In today’s digital era, it’s important to know the differences between centralized vs. decentralized. Where we store our data, which entity is guarding our financial records, and what kind of organizational structure is better – all of them come down to the principal differences between centralization and decentralization.
The biggest differences between the two lie in the structure and the workflow process. A decentralized system removes the dependency on a central authority and benefit the users although it's still not a perfect system
Here is the complete explanation regarding the two and which one you should go with.
Centralization means concentration of power or process in the hands of the few. While the word “centralization” itself can be used on plenty of different occasions, most people use the word when they want to talk about power structure or workflow process.
Traditionally, centralization of power was seen as the most effective power structure in politics, business, and even tech. For example, many traditional projects have the same power structure, where only very few people are able to decide the direction of the projects.
In tech, the term centralization usually means the workflow of the tech itself. Centralized servers usually use the same data center to process all the data, where only the business employees are able to modify the data inside these servers.
How about decentralization? Contrary to centralization, decentralization basically means the power or structure is spread among the participants and supporters.
In terms of the power structure, decentralization means there’s no one single entity or individual that can always modify everything at will. The participants inside a decentralized network need to reach a consensus or majority agreement.
And when it comes to tech, a decentralized system utilizes peer-to-peer computing to store records or data, where everybody has the same copy. The idea is that nobody should be able to modify the data whenever he wants since all the other participants can verify if the data has been falsified.
The best tech example that utilizes a decentralized system is blockchain. You are probably familiar already with the blockchain if you have traded cryptocurrencies before. Read also our cryptocurrency for dummies guide.
While a centralized system puts the power and decision-making in the hands of very few individuals or entities, a decentralized system tries to share the power with all participants supporting its network.
The idea here is that a decentralized system does not want one individual or entity to have the ability to abuse its power. A decentralized system wants to create a “trustless” mechanism where the most powerful individual or entity inside that system cannot easily falsify any record or data since everything needs to go through a consensus.
Meanwhile, a centralized system believes in efficiency. It believes centralized leadership and workflow are must-haves to make sure everything works efficiently. A centralized system has to trust its leader or its centralized server. It comes with a default assumption that the one with power will not go rogue.
Here are the biggest advantages of centralization:
It’s important to keep in mind that centralized systems have been used for much longer than decentralized systems. One of the main reasons is because centralization provides a much more efficient workflow.
When you work with centralization, you can be sure that everything will go through the same process every single time. For example, data-keeping will always go through the same set of servers since they are stored in the same data center.
This guarantees a faster process compared to decentralized systems. In standard cloud computing businesses like Dropbox or Amazon Web Services, or even Gmail, all work fast because they utilize the same set of servers in centralized locations.
Any system always starts with “founders”, which means someone or a group of people have early visions and goals for that system.
With centralized systems, it’s much easier to stay consistent with these goals and visions of the project leaders.
Whenever the system wants to do something, you always have one or a few individuals directing and planning everything. It provides consistency and clear direction to everything.
Another great benefit of centralization is the incentives part. People create and manage something because they want to make money. That’s just part of human greed.
Founders or executives of companies work hard because they want to get more incentives as their companies grow. The incentives for the leaders in centralized systems are great and might help them to increase their productivity.
Meanwhile, there are more parties that get the economic incentives in a decentralized mechanism. Centralization ensures that the project or system leader gets the most (if not all) economic benefits.
Here are the biggest disadvantages of centralization:
One of the most obvious problems in centralization is the risk of corruption. When there are very few individuals or entities controlling the entire system, you must trust these individuals or entities to never do anything bad.
The problem is history has proved time and time again that human nature is corrupt, and the centralization of power will increase that risk significantly.
When only a few entities are able to modify records or data in a centralized server, they will be tempted to do it from time to time whenever there are incentives for them to do so.
Many corruption cases in financial world started with centralization. Just look at what happened with FTX, where their leaders abused and mismanaged their user funds. Ironically, FTX is a cryptocurrency exchange, and yet its centralized system failed everybody.
Another disadvantage of centralization is less transparency. Imagine where all your data is stored in one server managed by one entity. In this case, you have to trust that same entity to never lie to you.
If the entity wants, it can just modify your data without your knowledge and delete any digital footprints. You won’t be able to verify whether the data is correct or not since they are the only ones owning the data.
We have listed the pros and cons of centralization above. Now let’s talk about the biggest advantages of decentralization:
Undeniably, one of the most obvious advantages of decentralization is its ability to create a trustless mechanism. Since there is no single entity or individual controlling the system, you don’t have to trust a third party.
In a decentralized network like the blockchain, you can just broadcast your transaction, and thousands of miners will verify and confirm the same transaction. You know the transaction has been recorded to the blockchain since there are various different entities confirming the same thing.
You don’t have to trust one or two individual miners; you just have to trust the majority of them that all have confirmed your transaction.
Another super important point about decentralization is transparency. As shown above, the best example of a decentralized mechanism is blockchain. All verified records are publicly accessible in blockchain network.
Anybody can use blockchain explorers and confirm the transactions are valid since every network participant has a copy of the same transactions.
While not all decentralized systems have public explorers, the concept remains the same. When there are multiple validators and participants, you have more than just one person that can validate the records. It’s always more transparent than centralized systems.
Earlier I mentioned centralized systems are better for the project leaders or owners. The financial benefits in decentralized mechanisms, however, are actually more “for the people” and less about the top executives or leaders.
It’s a very subjective point of view to decide which one is better, but I personally believe having more incentives for network participants is fairer. Network participants are incentivized to participate and support a decentralized system. Meanwhile, centralized systems rarely incentivize its end users.
Just look at Bitcoin blockchain or Ethereum. The miners won’t waste their time providing computational resources if they are not incentivized. Spreading the project’s wealth with the community is actually one of the core political objectives of decentralization.
Here are the biggest disadvantages of decentralization:
Centralization provides faster workflow whereas decentralization is more inefficient. Why is that? Because every new record or data will have to be verified by all the validating nodes or participants.
This makes decentralized systems typically slower than centralized systems. This is also why more centralized blockchains are usually faster than more decentralized blockchains.
The more participants you have in one decentralized system, the longer it takes for everything to be verified.
Generally speaking, one of the risks in decentralized systems is the problem of leadership. In centralization, you have clear leaders and objectives. In decentralized systems, nonetheless, you don’t always follow the same vision.
Sometimes you might have more drama than unity in the long term without clear leadership despite some crypto fanatics might actually see it as an advantage.
Centralized vs. decentralized, who wins? Obviously, it depends mostly on what you are trying to do. If it comes down to business, there are various business categories where centralization makes much more sense. Likewise, certain use cases are far better utilizing decentralized systems.
You might want to try decentralized systems like the blockchain when you want to solve transparency or trust issues in a business process. Healthcare, supply chains, and even banking institutions can actually benefit from implementing decentralized mechanisms.
As for centralized systems, they are more useful if you are trying to build applications that require heavy resources.
It’s also important to notice that centralization against decentralization is not that black-and-white. There are multiple levels of decentralization. For example, a blockchain with 20 node validators is considered more centralized than a blockchain with 100 node validators.
One thing for sure. If you want to build blockchain-based businesses and applications, always try to prioritize more decentralization over features. Removing dependency on a single authority is the single most powerful feature of blockchain.