Centralization and Decentralization are everywhere in this cryptocurrency industry. In this post, I will share what is centralized and decentralized terms and differences between them.
Why you should get to know about these two?
Honestly, these two terms are the nature of cryptocurrency I would say.
Besides, Cryptocurrencies have these two different categories. It’s not the point. The point is you have to consider what kind of exchange you are going to put your funds in, what kind of cryptocurrency you are going to invest in.
Knowing this centralized and decentralized is really helpful. This is a post who is looking for the main keyword and having no idea about centralization or decentralization.
However, Let’s discuss these two terms individually
1) Centralized System
Here is a simple example for “centralized”
When you are going to send money to someone else,
Firstly, You have to go to the local bank.
Secondly, You have to make transaction documents.
Then, the bank verifies your details and receiver”s details. After successful verification, the bank will begin the transaction.
After, the receiver comes to the same bank nearby and validate his details and pick up the money.
During this process, you might already notice there is a third party to make the transaction. Who?
The bank. The bank is the centralized authority to verify all the transactions and data and it is the third party. Now let’s get into how is this fact runs on cryptocurrency.
I think you already know about cryptocurrency exchanges. In simple, Cryptocurrency exchange is a spot allows you to trade, send receive cryptocurrencies and even you can safely store cryptocurrencies.
It’s like a bank in real life.
This means Cryptocurrency exchange is acting as a centralized third party to manage transactions. But it’s not the 100% truth. After you made a transaction in a cryptocurrency exchange it’s completely decentralized (read more)
It’s about the transactions.
You know we can buy and sell cryptocurrencies in a cryptocurrency exchange. At that point, If you want to buy coins, the exchange gives you coins. If you want to sell coins, the exchange manages it.
However, Centralized Cryptocurrency exchanges can manage a lot of facts beyond that.
What about centralized cryptocurrencies?
Centralized cryptocurrencies like Ripple(XRP) Can’t mine. Why? As a centralized cryptocurrency, they manage the whole stuff like transaction, supply, etc.
Finally, A company which have a central authority to control and manage, it is “Centralized”
You are in control of this system.
But the biggest disadvantage in the centralized system, The authority has its own tools that we have to follow.
Do you understand now?
2) Decentralized System
Usually known as peer to peer system. In this system, doesn’t have a central authority to control. Whether it’s an exchange or cryptocurrency.
Everything is in the user’s hands.
When you make a transaction, No third party, No confirmations and stuff.
In fact, you need to consider when you using platforms using decentralization.
For example, When you make a buy or a sell in a decentralized cryptocurrency exchange, you put the price. Think if you are placed at a lower price than the current price, your asset could be immediately sold.
There’s no central authority to validate pricings. A little bit risky, right?
However, This is one of the important factors when you using decentralized platforms for trade cryptocurrencies.
For decentralized cryptocurrencies, They are under miners control which means, miners responsible for the transactions.
I think I explained much with some relative examples.
Do I need to correct something?
What do you think of centralization and decentralization?
Leave your ideas below.