Cryptocurrency: Decentralized vs. Centralized

Cryptocurrency: Decentralized vs. Centralized

What's the Difference?

A Simple Answer:

Decentralized cryptocurrency is a currency that does not have a single center. The most common, and the original, was Bitcoin. A majority of cryptocurrencies don't have a centralized administration. The stability of the system is based solely on the mathematical calculation. Mining of centralized cryptocurrencies is done by one company, not an abstract community. The company is responsible for all processes. An example of a centralized cryptocurrency is Ripple (XRP).

A Bit of Thought:

In a centralized system, there is a group of people responsible for the state of the whole system. If you made a mistake in a transaction, you can make a request to the company and rely on the successful outcome. You cannot do this in the decentralized system. On the other hand, centralized networks keep a lot of confidential information about the users. This data may get lost, hacked or be transferred to law enforcement agencies at court request. Decentralized networks do not have these problems. The same goes for a transaction cancellation. If the system is revocable, you can make changes to a transaction. At the same time, it opens room for fraudulent activities.

The Long Answer


Decentralized. You hear this term thrown around the crypto-sphere a lot, but I wager that 90% of the supposed experts that you ask, don’t actually understand the meaning of it, and only serve to continue the cycle of misunderstanding.  I hope to clarify the situation and I hope that after you read this, the next time someone says that “[so-and-so] is not decentralized” you will be able to correct them, with the confidence of the Dos Equis man with a half lit cigar and a bourbon.

So what does it mean to be decentralized?

Let’s start with the good ol’ Webster-Merriam definition:

noun de·cen·tral·i·za·tion (ˌ)dē-ˌsen-trə-lə-ˈzā-shən
1:  the dispersion or distribution of functions and powers; specifically : 
the delegation of power from a central authority to regional and local authorities 
On the surface, it simply means there is no central authority or controlling power.  But we know that when we speak about technology, we must also consider the different dimensions of meaning to which they can apply.
According to the dictionary meaning, would you say that the internet is decentralized?  Certainly most would agree with you in terms of its ability to bring commerce to the marketplace without any central control or authorization.  Indeed, the internet was really the decentralization of information, for before its mass adoption, we relied on the media of newspapers and periodicals, along with that of television and radio for the dissemination of information.  But even as the internet decentralized information in the broader sense, is the internet itself a decentralized technology?  Internet Corporation for Assigned Names and Numbers (ICANN) controls the issuing of domain names.  We rely on ISP companies to give us an on-ramp onto the information superhighway (how long has it been since that term was used? Sorted!) and they in turn rely on BGP (Border Gateway Protocol) routers which form the backbone of the internet to route your traffic.  Most of these routers are physically situated in USA, and most of them run on the hardware developed by one US company, CISCO.  Still think it’s decentralized?  Not so clear anymore huh?  Well that’s exactly the state of affairs in the cryptocurrency industry.  The word decentralization is being paraded and sold as a feature of various projects, and thus the word is overused and over-abused.  But as with many things in life, when you start peeling back the layers, you soon see many different versions of truths, and many times conflicting viewpoints are actually simultaneously true, depending on the context or point of view.  So lets enumerate all the different contexts in which people in the cryptocurrency field normally speak of in terms of decentralization.


Before we examine the specific aspects of cryptocurrency systems in light of their degree of ‘decentralization’ let’s first begin by clearly defining what each type of topology looks like.
Centralized systems have one hub or server, and every other node is a slave or client. Centralized systems have many advantages, namely in speed and ability to relay information quickly without having to worry about data contention.  This is because as updates are only happening in one place,  sequencing them in a consistent way is as simple as putting them in the order that they arrived at the hub.  Additionally,  the ability to unilaterally control the rules of participation and membership are either necessary or an advantage in the domain in which they are operating.
Traditional systems which work best in a centralized way are rail/traffic control systems, telecom networks,  governments and the central banking systems.
If you look at the decentralized graph in the middle, there are no large control centres but instead there are many smaller clusters with a hierarchy of mini-hubs.  This network topology is much like what we have in the internet today, which is small centralized clusters of users connecting through small hubs (local ISPs) which in turn connect through large hubs (global ISP, BGP routers).  You will note that although there is certainly less centralization than in the first case, you will notice that there are certain nodes which are ‘better connected’ than their peers.  Natural systems tend to develop in decentralized ways, from human societal structure, friend association networks, to tree root systems and fractals.  It’s pretty safe to say that it is the most ‘natural’ state in which complex systems and living things in our universe arrange themselves.
The last diagram shows a distributed network, you will see that the difference is that each node connects to all of its local neighbors and on average each node has about the same number of connections as their peers.  Notably, this means that it would be impossible to clearly designate any group of nodes as ‘better connected’ than others, and thus we no longer have any notion of hub nodes.  Systems like this are found in highly independent systems, such as BitTorrent and other systems where every node is simultaneously a client and a server.

