In the ever-evolving technological landscape, the concept of decentralization has emerged as a game-changing card. At the heart of this transformation lies blockchain technology the bedrock of the web3 vision: give users more control over their data.
In this article, we will dive deeper into the core principle of blockchain: decentralization. We will highlight the importance of decentralization in Blockchain. We will also classify the types of blockchain and its subcategories based on the degree of decentralization. Then we will compare the Blockchain decentralized and centralized approaches. And we will explore how industries are implementing blockchain in their solutions.
Fundamentals snapshot :
Crypto, Blockchain, and decentralization are concepts that often go hand in hand and are closely interconnected.
- Decentralization: in a decentralized system, the processes of decision-making, controlling, and sharing data are distributed across the network nodes(computers). Therefore, each node can make its own decision instead of centralizing the authority into one entity.
- Crypto: cryptocurrency is a digital currency that uses cryptography to secure financial transactions. They often operate on blockchain technology. we already have provided a complete guide to cryptocurrency
- Blockchain: it is a distributed ledger technology that records data on multiple groups of validated transactions considered as blocks. Blocks are chained together respecting a chronological order to form a Block-chain. It is the underlying framework of cryptocurrencies and decentralized systems.
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In a nutshell, cryptocurrencies are an important application of blockchain technology that embodies decentralization by removing the need for centralized financial intermediaries like banks.
Key concepts of decentralization:
- Node: It is a computer or a device that participates in a blockchain network.
- Peer-to-peer transactions: refers to the direct interaction between entities without needing any middleman
- Consensus mechanism: is a bedrock protocol used in blockchain networks to ensure participants’ agreement regarding the validity of transactions. It’s crucial to maintain a tamper-resistant ledger.
Why decentralization is important in Blockchain
As for decentralized systems, a decentralized blockchain network operates in a peer-to-peer architecture. Therefore, nodes communicate directly with each other, eliminating the dependency on an intermediary or a central server.
But what for?
The decentralized aspect of blockchain ensures a secure, immutable, and transparent recording of data and transactions.
- Security: since data is distributed across different nodes, it becomes more resistant to hacking. Because it uses encryption for higher data protection. Besides, there is no single point of failure which reduces downtime.
i: Encryption: is a mathematical process that turns human-readable data into a set of values that seems random. Only the authorized parties can decrypt it using a cryptographic key approved by both sender and receiver.
- Immutability: once data is recorded on a blockchain it becomes practically impossible to be altered or deleted. Here lies the importance of the consensus mechanism in fostering immutability. In simple terms, any data alteration needs to be confirmed and changed in all the network nodes, which makes data tamper-resistant.
- Transparency and trust: by ensuring that the entire transaction history is accessible to all the network nodes, blockchain technology fosters trust between participants.
At this point, you can see the high importance of decentralization in blockchain (hopefully)
But does that mean that all blockchains are decentralized?
The answer is No. There are 3 types of blockchains.
The 3 types of Blockchains:
- Permissionless blockchain: it is a public network that enables anyone to join without seeking any permission. It is a fully decentralized network. For instance, the majority of cryptos are run on a public blockchain. Also, organizations employ public networks to conduct fundraising, increasing trust and accountability.
- Permissioned blockchain: it is a closed network where the user should grant permission to join it and conduct transactions. So yes as you guessed, it is centralized! the network will be managed and controlled by an authority or multiple ones. Here we can have two types based on the level of centralization:
1- Private blockchain: it is a fully centralized network that is managed and controlled by one single authority. Wait, isn’t it against the fundamental principle of blockchain? Well, Yes! But think about it this way: consider a company that is conducting an internal voting, of course, a private network will be its best fit.
2- consortium blockchain: it is a partially decentralized network since it is managed and controlled by a group of predetermined nodes. For instance, in a supply chain that involves multiple companies (manufacturers, suppliers, and retailers), a consortium blockchain would enable each of the participants to track and manage their goods. It improves transparency, traceability, and efficiency throughout the supply chain management process.
- Hybrid blockchain: this type blends the greatest features of both private and public blockchain. In other words, it employs some private processes while others are kept private. Let’s take the example of cross-border payments where transactions are operated across at least two different countries. The hybrid blockchain can streamline the step of currency conversion and foreign exchange: a public process will take place when dealing with currencies, while the conversion of funds to the recipient’s account requires a private network.
The subcategories of decentralization in blockchain:
Decentralization can be categorized into subcategories based on the degree or aspect of decentralization. These subcategories highlight the many dimensions of successful decentralization. This section, emphasizes the diverse ways in which decentralization can manifest within blockchain networks.
