Decentralization is very important when it comes to interacting with cryptocurrencies and web3, especially in terms of security and transparency. Find out why decentralization is essential in the crypto space.
Imagine going to your banking website or app, but the website is down. So you go in person – and find that the bank is closed! Because the bank is a centralized entity, now there is no way to access your money until the bank decides to open or to fix its website. Decentralization removes this potential problem by not relying on a single entity, instead distributing control across multiple entities.
Decentralization is an important concept that affects how systems such as governments, technologies, and economics work. In crypto, decentralization improves security, transparency, and resilience by distributing decision-making across multiple users and organizations. It also empowers individuals and promotes innovation by enabling diverse ideas to thrive. Understanding decentralization allows us to recognize how it can result in stronger, more equitable, and adaptive systems.
What Decentralization Means
In crypto, decentralization means that your assets are more secure and there is a layer of transparency when participating on the blockchain, since record-keeping is spread across multiple, independent entities rather than one primary authority.
With a centralized entity like your bank, all transactions are hidden, including the bank’s – so you won’t know if it’s acting in your best interest, or using your money for something you haven’t approved. The transparency of the blockchain allows users to observe what is going on, reducing the possibility of concealed manipulations or fraud. Because no single entity has the ability to manipulate or modify the system without being observed, users can trust that it runs fairly and honestly.
Decentralization even affects how you use your wallet. If you use a self-custody wallet where you have your recovery phrase or private key, your wallet is decentralized because you can import your keys into any other wallet interface and access your crypto.
In contrast, if you use a centralized wallet like an account on an exchange, you do not have control over the wallet directly. If the exchange were to go down, you could lose all of your tokens. This happened to the users of the FTX exchange. Many people held their crypto in the exchange, but it later turned out that the exchange was using the crypto for its own ends. When users tried to cash out, they weren’t able to get their assets.
How Decentralization Helps Crypto
Since crypto is decentralized, no one person or entity controls who can use the blockchain. Anyone can build anything they want on the blockchain without needing permission or approval from a central authority. This permissionless environment helped create the great landscape of decentralized applications (dApps) for lending, trading, farming, and even social media.
If you live in a region where the government can block access to websites that host dApps, or if a dApp website goes down, you can still host your own instance of the website on your local machine or even interact directly with the smart contract for that dApp. The decentralization of the app makes it resistant to censorship and more resilient, allowing complete freedom and control of how you use your assets.
Most of the websites we visit today are run on Amazon Web Services (AWS). If AWS was to go down, much of the internet would be inaccessible. On the other hand, every node on the blockchain holds all of the information of the network, so it is highly unlikely for the entire blockchain to go down, even if some of the nodes go offline. You will always be able to access your tokens and interact with dApps.
Not only that – on many dApps, users can influence how the app should operate through a Decentralized Autonomous Organization (DAO). A DAO is a group of users who usually hold a governance token and can vote on proposals that impact the way the dApp works. This creates a more open, inclusive, and secure environment in which everyone can contribute.
Why You Should Only Use Decentralized Crypto
A lot of the best known blockchains, like Bitcoin or Ethereum, are decentralized networks. They are literally maintained by a wide network of users where everyone has a part in sustaining the decentralization. Not all blockchains are created equal, though. Quite a few are centralized where the creators are the ones that run most of the nodes and have complete control of how the network operates.
For example – one of the biggest blockchains, BNB Smart Chain, was actually a centralized network where Binance ran a majority of the validators. This allowed Binance to temporarily pause the whole network when there was a hack on their cross-chain bridge in October 2022. During that time, no one could move any tokens or interact with any dApps until Binance resumed the blockchain.
In the early days of Ethereum, the Ethereum DAO was hacked, but the creators couldn’t pause the entire network like Binance did because Ethereum was always decentralized. Instead, they proposed a hard fork where they would roll back the blockchain to before the hack took place. Those users who did not agree with this plan continued running the blockchain as normal, while those that did agree with the rollback updated their state of the blockchain. This led to the creation of two Ethereum networks, one with the hack and one without. The network containing the hack was named Ethereum Classic, while the rolled back network became the Ethereum we know today.
Source: Visual Capitalist
Thanks to decentralization, every user had a choice in the matter, instead of having to accept what the blockchain creators wanted to do. Using decentralized blockchains, applications, exchanges, and self-custody wallets is the only way to use crypto while remaining in full control of the assets – the way crypto was meant to be used.
Thank you for checking out our Why Decentralization Matters article!
Don't forget to download Enkrypt for a seamless web3 multichain wallet experience. We would love to hear from you on our social media about any guide or article suggestions you have for the future. Also, if you enjoy using mobile cryptocurrency wallets, give our MEW Mobile wallet a try, it's available on both iOS and Android platforms!
