Over the past few years, cryptoculture has evolved into a more tribal state. On social media, supporters of one cryptocurrency frequently debate holders of competing tokens. A frequent slur during these discussions is to claim that a different cryptocurrency is centralized.
Blockchains are not decentralized by nature, a common misperception among cryptocurrency speculators. But what exactly is decentralization, and how can cryptocurrency investors tell whether a coin is decentralized or not?
Decentralization: what is it
A good or service is considered decentralized if it is managed by a group of users who follow the majority rule. In the case of bitcoin, the majority of its network participants control its characteristics, such as the total supply of bitcoins.
Understanding decentralization and its significance is crucial to comprehending cryptocurrencies in general and the initial motivations for its creation.
What makes decentralization crucial
Conflicts of interest frequently occur in centralized systems, or systems where a single entity has complete control. Additionally, these systems have a single point of failure, which makes them more vulnerable to attacks.
Decentralized systems considerably reduce the chance of successful attacks and the potential for corruption since they lack a single point of failure and cannot implement changes without the consent of the majority of participating parties.
Bitcoin is the first actual illustration of a system without a central authority outside of the internet, which is largely centralized as a result of internet service providers.
How is decentralization measured
Proof-of-work
A proof-of-work blockchain’s degree of decentralization is determined by the amount of its hash rate, the distribution of that rate among various entities, and the frequency of community-driven protocol upgrades.
Proof-of-stake
The number of stake pools or validators, how the token supply is divided among them, and the percentage of the token supply that is staked are all indicators of how decentralized a proof-of-stake blockchain is. Another crucial factor to take into account is the degree of democracy in the growth and governance of a proof-of-stake blockchain.
Distribution of governance and development
Investors looking for more decentralized initiatives should think about the governance of a blockchain and whether community members or a centralized entity oversee development.
Some more recent blockchains still rely on centralized development teams to issue upgrades, while this procedure might become decentralized in the future. Others, such as Bitcoin, have more open development communities where anybody can suggest changes.
The following considerations
The cryptosphere is chaotic and perplexing. Because of this, some investors only have a basic comprehension of their holdings, which enables some currency creators to have more influence over a decentralized protocol than they ought to. Despite the fact that Satoshi Nakamoto has no influence on the direction of bitcoin, even early bitcoin investors accord the pseudonymous person a deity-like status.
Investors should nonetheless be mindful of a figurehead’s influence even though there is probably no incentive for them to operate otherwise than in the best interests of the ecosystem they helped to build.
Examples of this in the current cryptocurrency market include Anatoly Yakavenko of Solana, Charles Hoskinson of Cardano, Gavin Wood of Polkadot, and Vitalik Buterin of Ethereum.
