Decentralized – The Word that Changed the World
“Decentralized” is a word we hear and read so often these days. And once cryptocurrencies stole the spotlight with Bitcoin in 2009, the world started to experience a transition. From what we thought financial limits t эхххo be, the innovations in crypto and blockchain technology have brought and still bring to the table new opportunities.
But what does “decentralized” mean anyway? And why is there so much buzz around this concept? How does it contribute to improving the financial field and other industries?
What Is Decentralization?
Basically, decentralization implies the transfer of power, such as decision-making, from a centralized entity (an institution, organization, or a single person) to a distributed network. To have a better view of what decentralization means, imagine that there is a decision to make in a family.
Making the decision in a centralized way would imply one family member deciding for them all. But with decentralization, all family members would vote for that decision to be made, they would have equal rights, and the decision would be significantly fairer.
Although decentralization is not new, but once crypto became popular, users started hearing more about what being decentralized means and what the benefits of decentralization are. And to be fair, the benefits are plenty.
First, a decentralized network is extremely transparent and trustless. Each network member has a copy of the data; voting for something could not be more straightforward. You have a specific amount of power based on your contribution to the network. All participants should vote, and everything is clearly described in the code of the network.
Then, decentralization highly contributes to providing financial freedom. Every network participant has full control over their transactions, and considering that the network is available anywhere in the world, they can take part in the decision-making process very easily.
Furthermore, decentralization provides surprisingly high levels of security and privacy. Why do you think there are companies that aim to build a decentralized crypto search engine? Crypto users look for security and privacy when trading their digital assets, and a decentralized browser can offer them that.
But are there other concepts that involve decentralization?
DeFi
DeFi (Decentralized Finance) is a developing concept that uses Distributed Ledger Technology (DLT) to decentralize various financial processes also found in traditional finance. This way, there is no need for third-party entities anymore, and this can provide faster transactions and surprising freedom.
For instance, if you want to exchange some fiat and it’s 2:00 AM, you have to wait until the next morning, when exchanges open. On the other hand, if you have some BTC and you want to exchange it for ETH at 2:00 AM, you just have to open your phone, laptop, or PC and complete the transaction. And this is the simplest example of what DeFi implies.
With decentralized finance, there is no more need for banks, and this can also lower the fees a user has to support. Furthermore, the level of security will be higher, as users hold their digital assets in secure wallets, and every transaction is processed based on, guess what? Decentralization.
DApps
Decentralized applications (dApps) are built and run on a blockchain and work based on a peer-to-peer (P2P) decentralized model. At first glance, decentralized applications are not different from centralized platforms.
The user interface is similar, and there is nothing to tell you whether a specific platform is decentralized. However, dApps provide significantly higher levels of transparency, security, privacy, and many more.
Still, as much as we would like to believe that decentralization is equal to blockchain, it is not.
An older example that proves this theory wrong is BitTorrent. The platform was built to enable users to share data via a peer-to-peer network. The data is stored on all network participant’s devices, and when a user wants to download something, they initiate the BitTorrent protocol and start downloading data from many other network participants. This way, large files are distributed as equally as possible, and sharing them has a lower impact on the network.
DEX
Decentralized exchanges (DEX) are platforms built on top of a blockchain and based on a peer-to-peer network where users can trade crypto in a non-custodial manner without needing a third party or intermediary to facilitate the transfer. Instead, smart contracts are the ones that process transactions, thus reducing transaction time and increasing transparency.
The main difference between DEXs and CEXs (centralized exchanges) is that in a DEX’s case, the user has full control over their assets, while CEXs can still control funds to some extent.
Then, centralized crypto exchanges use off-chain order books to match buyers with sellers. It is pretty similar to traditional finance and exchanges that have used such concepts for a long time. However, decentralized exchanges use an automated market maker (AMM) model. This allows assets to be traded permissionless and automatically via liquidity pools.
Decentralized Web
The term “decentralized web” might be a little vague for some users. However, “Web3” will surely enlighten them. Web3 might be the most intriguing innovation decentralization contributed to. It is the latest version of the internet, also called the “decentralized web,” because it is actually decentralized.
Compared with Web1 or Web2, Web3 was developed with a read-write-own functionality, and this introduces the concept of ownership to the internet space. Decentralization eliminates the need for third parties once again, and ownership allows users to own assets, data, and identities. This way, Web3 users will have full control over their personal data.
Although still developing, Web3 is the concept that will change how we look at the online space. With many updates and plenty of new technology being introduced to the concept, Web3 will become the foundation of how we use the internet.
In Conclusion
Decentralization is a concept that has become increasingly popular over the past few years. Bringing high levels of security, privacy, and transparency, decentralized platforms can change how we complete transactions and reshape how we navigate online.
Among all the projects being developed these days, dApps, DeFi companies, DAOs, DEXs, and Web3 are just some of the popular concepts that slowly but surely change the financial field and not only.