What is Decentralization?
Crypto Investing Made Simple.
In simple terms, decentralization happens when the decision-making and controlling power is distributed among many entities instead of accumulating in and being controlled by one big entity (an individual or organization).
In the context of blockchain, decentralization is two-fold:
1. Data is recorded and stored everywhere on multiple sources, in multiple locations around the world, as opposed to one place
2. No one person, company, authority, or entity controls the data record & storage process
As a result, instead of putting our trust in a single entity that can control our data and is prone to compromise, we trust the systems, networks, and algorithmic rules that are distributed, transparent, and open-source. Each member in the network has a copy of the exact same data in the form of a distributed ledger and access to a real-time, shared view of the data.
In a centralized system, one entity controls and decides what happens to its users everywhere and owns all the data. In a decentralized system, the users own their own data and decide what happens in the system through a consensus process. The consensus process occurs when there are transactions being made on-chain or a decision being made in a DAO (decentralized autonomous organization), etc. It's important to note that no one entity controls the process and it's voted on by the community or the contributors.
While the essence of decentralization remains the same, the implementation may differ based on the purpose. Every blockchain protocol, dApp, DAO, or other blockchain-related solution adopts varying levels of decentralization. Decentralization should only be applied where it makes sense, just because something is an application on the blockchain doesn’t mean it needs to be 100% decentralized.
A couple of examples of decentralization in effect are DeFi and Web3. DeFi replicates banking services with transparent algorithms and Web3 allows people to own their data instead of big-tech.