WTF Is Decentralization?
Here’s a Breakdown of the Crypto Community’s Favorite Buzzword
If you’ve been in the crypto world longer than a millisecond, chances are you’ve heard the term “decentralization” tossed about. But what does decentralization actually mean? Why does it matter? And how does it differ across some of the big players in the crypto world?
Well, stick around and find out. Let’s dive in.
What is Decentralization, Anyway?
The textbook definition set down by the logophiles at Merriam-Webster defines decentralization as “the dispersion or distribution of functions and powers.” It’s essentially a process that distributes the controlling activities of an organization, away from a central, authoritative entity to diversified groups and individuals involved in the organization.
In a nutshell, if everything is centralized, only a few people have the power to make a final decision. However, in a decentralized ecosystem, the collective (or people elected by the collective) possess the power to govern as a whole. A large aspect of decentralization within a blockchain is the ability to maintain and update the distributed ledger in a dispersed manner and eliminates the need for a central party.
So Why Does Decentralization Matter?
Networks that are decentralized aim to reduce the amount of trust needed between participants, and to prevent them from exerting authority or control over each other in ways that compromise the network’s performance.
Beyond that, decentralization further benefits the overall function and efficiency of a blockchain by improving data reconciliation, reducing vulnerabilities and the likelihood of systemic failure, and optimizing resource distribution across the blockchain.
But while all blockchains aim for essentially the same end goal, they don’t all take the same route to get there…
Cardano vs. Bitcoin: Two Roads to Decentralization Diverged in a Wood
All blockchains utilize a consensus mechanism to verify that every transaction within a block is accurate (and therefore legitimate) across the database. Once consensus is reached on a string of transactions, a new block is minted – but the difference between Cardano and Bitcoin lies in how each blockchain reaches that consensus.
Bitcoin At a Glance
Bitcoin operates under a Proof-of-Work model which relies on work done by miners who are incentivized with rewards in the form of bitcoin to keep the ledger of all crypto transactions by solving complex mathematical equations in order to mint new blocks. However, because of the computing power required to solve these algorithms, collections of miners, known as mining pools, join forces to mint blocks more quickly and efficiently and therefore collect more rewards. Unfortunately, this means that miners with smaller stakes are often forced to lend their computing power to larger, more influential pools, the 10 most prominent of which are currently responsible for 85% of Bitcoin block production. As you can imagine, this distribution challenges the chain’s decentralization model.
Cardano At a Glance
On the flipside, Cardano utilizes a Proof-of-Stake model. Unlike the proof-of-work model which uses miners, proof-of-stake blockchains utilize validators. And rather than solving math problems, randomly selected validators are able to earn the right to verify the next block of transactions (and earn the rewards that come with it) by staking or “locking” their cryptocurrency for a set amount of time.
Similar to how Bitcoin miners with less powerful computers can group together on Proof-of-Work, validators on Proof-of-Stake can pool their money together in a staking pool to compete with other validators that might have more block-creating power. But unlike Bitcoin, Cardano has taken measures to avoid the issue of larger pools controlling the majority of the blocks minted on the chain by capping rewards once a pool has reached a set “saturation point”.
However, like most things, the process isn’t 100% foolproof. Many would-be delegators are drawn to larger staking pools which offer tempting rewards in the form of native assets – AKA tokens – that are unique to that pool, leaving smaller staking pools struggling to compete. But luckily, there’s a solution for this too…
Drip Dropz Has Entered the Chat
DripDropz is a platform that provides token dispensing services to the Cardano community. You can think of it as a token vending machine that any pool or token project can use to distribute their tokens in any way they choose – whether it’s to select pool delegates or all delegates across the entire blockchain.
Why is this a sweet deal for delegates? Because all delegates are able to receive a variety of tokens from different projects without the need to switch pools. Meanwhile, token projects benefit from a more open ecosystem that doesn’t require them to open a pool, and community pools enjoy token distribution that is limited to its delegates. It’s a win-win.
The Big Picture
When it comes to the Magnum Opus of cryptocurrency, decentralization is the name of the game. And while both Bitcoin and Cardano achieve decentralization, they do so in very different ways. But it’s important to recognize that a core feature of decentralization lies in the concentration of people who maintain and update the blockchain. What we do know is that the Bitcoin blockchain is kept by a powerful few groups, while the Cardano blockchain is fundamentally designed to be maintained by the many.
So which is better? That’s up to you.
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