Imagine making an online payment to a stranger without going through a bank and you still get a reliable and verifiable transaction history. This is how decentralization works. It is the type of process that gives cryptocurrencies the upper hand against traditional currencies. It eliminates the need for intermediaries and allows parties to engage in different transactions without relying on any third party.
The concept has hugely influenced the crypto space, which led the crypto community to revolutionize financial services and other markets. For example, DeFi, or decentralized finance, and DAO, or decentralized autonomous organizations are two famous offsprings of decentralization. As these ideas become more widespread, it is essential to learn what decentralization has to offer to the crypto world.
Do We Need to Decentralize Our Payment System?
Cash and banks have existed for decades, and everyone put their trust in this form of centralized structure until the financial crisis that occurred in 2008. This worldwide economic crisis made it evident that a single entity should not be making decisions that will affect everyone. Thus, the need for decentralized currencies became apparent.
In October 2008, Satoshi Nakamoto published the Bitcoin whitepaper, where the idea of a global currency that would be managed and owned by the people was born. More than decades later, the question still remains: should we use decentralized currencies?
Decentralization transfers control and decision-making to the users, enabling the system to not be reliant on a single authority and eliminating the risk of a corrupt or compromised authority. Through this, decentralized systems can ensure better protection and independence. Moreover, decentralization promotes trustless connections, wherein the verification of transactions relies on the collective wisdom of numerous devices that are working together. This prevents the system from being compromised by keeping any bad actors at bay.
Moreover, decentralization reduces vulnerabilities by distributing them across the network. Trustless connections prevent single bad actors from forging transactions or corrupting the system. Cooperation from more than 50 percent of the nodes is required to gain influence, making it increasingly difficult in larger systems. Distributed networks also mitigate threats, as compromising a single node does not jeopardize the entire system.
Moving Forward with Decentralization
Decentralization is the defining and exceptional characteristic of cryptocurrency. And as we progress, there will be new decentralized cryptocurrencies and exchanges that will preserve the benefits of decentralization and address its limitations. These will strengthen the innovative structure and revolutionize the world of finance in the future.
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