By Tofiq Aliyev
On Oct 27, 2020
What comes to your mind when people refer to centralized and decentralized systems? Centralized governments or bank systems? We were so much getting used to central everything. It seems that we cannot leave centralized systems in our minds. The centralized system idea was good enough for its age. However, it is time to move to another type of control system.
Bitcoin revolutionized some ideas that they were not the center of attention before. Satoshi’s decentralized currency system ideology had widespread than he thought. His philosophy now trends worldwide. Users of many systems now think about decentralized systems as a safe and fast improvement to traditional. Here, we will examine both the centralized and decentralized policies to help you understand the concept and decide which one you choose.
Centralized systems proved themselves in the past when the world needed. In the past, centralized systems were so convincing that it was the first choice by the administration. We cannot imagine a country has more than one center or everyone decides themselves in each subject. It would not end up good for the country. So centralized systems were only a choice to assure stability.
Decentralized systems, in contrast to a centralized system, emerged when people thought that central bodies have so much power in every aspect of life. They search for the alternative method to organize relations between users and the database. Decentralized systems seemed plausible for most of the people. This system allows users to be their database of their own. It means everyone can accept data and validate it with their managing tools. However, sometimes it is hard to distinguish the systems. In some cases, they are partially centralized and partially decentralized. We will examine both policies in the cryptocurrency model.
In central systems, there are have to be one central body. Since there is one server, then it will consume much less energy than a decentralized policy. As we know from the cryptocurrencies, the mining process can consume a lot of electricity. It is not advantageous for the modern world because there is natural resource scarcity, and unconsidered usage of resources will threaten our future. Bitcoin mining needs lots of capital to begin mining. Since not everyone is capable enough to buy equipment, some groups of people can have those, and it will somehow result in the centralization of the Bitcoin network. This aspect of Bitcoin seems undesirable for the community.
There are many controlling nodes in the decentralized system. Bitcoin is a pure example of this peer-to-peer network. Every individual can join the system because it is open to everyone. You can download a Bitcoin client to your computer and begin to be part of the network. It will consume most of the power of your notebook or pc, yet you can be the node yourself and verify the transaction of others by yourself. However, in a centralized system, you do not have enough authority to become a node. Only one server can verify the transaction, and it is highly regulated.
Another crucial aspect is the regulation of the system. In centralized systems, all the rules come from the central body, which is the rule maker and enforcer. If we give an example of a central bank, we frequently see that they increase interest rates or announce new reserve requirements. These principles make the system to be dependent on the central body.
However, it is different for cryptocurrencies. If some group of people does not like or think that those rules are not fair for the system, then they gather and create a fork in the system. If those ideas are so much different than the original rules, then they form a hard fork and leave the blockchain. They will offer changes to the principles of Bitcoin, if people have some new ideas and want to better the system. It is called a soft fork, and the same blockchain continues. Here we can see that in the central government, the rule goes top to down, but in a decentralized system, it goes down to top.
We talked about the identity requirements in the central systems. Central governments of the data impose some threats to the security of information, and it so undesirable. We encounter some news about the data breach, the hacker attack, cancellation of bank accounts. These facts work against the central systems, and it is dangerous for users. In all of those cases, we bare all the losses except the central body pays compensation. Central bodies have to be very careful about this issue, and they must have high-security systems. However, blockchain technology is secure for users. It is so hard to hack the decentralized system since there are many nodes to hack. Also, it takes too much money and energy to possess 51% of the chain, to execute some malicious code.
Central governments usually control the environment, and they are responsible to some extent. For example, central banks manage interest rates and the amount of money in the system. They decide when to increase and decrease, and with those measures, they achieve stability of the currency. However, a decentralized system is free from interference, and it imposes volatility in the price of the cryptocurrency. As we see from here, lack of control can cause instability.
Since people’s data stored in one center, then holders of data can use the database for different purposes. They can sell it to the third database and get paid. However, you will not get your share from the payment. On the other hand, the transaction history is visible for many people in cryptocurrency. Since Bitcoin is pseudonymous, they will not know who paid to whom, so this data is not so much useful.
These systems have some similarities too. You have to possess some proof to be in the system. For example, to be recognized as a citizen, you have to have at least a birth certificate. This document gives you some privileges to use some services that government provides. Similarly, in the cryptocurrencies, you have to supply some proof, such as Proof of Work (PoW) and Proof of Stake (PoS). It depends on the blockchain to consider which one to choose. PoW requires enough computing power besides your address, and PoS demands some ownership of coins to be a miner.
Centralized and decentralized policies can serve for various purposes. As we investigated above, these systems have some advantages and disadvantages, and they can be used in different situations. Some people prefer centralized, and some prefer decentralized systems. We can conclude that if that system works well, and it meets the requirements of users, then it is best to continue using the current system.