What Does Decentralized Mean?

What Does It Mean To Be Decentralized?

While decentralization has become part of the lexicon, it has already assumed many meanings. In order to better understand a decentralized structure, it’s helpful to compare it with distributed and centralized models. While these characteristics could be used to describe an online network such as a blockchain, they are not limited to the online realm. These concepts can also be assigned to offline networks that exist in the physical world. Let’s examine the differences between these three categories.

Centralized vs. Decentralized vs. Distributed Networks

In order to distinguish between these three categories, let’s look at an example. Imagine that Company X is a large U.S. online retailer that has decided to handle its own warehousing and distribution. It starts with one warehouse in the state of Missouri. This would be considered a “centralized” distribution model. It has one central location from which it ships products. One benefit of this model is that it’s easier to coordinate logistics, but this may lead to longer customer wait times and increased shipping costs. Further, if the warehouse has a significant problem, there isn’t a backup option at the ready.

Let’s say the company decides to expand. It establishes warehouses in Texas and Minnesota; later, it adds warehouses in other states. This could now be considered a “distributed network” of — in this case — distribution warehouses. The more warehouses, the more distributed it would be considered. While this may make coordination a little more complicated, it also comes with some advantages. In addition to likely delivering shorter wait times for customers, a distributed network is more robust. If one warehouse experiences a natural disaster or a warehouse fire, there would be another warehouse that could pick up the slack.

Let’s say Company X ends up having warehouses in every state and then expands internationally. It doesn’t matter how many warehouses it controls — this collection of warehouses will never be considered decentralized. This is because the ownership and/or control of the network is controlled by a single entity, which in this example is Company X.

Here is a good rule of thumb:

• While all decentralized networks are also distributed networks, this doesn’t hold true when reversed; not all distributed networks are decentralized networks.

Benefits of Decentralization

In addition to sharing many of the advantages of a distributed network, a decentralized network confers additional benefits. For one, it makes the network more resilient. As the above example makes clear, it is necessary to trust that Company X will fulfill its orders and act in good faith. Further, the centralized operating structure of Company X means it suffers from a single point of failure: If Company X had a catastrophic failure, such as a bankruptcy leading to the liquidation of its assets, the whole network could go down with the company.

Let’s consider a different scenario: a global network of 1,000 warehouses working together to ship products, but this time, each warehouse is individually owned by a sole proprietor. If one warehouse disappears, there are still 999 waiting in the wings to keep the distribution network going. This would give this network a degree of decentralization. This resilience is one of the benefits of decentralization.

What Does Decentralized Mean in Crypto?

Decentralization offers similar benefits to online networks, such as digital payments systems. Unlike credit card networks, which are distributed but not decentralized, adequately decentralized blockchain networks do not suffer from downtime. Likewise, decentralized, blockchain-based payment systems offer censorship resistance — because no single entity controls the chain, no one can censor transactions.

Bitcoin’s Decentralized Structure

Let’s look at the first successful crypto network: the Bitcoin blockchain. The Bitcoin network is widely distributed — and decentralized. The network is run by a large network of nodes; each node stores a copy of the Bitcoin blockchain’s transaction history. There are over 15,000 Bitcoin nodes spread throughout the network as of April 2022. Even if the vast majority of network nodes were to go offline simultaneously — the Bitcoin network would continue to function as designed. In addition, Bitcoin introduces the concept of a trustless payment network. There is no central entity that you need to place trust in when you make a bitcoin (BTC) payment. Even Satoshi Nakamoto, the pseudonymous creator of Bitcoin, would be unable to shut down the network.

Other Decentralized Blockchains and Use Cases

These decentralized characteristics hold true for other blockchains as well, with more nodes making a blockchain more decentralized. Other public blockchains that are considered to be some of the most decentralized include Ethereum, Cardano, and Polkadot. Other use cases for these blockchains include decentralized finance (DeFi), decentralized cloud storage and computing, and various web3 applications.

It is important to note that, generally, only public blockchains benefit from the advantages of decentralization. There are a variety of other blockchain designs which do not, variations including: permissioned, private, and consortium blockchains. While these blockchains are, in some cases, widely distributed, they are not decentralized, as they can be controlled by a single entity — or a very small number of nodes or validators.