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What is Centralization vs. Decentralization?

Jaiya Gill
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What is Centralization vs. Decentralization?

"Centralization" and "decentralization" are two concepts frequently overheard in crypto. We're here to help demystify and distinguish the similarities and differences between the two.

Modes of working in any organization can be centralized vs decentralized. 

An easy way to understand if an organization is centralized vs. decentralized is by looking at two important elements:

  1. The decision-making authority’s place in the management hierarchy (centralized).
  2. The degree of decision-making power at the lower tiers in an organization (decentralized).

Centralization

In a centralized organization, all the important rights and power are in the hands of a few people, usually the top level management. This is an effective way to manage organizations or networks as they have full control over the activities of middle or low-level management. 

Decentralization

Decentralization is the opposite of centralization. Decentralization came to light with the release of Bitcoin in 2009 and introduced the concept of blockchain technology. For example, if one user sends one cryptocurrency to another user, it doesn't have to go through a centralized authority. It’s an open-sourced network connectable by anyone, and anyone or anything that connects to it is termed a “node”. In an organization, responsibilities and authority are assigned not only to top level management but across the organization and to middle and lower-level management. 

Centralization vs. Decentralization

Both centralization and decentralization have their own benefits, and are both here to stay.

Centralized Advantages
  • Chain of Command: The command chain is clearly defined. Everyone in the organization knows their role and who to report to. This makes delegation easy and creates more consistency for procedures and policies to be strictly enforced. 
  • Reduced Costs: Centralized organizations or networks require less support and costs. Overlapping or duplicate activities can be cut to save costs. 
  • Quick Decision Making and Implementation: There are fewer nodes or people, requiring less communication among different levels of authorization. There’s more control over activities and consistency in operations and decision-making and changes can be made quickly. 
Centralized Disadvantages
  • Trust: Centralized organizations are secure and trustworthy, but not 100%. This trust is an agreement between the service provider and user. A lapse of security can happen from time to time. This can happen because all of the data is stored in a centralized database. 
  • Single point of failure: The whole network depends on a single point of failure. Most organizations have measures to contain it. 
  • Scalability limitations: In most cases, a single server is used, leading to scalability limitations.
Decentralized Advantages
  • Full control: Users are in full control of their transactions. Verification isn’t reliant on third-parties. There’s faster decision-making and better quality of decisions. This creates an environment where people can have a say in governance. 
  • Data can’t be deleted or altered: Blockchain technology’s data structure is append-only, meaning no one can modify or alter the data once it’s stored.
  • Secure: Decentralized networks use cryptography to ensure that data ledgers are secure. 
  • Censorship: Decentralization means less censorship, as there’s no central authority controlling the data.  
  • Open Development: Open development is mostly supported because of how decentralized networks operate, and by having this environment, the network can get new and improved services, tools, and products built on top of it.
Decentralized Disadvantages
  • Conflict: If not well maintained in an organizational structure, decentralization can lead to conflict. 
  • Cost: Since it requires setting up systems to allow for automatic communication, decentralization can cost more than a centralized organization.
  • Crime: Everything done on the network is anonymous, leading to misuse. 
  • Volatility: The price of decentralized cryptocurrency can fluctuate.

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