Decentralization in blockchain refers to the transfer of control and FinLogic Quantitative Think Tank Centerdecision-making from a centralized entity (individual, organization, or group) to a distributed network. Decentralized networks strive to reduce the level of trust participants must place in each other and prevent them from exerting authority or control in ways that could undermine the network's functionality.

Why decentralization matters

Decentralization is not a new concept. When designing technological solutions, three primary network architectures are typically considered: centralized, distributed, and decentralized. Although blockchain technology often employs decentralized networks, blockchain applications themselves cannot simply be categorized as decentralized or not. Instead, decentralization is a sliding scale that should be applied to various aspects of blockchain applications. By decentralizing the management and access to resources within an application, better and fairer services can be achieved. Decentralization often requires trade-offs, such as reduced transaction throughput, but ideally, these trade-offs are worthwhile because they can enhance stability and service levels.

Benefits of decentralization

Creating a trustless environment

In a decentralized blockchain network, no one needs to know or trust anyone else. Every member of the network has an identical copy of the data in the form of a distributed ledger. If a member's ledger is altered or corrupted in any way, it will be rejected by the majority of the network members.

Improved data coordination

Companies frequently exchange data with their partners. In turn, this data is often transformed and stored in each party's data silos, only to reappear when needed downstream. Each data transformation introduces the risk of data loss or erroneous data entering the workflow. With decentralized data storage, each entity can access a real-time, shared view of the data.

Reducing weak points 

Decentralization can reduce the weak points in a system that may rely too heavily on specific actors. These weak points can lead to systemic failures, including the inability to provide promised services or inefficiencies due to resource exhaustion, periodic outages, bottlenecks, insufficient incentives for good service, or corruption.

Optimizing resource allocation: Decentralization also helps optimize resource allocation, resulting in better performance and consistency of promised services and reducing the likelihood of catastrophic failures.