Decentralization in cryptocurrencies – what is it?
Decentralization of Cryptocurrency
The first cryptocurrency was conceived as a payment system independent of governments and banking corporations. Bitcoin, for example, has no owner, and its blockchain is stored on multiple devices, making it resistant to manipulation. Cryptocurrency assets exhibit the following characteristics:
- Coins have no physical representation.
- Transactions within the network are fully anonymous.
- The network is protected against attacks.
- There is a known finite token supply, implying the presence of deflation.
Decentralization of Cryptocurrency
Decentralization implies the interaction of network participants without a central issuer or regulator.
The issuance process depends on the consensus algorithm of a specific cryptocurrency. For example, the Proof-of-Work algorithm rewards miners with newly created coins. A multitude of network participants contribute to the creation of new coins, which enhances the security of the mining algorithm.
Fiat money and traditional exchange-traded assets often have centralized owners who can use those assets at their discretion. Any significant failure in a centralized system leads to substantial disruptions in the functioning of financial institutions and society as a whole. Cryptocurrencies do not suffer from this drawback.
Each data node in a blockchain system holds equal importance, distributing trust across the network.
Decentralization Violation or 51% Attack
The most dangerous phenomenon in the world of cryptocurrencies is a 51% attack. The vulnerability of the Proof-of-Work algorithm manifests in the following way:
- An attacker gains control by capturing 51% of the network's computing power.
- They prevent other miners from finding blocks and engage in double spending of coins.
- They gain control over fees and transactions.
- They split the blockchain into multiple competing chains.
Such attacks are nearly impossible against popular blockchains; however, younger projects often face this threat. The 51% attack represents the greatest risk to the decentralization of cryptocurrencies.