So with those images in mind lets go over all the different contexts by which we can judge a cryptocurrency in terms of its topology.

Source Code

Who controls the source code of the project?  If it is closed-source, then clearly it is centralized, and opaque.  But what if it was open-sourced?   Does that mean it is decentralized?  Certainly we can’t call a project which is open-sourced centralized in terms of control of its code, as it could be simply copied and forked by others.  Though if you look at Bitcoin as an example, although its code is open, the number of people who hold commit rights to the code base are a very select few.  Although this control is limited, I would still label an open-sourced project a decentralized one.  It may not be as decentralized as say, the internet, but it is certainly not as centralized as say, the code for MS Office.


How do participants join? Who gets to determine who is allowed to participate? How are bad actors handled? Are they expelled by the will of a superuser controller or voted out by a quorum of network peers or simply ignored?  As most cryptos are Dynamic Membership Multi-Signature (DMMS) systems, they are all decentralized by nature.  We can contrast this with traditional banking and brokerages, which whom you must open up an account with in order to participate.  Even the internet is more centralized in this regard, as we discussed earlier, you must register domain names with a registrar which operate under the oversight of ICANN. Although some fine folks are working on changing that. With crypto, you can join the network and create your own accounts without getting anyone’s permission, and indeed this is the basis upon which most ‘cold wallets’ work.

Value distribution (token distribution)

How is the distribution of its token handled?  Is it dolled out to groups or early investors from a central repository controlled by an entity? Is it earned or mined by participants themselves? Is it some combination of the two?  This is a particularly contentious topic and one that will most likely get at least 3 people in the room embroiled in a heated debate, that may or may not end with a broken nose. That is because the method of value token distribution is at the heart of why many claim cryptocurrencies are scams or ponzi schemes.  Apparently making a token out of nothing and selling it to people for profit is something that only the government licensed banks are allowed to do.  If you make your token yourself and distribute or sell it to people, then you are running a centralized value token.  You may or may not be operating a ponzi scheme.  Proof of work is the only way to achieve decentralized distribution of a token without picking favorites.

Validity and Security, immutability

How is security of the data ensured?  What prevents bad actors from selectively partitioning the network or promoting their transactions over others?  How do they prevent actors from filtering out or delaying certain transactions and isolating victims?  How is the data protected from being modified without anyone knowing?  Mostly all cryptos have decentralized verification and integrity roles, as they are normally part of the job of every node to validate transactions in the P2P (peer-to-peer) work.  Contrast this to the traditional banking system where only the banks could validate and clear checks, which is a classic centralized system.

Consensus mechanism

How is consensus achieved and ensured?  Through a vote, or through a proof of work? This is basically how the network manages to ‘stay in sync’.  Which is to say, how it manages to agree on the ordering of transactions which are all asynchronously floating around the P2P network.  What does it mean if a proof-of-stake system which depends entirely on the rules of the system to determine who gets to be the ‘forger’ of a new block, to be decentralized?  I would argue that in these cases of PoS, where the essential nature of consensus is based on a distribution algorithm, then the algorithm rules themselves being written by developers form a sort of centralized control system.  Unlike proof of work, where only the amount of work to be done is controlled and miners are free to maximize their ability to perform the work in order to increase their chances at forging a block, stake systems having no work requirement so anyone’s chances at becoming a forger depend solely on their stake in the system through some formula decided by the developers.  This is a form of centralized control.

Exchange mechanism

Some cryptos have a built in exchange protocol or match making engine along with the ability to store an open order book.  The orders are stored as part of their blockchain and matchmaking is done via the network transaction mechanism itself.  If they can run without the need of a central service hosted in one place, then they can be considered a decentralized exchange.    In contrast, there are many exchanges which are run off-chain as a business and these are centralized, as their order books are maintained by them on proprietary databases, and if you open a trading account with them, then you wear all the counterparty risk in the odd chance they were to fold and go under. Not that that happens very often (Mt. Gox, etc.).

Hopefully this makes sense!

Armed with these contexts, you can now start to talk about decentralization in a way which may be meaningful without the discussion degrading into the “You aren’t decentralized!” Yes we are!” mudslinging-fest that they sometimes tend to do.

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