A Beginners Guide to Centralized Vs Decentralized Cryptocurrency
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A Beginners Guide to Centralized Vs Decentralized Cryptocurrency

April 20, 2020      Tarulika Jain

Blockchain-based digital currency is attracting the interest of the traders and investors all across the world due to its decentralized nature. Also, governments of many countries are planning to launch the digital currency which would be centralized in nature, i.e. managed by the central authority of the country. Confused? Centralized vs decentralized cryptocurrency has been a part of raging debate amongst the crypto community for a few years. Let us try to understand the basic concept of both decentralized and centralized blockchain, currency and compare them to have a crisp idea about the future of the crypto space.

What Is Decentralized Cryptocurrency?| Centralized Vs Decentralized Cryptocurrency

 

What is decentralised cryptocurrency

 

Satoshi Nakamoto in 2009 created our very own decentralized cryptocurrency or bitcoin.  The core principle of decentralization which means no single entity manages the crypto coins attracted the traders to invest in the cryptocurrency. Blockchain technology-based digital currency utilizes a number of entities and distribute the load of a network amongst multiple computers of the network. Crypto enthusiasts appreciate the idea distributed ledger-based decentralized currency as network provides easy traceability, transparency of transactions and relatively less prone to cyber-attacks. Some of the examples of cryptocurrency from which almost all of you might be well aware are Bitcoin, Ethereum, Litecoin and many more.

What Is Centralized Cryptocurrency?| Centralized Vs Decentralized Cryptocurrency

 

What is centralised cryptocurrency

 

As the name suggests, centralized cryptocurrency is that in which a majority of the supply of coins and assets is managed by a single entity, usually by the organization that founded it at first place. The degree of centralization depends on the type and purpose of ownership. More the currency is centralized, more its management, supply, operations, rules associated with etc is controlled by that particular single entity or organization or authority. In the crypto space, still, the idea of centralization is not supported by the majority of the crypto community as it is against the basic notion of the blockchain technology-based cryptocurrency. Mining (you cant mine coins, can only do the trade) and governance (development and management by a team of the entity) centralization are the major reasons which the decentralization and limitation of the cryptocurrency.

In crypto space, Ripple (XRP) tops the list of most centralized cryptocurrency as its founders have the control of over 60% of pre-mined XRP in circulation. Crypto miners face the mining constraints and traders might face the governance issues by Ripple Labs. But on the contrary, more stability can be expected as the currency is majorly controlled by the single entity. NEO and EOS are the other two popular cryptocurrencies that are highly centralized as they are governed by a fixed number of nodes managed by their own organizations.

If you dig deep, every cryptocurrency(except Bitcoin and Ethereum) is centralized in one or the other way and not follows the principle of complete decentralization.

Centralized vs Decentralized Cryptocurrency| Lets Compare!

It is well known to even a newbie that there are only a few of the centralized currencies present in the crypto space due to blockchain still being niche and the crypto community is relatively supporting centralization. But, the principle of centralized cryptocurrency also has its own advantages and decentralized one has its own disadvantages. Let us compare both principles and try to find out which one is better.

Decentralized vs centralized cryptocurrency

 

  • Governance: Let us compare the factor of governance in terms of centralized vs decentralized blockchain. In centralized systems, control of a single entity can be proved as a boon when the decisions of an entity improves the stability of the system but it can be proved as a bane if that entity makes mistakes or act in a corrupted manner. On the other hand, in a decentralized system, control is being distributed among various entities, thus stability can be compromised and it may take longer to finalize the decision( for instance longer transaction time of Bitcoin) but the transparency of the network is not compromised as every decision is based on consensus.
  • Security: In a centralized cryptocurrency network, the information and the confidential data is stored at a central hub (user give up control of the data), which might be prone to cyber-attacks but might create ease in management. On the other hand, a decentralized blockchain network eliminates the single point failure and decreases the vulnerability of cyber attacks being distributed in nature or is a peer-to-peer network.
  • Trustless network: In a centralized blockchain network, there is the interference of a third party in the process of transaction or any information sharing. This intermediary may result in middle man attacks over the network. On the contrary, in a decentralized network, no middleman is involved which assures that it is a trustless network as a transaction takes place between the sender and recipient only.
  • Infrastructure: Being a single entity, the blockchain network of centralized currency requires less infrastructure support to manage its operations while on the other hand, decentralized network requires a huge infrastructure to support and manage the various processes involved.
  • Legal issues: Decentralization is one of the major factor which has become the bone of contention to the government authorities in legalizing the cryptocurrency in their country. Authorities consider that the currency which is not controlled by any single entity is difficult to regulate. On the other hand, centralized cryptocurrency is relatively facing the lesser legal issues as they are easier to be managed by the authorities.

Besides the major difference, both the networks vary on the different grounds like that of scalability, transparency, bandwidth needed and many more. But the major factors signifies that none of the network can be employed as perfect for cryptocurrency evolution.

Summing Up

In the comparison guide of centralized vs decentralized cryptocurrency, we cannot justify which one is better as both have them have some pros along with some cons. Crypto enthusiasts support the idea of decentralization but the crypto movement might not accelerate without centralization. In a way, crypto space needs hybrid cryptocurrency with the best of both the networks so that governance and security can be assured at the same time without compromising the confidential information of the users deploying the network to share information or completing any transaction.

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Tarulika Jain
Tarulika Jain

Tarulika is an engineering graduate and an eloquent crypto blogger. Being a digital economy supporter, she keeps herself updated with the latest innovation in the crypto industry, Blockchain Technology, Internet of Things and other technologies. Currently, she curates the simple and interesting content for Crypto guides for beginners. If you want to learn more about the cryptocurrencies, latest trends of blockchain-powered AI applications, you are free to follow her on LinkedIn and Twitter.