If you have been in the cryptocurrency market for some time, you are probably aware of any prejudices about any centralization, be it banks, governments or even centralized cryptocurrency exchanges. Why is the general cryptocurrency community opposed to centralization?
BASIC PHILOSOPHY: DECENTRALIZATION
We need to realize that one of the cornerstones of the cryptocurrency is the idea of decentralization, which runs counter to all the centralized systems that humanity is used to. In principle, each individual unit that has complete control over the management of the system is called the centralized unit, and the ecosystem that is controlled is called the centralized system.
Governments are centralized because nyesterday we have the right to develop, maintain and remove laws that govern us. Banks (and central banks) are centralized because they control our monetary system, which is at the heart of our economy. Companies are centralized because the CEO has the last word on maximizing profits and any company policies and rules.
Decentralization refers to the distribution of power and control
from a central authority -> to the whole community online.
The cryptocurrency and the underlying technology blockchain are at odds with any centralized control and instead give all participants a say in managing and contributing to an open and transparent system.
CHARACTERISTICS OF THE DECENTRALIZED SYSTEM
Before looking at centralized coins, it is crucial to understand the concept of decentralization. As Vitalik Buterin (founder of Ethereum) has theoretically said, there are 3 main categories in a decentralized system:
Blockchain systems are thus designed to provide mechanics for open and immutable systems so that they can be stable and resistant to attack. Bitcoin, the first decentralized cryptocurrency, was created to provide a viable alternative to a centralized monetary system, allowing users to transfer money without the need for intermediaries (banks and payment processors). The decentralized nature of Bitcoin provided a number of benefits, including:
Decentralization has been synonymous with the world of cryptocurrencies since the beginning. That is why there is great resentment against centralization – or any form of it – in the general cryptocurrency community. Let’s take a look at the different forms of centralization that exist in the cryptocurrency world.
TYPES OF CENTRALIZED CRYPT COINS:
Centralization in the context of cryptocurrencies takes two main forms, including:
Perhaps the most obvious feature of a centralized cryptocurrency is that the majority of coins belong to a single entity. Usually to the entity (company or foundation) that first created the coin.
Centralization is even more evident when the entity is a for-profit company. Owning a majority stake in a coin gives the company more power to control and manage the entire network. This is no different from a centralized company that has full control over all aspects of its operations and management. In addition, previously mined tokens are more likely to become centralized because the entire amount of tokens is initially created and no new ones are created in the future.
This is in stark contrast to coins such as Bitcoin and Ethereum, which can be mined and where miners have the opportunity to earn more coins during mining. In this article, we will further explain the differences between coins and tokens.
An example is Ripple (XRP), where Ripple Labs is the for-profit company that founded Ripple, and its founders own about 60% of all previously mined XRP in circulation. This means that only a small portion of XRP is owned by the public. The cryptocurrency community has a negative attitude towards this, as it runs counter to the concept of decentralization offered by cryptocurrencies.
There are two main elements in the category of centralization of mining:
This category of centralization refers to the number of nodes in the project. If most or all of the nodes belong to the coin-producing entity, the coin is called centralized.
Because nodes are required in each block circuit to verify and validate transactions, a block circuit that is usually controlled by nodes in a single central unit would compromise the integrity and openness of the network. This would make the bloc chain vulnerable to interference from external actors, such as entities controlled by governments and companies. In addition, a block chain controlled by one central unit would be vulnerable to a central point of attack – a situation where the entire network would fail if the nodes failed (shut-down).
NEO is an example of a project with only 7 validation nodes, all of which are controlled by the NEO team. Although NEO has said that decentralization will be gradually achieved in their agenda, the current situation will make NEO centralized.
If more than a third of the nodes remain offline, no consensus can be reached and the block circuit is effectively shut down. This means that no more than three of the 7 NEO nodes can be left offline so that the block circuit can continue.
Hash power refers to the computing power of nodes in a network. The centralization of the hash power occurs when the majority of the computing power belongs to one centralized unit. Also known as the “51% attack”, where miners who control the majority (51% or more) of the hash force can prevent new transaction confirmations, monopolize the mining of new blocks (and retain all benefits), block all transactions at their disposal, and the most dangerous , they can spend coins twice. This in turn compromises the security and integrity of the block circuit.
Double spending is the possibility that a coin will be spent twice.
This is a scam in which the owner may make a copy of the digital token
and send it to the party (or merchant), keeping the original.
An example of a “51% attack” occurred in 2018. in May with Bitcoin Gold, a Bitcoin hard fork. The malicious actors were able to control the huge amount of Bitcoin Gold’s hashing capacity and were able to spend twice as much on the coins over several days. They managed to steal more than $ 18 million worth of Bitcoin Gold.
There are several ways to mark cryptocurrency as centralized. It is true that cryptocurrencies were originally created with a philosophy of decentralization, and the community may be negative about any variations that run counter to this ideology. A centralized solution – namely performance, scalability and stability – certainly has values that require closer scrutiny, but ultimately community involvement and participation is a vital feature of cryptocurrencies and blockchain technology.