Decentralization is the core concept behind the advent of blockchain technology (though there are centralized blockchains, with permissioned and permission-less networks).
Decentralization basically means that this technology is not dependent on a central authority or point of control. It works in such a way that the data of every user and transaction is stored and recorded onto a distributed (decentralized) ledger. Decentralization also validates the authenticity of the data through mutually agreed protocols.
To understand why decentralization in blockchain technology is a game-changing concept in the world of digital communication and transactions, we have to look at certain key features that can be considered as merits of the notion and underlying technology:
1. Zero Fraud
Decentralization means the absence of a central authority governing the blockchain protocol. This brings a lot of transparency among users as every node is treated equally where each transaction is verified by all the individual nodes before being recorded on the blockchain – which, in this case, is an open source ledger. Transactions being entered into such ledgers are monitored and checked for their integrity by various miners. This ensures zero scopes for any duplication of currency.
2. Absence of Government Intervention (In mining Cryptocurrencies)
Constant interventions on part of governments have curtailed the development of their own fiat currencies. In the past, devaluations of various currencies have led to increases in trade deficits. Government interventions have contributed to a host of economic problems like hyperinflation, distortion of interest rates, tax hikes, etc. In the world of cryptocurrency, the scope for such problems is negated due to the absence of government intervention.
3. Low Transaction Fees
Transactions on the blockchain are instantaneous and are based on end-to-end user encryption which eliminates the costs associated with middlemen. There are transaction fees associated with Crypto-exchanges but it is negligible in comparison to traditional middleman fees. This helps reduce capital costs to a great extent.
Blockchain can be used as the most reliable of technologies today, taking into consideration its fundamental attribute of decentralization. Unless the whole network gets compromised (which won’t happen since there is no single point of failure), this technology will remain as is, and record each transaction. If one node gets compromised, the other million nodes will record the data and update the system to safeguard its reliability.
5. All-Time Availability
Cryptocurrencies are accessible to users whenever they need them. One can transact with Bitcoin, and subsequent Altcoins, at any hour of the day if he or she wishes to do so. Unlike the system of banking, there are no public holidays. This solves the problem of liquidity to a great extent, thereby improving trading in general.
Why, then, do Governments and Centralized Financial Institutions oppose Bitcoin so much?
Readers must find themselves in a dilemma while reading on Bitcoin and other decentralized coins, that in spite of having such significant advantages – what would have propelled certain democracies to ban Bitcoin, and cryptocurrencies in general?
To put it bluntly, governments and centralized financial institutions oppose Bitcoin and other decentralized cryptocurrencies as their blockchains do not fall into the purview of their rules and regulations. These entities fear giving up institutional and monetary power, in a world where cryptocurrency will take over old and traditional fiat currencies.
Fiat currency is nothing but a piece of paper which holds a certain value and not backed by a physical commodity. The values are derived by the forces of demand and supply as opposed to the value of the material from which the money is made.
i) Collapse of the Banking System
If we adopt cryptocurrency as our medium of transacting while replacing traditional bills, the entire system of banking will collapse. The absence of banks or any other centralized financial entity will mean the absence of middlemen in transactions, in issuing financial services to those seeking it. This arrangement will not favor governments and other centralized institutions and may result in large-scale unemployment for the ministry.
ii) Reduction in Government Revenue
Replacing paper currency will result in a domino effect that will be felt by everyone in the mainstream economy. Reduction in institutional fees, as well as fewer receipts in taxes, will result in far lesser revenues for the government.
iii) Economic slowdown
Moving from paper currency to cryptocurrency will result in the economy slowing down in the short-run. If banking systems become irrelevant, it will affect people’s livelihoods to a great extent. The move towards mass adoption will definitely slow down financial and economic trading in the short-run.
The government’s apprehension in regards to cryptocurrency is in relation to the increase in criminal activities due to blockchain technology’s peer-to-peer network sharing protocol based on encryption. It has the potential be used in soliciting illegal activities, as with any new technology (As seen in the 1990s with the internet). Using this as a cause for concern, the center will take every measure to vote against cryptocurrency adoption.
v) Likelihood of Hacks and Thefts?
Even though Blockchain technology is significant in its encryption and due to the lack of a single point of failure due to multiple nodes on the network; hackers can still infiltrate users’ hot wallets, particularly if the user has his or her crypto-assets stored in a cryptocurrency exchange. These exchanges get hacked regularly, and its difficult or even impossible to retrieved stolen cryptocurrency from hackers.
vi) Lack of Knowledge for the Common Man
Cryptocurrencies are virtual in the sense that one can touch or feel these digital currencies. Furthermore, the values are constantly fluctuating. A layman will never convert his or her dollar bills into something that exhibits such volatility. Furthermore, Bitcoin and subsequent Altcoins are built upon complex algorithms that are beyond the understanding of an average citizen.
To put things into perspective, we can observe that governments and central banks along with centralized financial institutions face a major threat to their traditional modes of operation as a result of this technology. The central authorities are not willing to lose their footing with regards to financial dominance – and subsequently centralization of power. Add to this, the common man is not tech savvy enough to understand the technology or the currency, which further fuels the skepticism in regards to the adoption of digital currency.