- Business decentralization: In this case, businesses would share the decision-making authority, operations, and control. It involves delegating responsibilities to multiple parts rather than centralizing power at a single authority.
- Physical decentralization: refers to the dispersion and distribution of physical assets and resources across different locations. It aims to have a global presence to cut with the single-party ownership of the network. This would enhance the network security and resilience.
- Transactional decentralization: In a B2B network, a decentralized transactional system relates to the distribution of the operational processes enabling direct peer-to-peer transactions. The transacting parties can directly transact with each other via a smart contract without relying on a central intermediary.
i: Smart contract: a self-executing contract with predetermined terms of agreement between two parties written in lines of code. It is a fundamental concept in blockchain technology, ensuring an automatic execution and verification of the contract conditions. Add3 can lend a hand by providing you with standardized smart contracts. Learn more.
- Political decentralization: this type of decentralization in blockchain focuses more on the number of people or organizations governing the network. It empowers network participants enabling them to collectively make decisions about protocol changes, upgrades, and operational parameters.
Centralized vs. decentralized blockchains:
As you can see, choosing between decentralization and centralization depends on the nature of the organization and its specific goals, taking into consideration the pros and cons of each.
Centralized blockchain
Pros:
- Efficiency: a single point of control leads to faster decision-making.
- Clear accountability: transparent responsibility- assignment
- Consistency: it enforces uniform procedures
Cons:
- Vulnerability: it has a single point of failure
- Limited autonomy: nodes are excluded from the decision-making process
- Limited transparency: stakeholders are not invited to understand how the decisions are made.
Decentralized blockchain
Pros:
- User empowerment: users have more autonomy and control over their actions and data
- Resilience: it is more resilient to failures, attacks, and downtimes
- Transparency: data is publicly accessible and verifiable
Cons:
- Energy consumption: this has raised the environmental concerns
- Challenges in governance: decentralized governance can lead to disagreements that can cause splits within the network.
- Limited scalability: the more participants and transactions the less efficient the network becomes
Decentralized blockchain use cases:
The potential of blockchain goes way beyond cryptocurrencies. Its ability to ensure a secure, immutable, and transparent recording of data and transactions streamlines the efficiency of a wide range of businesses across a variety of industries.
- Cryptocurrency: starting with the most well-known blockchain use case. Bitcoin and Ethereum are the most popular decentralized cryptos. However, Ethereum shifted from a proof of work consensus mechanism to proof of stake, last year. This means that Ethereum is not relying on miners to add new transactions to the network but on validators instead. The validators own the authority to decide the transactions to add to each block. Although that is an energy-friendly action that dropped 99.9% of energy use, it also means that this change has made Etheurum more centralized.
- Decentralized Finance (DeFi): DeFi platforms offer peer-to-peer financial transactions reducing third-party fees and ensuring near-instantaneous transactions’ verification and settlement. The services provided by these platforms can include lending, borrowing, and the creation and trading of digital tokens. One of the key innovations of DeFi platforms is liquidity pools, where users can earn fees for providing liquidity to the DeFi ecosystem. The availability of liquidity enhances trade on decentralized exchanges (DEXs).
- Healthcare: implementing blockchain technology in healthcare solutions has reduced healthcare costs and improved medical data management. The use cases in this sector range from the secure share of EHRs ( electronic health records) among healthcare providers to tracking the drug's circulation. The decentralized structure of blockchain networks and their consensus mechanism, permit blockchain technology to enhance even the process of conducting clinical trials by protecting the integrity of trial results.
- Real Estate: blockchain technology has shown its ability to revolutionize the real estate industry, making it more efficient, secure, and accessible for all stakeholders involved. In this industry, blockchain is used to secure the recording of property ownership and to tokenize it, this means dividing the property into digital tokens making real estate accessible even to small-scale and retail investors. Blockchain can intervene in property management as well, streamlining the communication between landlords and tenants. It helps manage the rental collection and payment, and it even can provide a distributed ledger of the maintenance and repair history.
Conclusion
As we conclude this guide, it is clear that blockchain is reshaping the future of a wide range of industries. It represents a shift in business processes. Its decentralized aspect empowers secure transactions, records management, automated processes through smart contracts, and reduced costs through the elimination of intermediaries fees.
However, it is important to note that, while implementing blockchain to your solution, it is needless to code everything from scratch. Unleash the power of no-code, and increase the scale of creation and innovation! Add3 provides you with standardized and pre-audited smart contracts.
