization: oracles (i.e., third-party services that supply smart contracts with external information) may be partially decentralized, smart contracts may be fully centralized, while the governance process for adjusting parameters is decentralized and community-driven.
Decentralized blockchain solutions are being researched and utilized on a larger scale by businesses of all shapes, sizes, and sectors. Applications that deliver quick international aid or emergency aid to those in need without the involvement of a bank, government, or other third party are a few notable examples. Or software that enables users to control their own digital identities and data. Today, social media platforms, businesses, and other entities sell this information without providing any value to the individual. A decentralized strategy would aid in ensuring equity for everybody.
A real-world example
Contura Energy, a major coal supplier with headquarters in the United States, has relied on an antiquated letters of credit system to handle its international trade payments. Buyers are guaranteed payment through these letters of credit, which are issued by an intermediary bank on behalf of its client. Although this device is reliable, it is also manually operated, slow, and incredibly ineffective.
Contura Energy is aware of the value and significance of automating and digitizing its letters of credit procedure. However, establishing mutual confidence and verification between merchants and purchasers is a problem they must overcome.
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