Why is Decentralisation Important in Blockchain?
The Difference Between Blockchain and Distributed Ledger
What is Decentralisation?
Is decentralisation Important in Blockchain? When we speak of blockchain technology, decentralisation refers to the distribution of data across a network of participants. In traditional centralised systems, a single entity, group, or person holds the supreme control.
Decentralised networks are more like a consensus, involving multiple participants who validate and record each transaction. This ensures that no single entity can fraudulently alter or manipulate the system. The result is greater transparency and security. In short, the more checking points there are for the data, the less likely for error and corruption.
Why Decentralisation Matters in Blockchain
In the field of digital technology and financial innovation, blockchain has emerged as a disruptive force. With cryptocurrencies shaking up the financial landscape, and capturing the interest of investors worldwide, it’s increasingly evident how significant decentralisation within blockchain is. Decentralisation is crucial for the true transformative potential of the blockchain to be realised. It has also reshaped the way we envision trust and ownership in the modern digital world.
The Benefits of Decentralisation in Cryptocurrency
Security and Resistance to Fraud
Decentralisation eliminates the risk of a single point of failure. Data is stored across the entire participating network, making it exceedingly difficult for the database to be compromised. Each transaction is linked to the preceding one, forming an unalterable chain of records, hence the name, ‘Blockchain’. Every participant in a decentralised blockchain network has access to the same distributed ledger.
Resilience and Redundancy
Traditional centralised systems are prone to disruptions. If the servers are down, then there is no access. In a decentralised blockchain network, even if multiple nodes are offline, the network continues to function as normal. This resilience is particularly crucial in financial transactions and online databases.
Empowerment and Inclusion
Decentralisation empowers individuals by giving them full control over their digital assets. This is particularly important to regions with limited access to traditional financial services, as blockchain technology enables participation without intermediaries. While there is still one full node left in operation, the system continues to function. Even if all the nodes are offline, it only takes one node containing the full database to come online again, and the system resumes operation.
The Disadvantages of Decentralised Blockchains
Scalability
Decentralised networks sometimes face challenges in scaling. This is crucial to accommodate an increasing number of transactions. The participating nodes that ensure security and validity can experience severe bottlenecks as network usage grows, and it outgrows its original plan.
Energy Intensive
Some blockchain networks such as Proof of Work based systems, consume significant energy for optimal function. This has raised environmental concerns and led to the exploration of more energy-efficient consensus mechanisms. However, what many do not take into account are the collective energy consumption of the existing systems by comparison.
Lack of Privacy
Unless the blockchain is encrypted and private by default, the transactions are transparent and trackable. There exists a new field of study called ‘blockchain analytics’ specifically created to track and trace all the transactions on a database. For privacy-conscious users, this poses a challenge. Currently, there are only a few cryptocurrency blockchains offering privacy by default. These are collectively called, ‘Privacy Coins’.
What is the Difference Between Distributed Ledger and Blockchain?
While the terms ‘blockchain’ and ‘distributed ledger’ are commonly used interchangeably, they are subtly different. Distributed ledger technology is a system where data is stored across multiple nodes or computers, therefore promoting decentralisation. Blockchain is a specific type of distributed ledger that structures itself into blocks of data, each linked through cryptographic hashes, forming an unalterable chain.
Differentiating Between Distributed Ledgers and Blockchains
The primary difference between distributed ledgers and blockchains lies in the structure and consensus mechanisms. Even though both involve multiple participants and shared data, blockchains make use of specific cryptographic techniques to create a secure and tamper-proof chain of data blocks. Once the data is written to the database, it cannot be altered. The data can only be read via the fixed tree of blocks of data.
Distributed ledgers, on the other hand, might employ different methods for recording and validating transactions. It’s not uncommon to have the entire database copied to each node, rather than just some of the blocks of data. Banking institutions have many distributed ledgers across different cities, servers, and even continents. It’s an entirely replicated database, and it’s editable. Therefore, anyone with access can alter the contents, and it will be replicated to every other ledger.
Decentralised Blockchain technology is having a disruptive impact on digital technology and the current financial systems. It’s paving a new way to perceive ownership, and accountability. These new ‘trustless’ transactions means that the participants engaged need not know or even trust each other. The blockchain holds the data, and it cannot be altered.
As the crypto market continues to expand and new innovations arise, understanding the importance of decentralisation is key to making informed decisions about blockchain investments, cryptocurrency trading, and the broader implications of this groundbreaking technology.
