Q&ACategory: GeneralWhat is the difference between centralized and decentralized cryptocurrency?
Thomas J Hardison asked 1 year ago

I understand from your Linkedin profile, you’re a crypto consultant. So, I wish to know the difference of a centralized and decentralized coin. What difference does it make?

1 Answers
Melvin Wong Staff answered 1 year ago

Thanks for asking Thomas,

First, we need to understand why there’s the movement towards decentralization. We are living in a centralized world – from our government to banks to Facebook to even a beehive, everything is pretty much centralized. Until 2007-08 economic crisis ripped the financial world apart and the public (or Satoshi Nakamoto) lost faith in the centralized banking system and started to work on this revolutionary thing called Bitcoin with blockchain technology to create a decentralized monetary system – essentially a currency system without a centralized governing body. So, that spark ignited this crypto wildfire that is still burning till today.

Which perhaps prompted you to ask this question or “why must a cryptocurrency be decentralized”? Here are some comparisons.

Centralized Cryptocurrency

  • Susceptible to attack or hacks since it is controlled by a single entity where this entity could have single or fewer points of entry or nodes.
  • Lack of transparency and may be prone to corruption. With a single entity having full control, greed lurks around those who have too much power.
  • Centralized governance. Cryptos could be controlled by incompetent hands. I’m sure you heard of the infamous hyperinflated Zimbabwean dollar.

Decentralized Cryptocurrency 

  • Prone to hard fork because communities could not come to a consensus. Classic examples are Bitcoin and Bitcoin Cash, and Ethereum and Ethereum Classic
  • Can be expensive to use. Since there’s no single authority that decides the fees, anyone could say their price – so it’s a willing buyer willing seller world. Sky-high Bitcoin transaction fees to say the least.

That being said, there’s no clear winner I believe, since this crypto arena is still very much evolving. We have centralized cryptos like Ripple, NEO, NEM, IOTA and they are centralized in their own right. How about Venezuela’s crypto called Petro? Some even claim Bitcoin is centralized due to its centralized mining pools. Even Bank of England is considering launching its own digital currency.
So, I think we just have to live with both types of cryptocurrencies or maybe hybrid ones too. As long that these cryptos drive mankind to a better, brighter future, I won’t be taking any sides.

Melvin Wong Staff replied 11 months ago

Hello Thomas,
If you need more help, please leave a comment here.