Decentralisation is a term that has been associated with cryptocurrency, blockchain technology, and NFTs. Although this is the case, many people are yet to know the real meaning and practices done or required for something to be fully decentralised. This might be a huge issue for investors. Decentralisation is one of the key factors to consider before investing in cryptocurrency. Blockchain assets that are completely or mainly decentralised can gain value over tie, thus the better option for an investor. The word decentralisation is the opposite of centralisation.
Centralisation is where all the power, influence, and authority are located in the same place or person. Most governments are centralised under the president, who holds the most power in the government. Decentralisation is where power and authority are delegated to many people with limited powers. In cryptocurrency, there are two forms of power people can hold. This is brought about by whether the cryptocurrency is developed to be proof of work or proof of stake. If it is proof of work, the power to make an executive decision is held by crypto miners, while with proof of stake, the power is held by validators.
History
The term decentralisation was developed as a political term but found its meaning in other practices over time. This was developed during the French revolution. At the time, people were tired of power being held by aristocratic families that were not affected by the same things as normal citizens. As a result, they wanted the power and political functions to be dispersed and distributed to people, each holding specific roles in the government. Decentralisation also falls under the libertarian form of governance, where liberties are more important to the people and the government.
Decentralisation in Cryptocurrency
Unlike other forms of currencies controlled by single entities, cryptocurrency strives to be influence free as much as possible. This is why no single entity can control the majority share of cryptocurrency of any form. Each cryptocurrency company puts in place procedures to ensure that their tokens are influence free and the power remains with the people. Some of the reasons why this is important include the following:
Security
Security is one of the most important concerns when developing a currency. This is the reason why all central banks in the world have military security. One of the reasons for decentralisation is to secure the currency from outside interference. Fiat currencies are affected by many external factors that can devalue their worth.
But decentralising cryptocurrency ensures no single point of failure or a weak link in the system. The decentralised nature also helps investors and users be assured that the technology they use does not allow censorship. Decentralisation helps crypto and anything built on blockchain technology to be censorship-resistant.
Crypto regulations
The second reason decentralisation is important to cryptocurrency is to help avoid crypto regulations. Governments and organisations with power may want to control people and their freedom of speech and development. Cryptocurrency and other blockchain-developed technologies are centralised to ensure such organisations do not have the power to control what people do. Since no particular person or organisation is sanctioned or coerced into conforming to the regulations imposed, cryptocurrency becomes immune to regulations that may be meant to reduce its value or affect investors.
Crypto decentralisation is done in several layers that help to ensure total decentralisation. These layers are applied during cryptocurrency development, and the developers can adopt the layers completely or partially. Still, from historical events, crypto developed with partial decentralisation has either failed or struggled in the market. The decentralisation layers include:
Developer Layer
When cryptocurrency is being developed, people with different skill sets unite to develop a cryptocurrency. The developers can either centralise or decentralise the project they work on. If the developers are affiliated with any organisation or government, the project they work on will be centralised under the body they work under. This is why many cryptocurrency projects try to minimise external influence by ensuring the developers are not affiliated with any organisation. This is critical to the cryptocurrency to ensure governments or any other entity cannot regulate that project in the future.
Coin/Token Layer
Under the coin or token layer, the main problem arises with power. If one person or entity controls the most power, it will influence decisions. Cryptocurrency may be decentralised, but people and organisations may try to gain control over the project. The main reason this is the issue is that validators and minors can make decisions during votes, and the person with the most power may have an influence over the decision made. Some cryptos, such as Solana, track all their validators to ensure they do not gain control over the crypto to avoid such an issue.
Infrastructure
Crypto infrastructure includes the systems people use to access the crypto they need for various purposes. Initially, these infrastructures were decentralised, with employees and equipment spread worldwide. But recently, governments have forced these organisations to be centralised and impose KYC verification on their users. This is a weakness, meaning governments could use their influence to regulate the infrastructure to include or exclude some cryptocurrencies.
Blockchain Layer
The blockchain layer includes the systems set in place to ensure power is distributed to as many people as possible. Some cryptocurrency tokens use nodes to control this, while others prefer having clusters of validators, such as Solana does. The layer also includes transaction storage. If validators have to store transactions, this might centralise the entire system if a person or organisation acquires the lion’s share of the cryptocurrency. Bitcoin is regarded as the most decentralised cryptocurrency since all the transactions are recorded in the 15824 nodes spread globally.
External Layer
The last layer is the external factors. This layer is made up of things necessary for cryptocurrency use for the developers and the users. Some things that fall under this category include the websites used to access cryptocurrency, internet access, devices used, and financial institutions. Since many of these are centralised, they might greatly impact decentralisation applications and Web 3 technology. These centralised external necessities might be controlled by governments, which means that the government will have control over cryptocurrency use in their jurisdiction.
