Decentralization
When discussing decentralization in the blockchain industry, it’s important to first understand what it means. Simply put, decentralization refers to the degree of autonomy that a given entity, or set of entities within an ecosystem, have over their operations and how they interact with other entities in that same ecosystem. Decentralization is therefore often used as a measure of trustworthiness within an ecosystem. The greater the trust, the more decentralized an ecosystem is considered to be. With that being said, decentralization varies considerably in different industries. For example, in healthcare providers may wish to remain highly centralized so that access to patient data remains under one single umbrella organization and so that data privacy is protected more effectively. Conversely, in the financial services industry it may be desirable for certain functions such as trading so be carried out by multiple parties at once in order to reduce costs and increase liquidity for individual investors. In other words, there are pros and cons associated with decentralization within virtually any industry when considering its use of blockchain technology. Consequently, this article will explore some of the potential advantages decentralization has when using distributed ledger technology (DLT) within your organization along with some potential risks involved as well.
What is Decentralization?
Decentralization is defined as the degree of autonomy that a given entity, or set of entities within an ecosystem, have over their operations and how they interact with other entities in that same ecosystem. The greater the trust, the more decentralized an ecosystem is considered to be. With that being said, decentralization varies considerably in different industries. For example, in healthcare providers may wish to maintain centralized data control so that access to patient data remains under one single umbrella organization and so that data privacy is protected more effectively. Conversely, in the financial services industry it may be desirable for certain functions such as trading be carried out by multiple parties at once in order to reduce costs and increase liquidity for individual investors. In other words, there are pros and cons associated with decentralization within virtually any industry when considering its use of DLT within your organization along with some potential risks involved as well.
Advantages of Decentralization
The first advantage of decentralization is that it creates a more secure network. One of the main benefits of DLT is the way in which it creates a more distributed and transparent platform for data security. Each node in an ecosystem has the ability to record what transactions have occurred and this means there’s less risk of data being altered or stolen by third parties. But, not all decentralized networks are created equal. The degree to which data can be protected varies considerably from one blockchain to another. If you’re looking for a decentralized network that provides reasonably good data security then you should consider using one that uses Proof-of-Work consensus mechanisms like Bitcoin or Ethereum as their consensus mechanism over Proof-of-Stake like EOS or NEO. If you’re after something more private, such as Ripple (XRP) or Zcash, then you should consider which is greater for your individual needs or project use cases. There are a multitude of new security tokens and ecosystems being established and evolving into serious competitors to traditional financial institutions.
Disadvantages of Decentralization
One major advantage of decentralization is that it can help increase trustworthiness. This can, in turn, lead to increased public adoption and usage of the blockchain ecosystem. However, this also means that there may be more points of failure in decentralized systems which increases overall risk. In addition, a system’s decentralization level works on a spectrum and not all systems are created equal. For example, financial services companies who choose to use DLT for clearing and settlement purposes may still maintain high levels of centralization in their operational (such as trade matching) as opposed to operational functions such as trading itself. Finally, it’s important to realize that the degree of decentralization one wishes to have is entirely up to them and whatever they decide will depend largely on their needs and preferences.
TLDR:
The benefits of a decentralized blockchain include the ability to reduce costs, increase liquidity, and improve privacy for individual & team investors.