What is decentralization?
In blockchain, decentralization is the fact of transferring control and decision-making from a centralized entity (i.e a central authority such as an individual or organization), to a distributed network. Blockchains are also called Distributed Ledger Technology, because they are essentially a distributed ledger, with the power being distributed within the blockchain network. Each block contains records of multiple transactions, and these blocks are attached to each other through hashing, making it impossible to introduce any changes in a confirmed block.
The digital record of transactions is maintained by a network of nodes, eliminating the need for intermediaries and allowing for the creation of peer-to-peer transactions, smart contracts, and other decentralized applications (dApps). The nodes check the validity of the data before it becomes permanently added to a blockchain, by using an agreed-upon consensus mechanism. Decentralized blockchains are most often open-source, allowing anyone to see the code, and secured with cryptography. A permissioned blockchain (private), unlike a public blockchain (permissionless), requires each node to be approved before joining.
The interest in decentralized blockchain solutions is growing rapidly, with more and more startups and organizations of all sizes taking the leap and joining the crypto ecosystem. The most well-known examples of decentralized blockchains are the Bitcoin blockchain and the Ethereum blockchain.
The adoption of a decentralized blockchain platform is usually based on the maturity of the solution and its proven reliability, its incentive models and consensus mechanisms, as well as blockchain security.
Decentralization is the foundation of cryptocurrencies such as Bitcoin, which was created as a decentralized digital currency by Satoshi Nakamoto. The Bitcoin blockchain uses a peer-to-peer network, the Proof-of-Work consensus mechanism, and a decentralized algorithm known as Nakamoto consensus.
Smart contracts are a key feature of the Ethereum blockchain, allowing for decentralized decision-making and the automation of some processes such as the transfer of NFTs and other digital assets. The ETH blockchain is also used as a platform for building decentralized blockchain applications (dApps), marketplaces, DAOs and DeFi apps.
In distributed systems such as these, there is no single point of failure. This means that the network can continue to function even if one node goes down. Decentralization and the use of consensus mechanisms such as Proof-of-Work or Proof-of-Stake also increase security, fault tolerance and the integrity of the network. Miners and investors can access all the data in real-time, leaving no space for incorrect or lost data.
Decentralization use cases
Decentralization has led to the emergence of many new blockchain-based apps, which leverage decentralized networks for the development of other decentralized systems. Some examples include decentralized social media platforms and supply chain optimization systems, as well as DeFi. While often built on the Ethereum network, dApps are spreading to a number of blockchains including Bitcoin via Stacks, Solana, BNB, EOS and Polygon
Decentralized finance, known as DeFi, is one of the major use cases of decentralization. It is often seen as an alternative to traditional finance, as users can access financial services directly without the need for a central authority, intermediaries or institutions such as banks and financial service providers.
DAOs are another popular example of decentralized apps. A DAO operates on the blockchain, using smart contracts to facilitate decision-making and governance, and is governed by its stakeholders. Members of a DAO hold governance tokens in a cryptocurrency wallet and have voting rights proportional to their stake in the organization. These tokens are often distributed through crowdfunding or other means, and can represent equity in the organization or other incentives.
DEXs (decentralized exchanges) allow users to buy and sell cryptocurrency and other digital assets without the need for a central authority or third party to facilitate the transactions. Instead of relying on a central server to hold users' funds and execute trades, decentralized crypto exchanges use smart contracts on a blockchain network to facilitate peer-to-peer crypto trading.
Despite some of decentralization's challenges such as volatility and the need for optimization, the advancements in blockchain technology are also helping to drive the development of decentralized systems in industries such as healthcare. As blockchain technology continues to advance and more real-world use cases are discovered, the potential for decentralized solutions in various industries will continue to grow.