There’s plenty of proof that the hype around cryptocurrencies is bigger than ever before. According to a study by Cambridge University, the current number of unique active cryptocurrency wallets is between 2.9 and 5.8 million, while CoinMarketCap has 212 exchanges listed on their site.
If you’re one of those who are brave enough to dip their feet into this growing landscape, you may find the whole process overwhelming. And it’s not just you—the cryptocurrency industry is still considered a novel idea. That’s why it’s crucial to learn everything you need so you can make better decisions.
Knowledge doesn’t just refer to a price or market changes. You also need to be aware of the concepts behind the scenes. For instance, it is important to know the difference between centralized and decentralized currencies and its relevancy to crypto exchanges.
Decentralization in a Nutshell
To understand decentralized currencies, first, you need to look at what decentralization means on its own. It refers to the “transfer of authority and responsibility of public functions from the central government to quasi-independent government organizations or private sector.” It can also be described as departments of a large organization moving away from one administrative center to other centers.
There are four common types of decentralization:
- Political Decentralization
This type gives citizens or an elected representative more power in decision-making affecting the public. It supports democratization by providing citizens or the representative more influence in the creation and execution of policies under the assumption that their decisions will be better informed and more relevant than those made only by national politicians.
- Administrative Decentralization
Administrative decentralization means redistributing authority, responsibility, and financial resources for public services from the central government among different levels or to agencies on-field units, subordinate units, semi-autonomous public authorities or corporations, or area-wide, regional or functional authorities.
- Fiscal Decentralization
This is the transfer of revenues from the central government to local units to help them carry out the decentralized functions effectively and to make decisions on expenditures.
- Economic or Market Decentralization
There are two forms of economic or market decentralization, both of which shift the responsibility and functions from the public or the government to the private sector (like businesses, community groups, cooperatives, private voluntary associations, and other non-government organizations): privatization and deregulation. Both usually go together with economic liberalization and market development policies.
What to Know About Decentralized Digital Currencies
Now that decentralization is defined, it’s time to find out how it correlates to digital currencies. But first, you have to understand how a regular currency works. Most countries follow the fiat model—they have money whose value is determined and adjusted by a central bank. This value is backed only by the central bank’s commitment to honor the recognized value, based on their funding obligations or goals.
Therefore, it’s safe to say that the standard cash or coins are centralized because there is a figure that regulates its value. In addition, centralized currencies have a single point of contact known as the private hub.
The value of a decentralized digital currency, meanwhile, is represented by the “coin” or the encrypted computer code in it. In addition, the rate is determined based on the end-consumers’ current demand and not by a central authority. This also means that coins like Bitcoin or Monero can’t be taken by a single authority or even by the developers of the currencies.
Benefits of Decentralized Currencies
Here are some of the advantages decentralized currencies like crypto can offer:
- Self-managing trust systems that eradicate the need for a centralized authority figure
When a third-party figure can’t seize funds or information, blockchain users manage the transaction themselves, making it trustless. This simply means that parties don’t have to trust each other when transacting because the ledger will record everything, making sure that all parties make good on the deal.
- Fraud prevention
The record on a blockchain is immutable, and can only be changed when all parties concerned agree to make changes. You can also monitor and maintain the integrity of your transactions anytime you want.
- Protected transactions
Most cryptocurrencies rely on NSA-formed cryptography to protect transactions, making sure that no one else aside from the wallet owner can make any transactions with it.
- Faster settlements and immediate transfers
Decentralization allows peer-to-peer transactions without third-party intervention, dramatically improving efficiency and saves people money that would have been used to pay for additional fees that traditional financial institutions require. Blockchain technology also eliminates the chances of delayed payment.
- Protection from government meddling
National monetary policies and other forms of government intervention have led to the devaluation of currencies in several instances, leading to inflation or hyperinflation. But since any government or central bank do not control cryptocurrencies, it means that altcoins won’t easily change in value, including goods and services bought with it, due to tariffs or unfavorable changes in monetary value.
Drawbacks of Decentralized Currencies
However, along with the benefits are also a few disadvantages that you may experience once you start dabbling into crypto:
- Anonymity can make it a magnet for criminal activity
Everyone can use crypto or other decentralized blockchain systems, that means criminals can try to take advantage of people by using it; it doesn’t help that blockchain is also anonymous in nature, making it easy for them to participate in illegal activity without being detected.
- Novelty leads to relatively high market volatility
Decentralized currencies are extremely volatile in part because it is still new. Governments, investors, businesses, and other groups are still fairly undecided on whether or not they want to adopt it. The volatility is also tied to its lack in inherent value is another issue, which can be solved by increased adoption.
The number of digital coins and adoption is increasing, but it is still insignificant when compared to transactions made with payment giants like VISA. This is primarily because the infrastructure of established institutions is better. Crypto can reach the same status if proposed solutions like lightning networks, sharding, and staking are proven effective.
- Lack of regulations and adoption by governments can hinder progress and investment in the technology
Government intervention can also be useful for cryptocurrencies despite the many positives of decentralization. If there are regulations and adoption by the government, there will be a better investment towards the technology and some of the issues already mentioned can be solved.
- Use and storage can be a problem for some
Admittedly, being tech-savvy is a requirement when using crypto. Those who are not may find it challenging to use or even store. For instance, the average person may struggle to create a wallet and transfer the coins from a digital wallet to cold storage. And when you leave your coins on the exchange, you are leaving it prone to hacking.
Centralized or Decentralized Exchange?
It is important to note that not all cryptocurrencies are decentralized; in fact, many people also dabble in the trade of centralized altcoins. Centralized exchanges are trading platforms that function like the traditional brokerage or stock markets. Since there is a company behind it, they maintain control over all transactions, and users do not have access to the private keys of their wallets.
Despite sounding counterproductive, considering that digital currencies happen because some people wanted little intervention from companies when doing their transactions, there are still those who opt for centralized trade because it also comes with many benefits like faster processing and execution of trade orders, high trade volume and liquidity, and fiat to crypto exchange.
If you want to start trading or investing in cryptocurrencies, the kind of coin you use is also vital then, especially if you’re meticulous about only having to work with either a decentralized or centralized currency. Don’t forget to do a little research as well, so you can make more informed decisions.
Keep on Learning
The advantages of decentralized currency logically come with a few perils, though the same could be said about any other financial platform. Aside from this, there are also obvious barriers to the mass adoption of crypto, so it’s only understandable that experienced investors choose to be on the safe side. Though, that won’t stop cryptocurrencies and blockchain from growing, especially since they address the need for decentralization, transparency, and flexibility.
Knowledge is power when it comes to crypto. The more you learn, the better you can trade. Every success story is essential to helping cryptocurrency earn wide-scale adoption.
More crypto insights each week from the Noah Coin Blog!