Decentralization has played a pivotal role in the popularity of Blockchain technology among crypto enthusiasts. The idea was pretty simple — users can be completely anonymous and can operate without the intervention of the government or central authority. But in recent years, the blockchain market has undergone some changes and we have witnessed the rise of centralized cryptocurrencies and blockchain exchanges. So, what is the future of Blockchain? Is Blockchain decentralization at stake or will it coexist with centralization?
Decentralization Versus Centralization
A centralized system has control over all the data and information you share on the network. So, this means that if the server is hacked or infiltrated, all your data is at risk.
To understand the concept better, let us take an example. We all are quite active on social media platforms like Yahoo, Twitter, Facebook, etc. All of these are centralized units. The moment we create an account and share our personal information, all these data are stored in the central server of the system. So, every time you upload pictures or send messages to your friends, imagine how much data you are sharing with these platforms.
At its core, decentralized networks are completely anonymous and do not store any private data or information. Here are a few differences between centralized and decentralized platforms.
Payment Gateway — All banks and financial institutions have centralized servers. So, they know the exact details of your transactions. Decentralization on the other hand operates on a peer-to-peer network and uses digital currencies. They do not retain any information about your identity or transactions.
Borderless Transaction — Banks charge hefty fees for financial transactions and if the centralized servers fail, you may be unable to send funds. Blockchain transaction fees are the same for all transactions no matter in which part of the world you are residing. Transactions are fast and completely transparent.
Voting Power — In centralized systems, the majority of the votes are owned by the controlling power. In decentralized networks, voting power vests in the hands of the blockchain community and they make decisions unanimously.
Optimum Security — One of the main benefits of decentralization is security. Cryptocurrency exchanges that are centralized are easy to hack and are susceptible to cyberattacks.
Regulatory Benefits — Centralization offers regulatory frameworks that are beneficial in managing operations and also to regulate the activities of users. This is a reason why many banks have adopted centralized networks. Decentralization can often create vulnerability and a financial crisis in the crypto market.
How Bitcoin Halving will affect Decentralization?
With the increase in demand for Bitcoin transactions, the Bitcoin market has experienced a surge in the supply and price of bitcoins. To cope with the growing demand, it introduced a new concept back in 2012 called bitcoin halving. This year bitcoin halving occurred in May 2020.
Bitcoin halving occurs every 4 years. In this process, the Bitcoin miners get half of their rewards. The rewards are paid from the fees of the bitcoin users. This process will go on until the year 2140 when all the bitcoins are released in the market. The idea is to reduce the supply of bitcoins increase the demand and push the bitcoin prices higher.
As a result, after the first bitcoin halving, miners who used to get a reward of 50 bitcoins per block in 2009 got 25 bitcoins, and subsequently, in the next halving, the price was reduced to 12.5 bitcoins, and so on. For individual miners, bitcoin mining was not only a costly affair but halving has also reduced their shares almost to nothing. To leverage profits, miners formed large mining pools which increased their overall hashing power in the blockchain network. So, it is quite evident that halving could result in intense competition among large mining pools and also pave the way to centralization.
How Decentralized is Blockchain?
So, from the above discussion, it is clear that blockchain technology is still new and needs time to attain absolute decentralization. It has also been proved that the degree of decentralization, privacy, or security depends on several factors. However, the main moto of decentralization is to establish a single database rather than multiple private databases to reduce the volatility of the system due to cyber-attacks and hacking.
So, in the present scenario, blockchain operates both in centralized and decentralized platforms. The financial sector for example banks mostly relies on a centralized structure where the identity of the participants is known and hence all their transactions are audited.
In a decentralized network, anyone can participate in the transactions. Therefore, a consensus mechanism is required that can put a check on the vulnerability aspect of the platform. Decentralized platforms work on the Proof-of-Work or PoW consensus mechanism. The PoW mechanism is a costly affair that prevents cyber-attacks and spamming of the blockchain network. It is time-consuming and regulates the generation of blocks through a process called crypto mining. Many blockchain ecosystems like Ethereum work on the Proof-of-Stake consensus mechanism which was later introduced in the blockchain that consumes less computing power and energy compared to Proof-of-Work and also validates participants and rewards them for taking part in the consensus.
This “consensus mechanism” proves that no matter how much we try, blockchain technology will never be completely free from centralization or governance protocol. Let us find out how:
· All new transactions on the blockchain network need to be validated through a process called mining. Miners constantly compete with each other to take part in the process and return, the winners win cryptocurrencies. This makes the mining process quite costly and time-consuming. So, to reduce the cost and risk of mining, miners form mining pools in exchange for a participation fee. So, the larger the mining pools the greater the chances of success. So, this leads to a certain degree of centralization in the process.
· The functioning of blockchain networks like updates or the implementation of a new policy is also governed by the blockchain community which further validates the existence of centralization in the blockchain.
· The decision-making power depends solely on how much stake you are holding in the blockchain network. Making decisions in the blockchain community is costly. The greater your stake, the more power you have to make decisions.
Blockchain decentralized governance is a costly affair. To attain decentralization, the associated costs may be humongous, and hence in many organizations especially in small companies, having centralized governance comprising of a small team of members may be more effective. It will not only save costs but also make it easy to manage the operations. Varying degrees of decentralization will always exist in blockchain platforms.
Though blockchain technology was originally envisioned to be a decentralized concept, in practice, it is much more centralized. The blockchain technology is still young and is evolving. Developers are still focusing on attaining a global decentralized platform for the blockchain ecosystems to maximize decentralization.
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