Reading Time
~ 4 minutes
Spread the Word
Bitcoin’s Decentralized Network
Advertisement

There was a commotion in 2009 when people learned about Bitcoin and its revolutionary technology. In the beginning, Bitcoin was renowned primarily for its peer-to-peer transactions. However, it was realized by the world that its underlying technology was a real difference-maker. Bitcoin works on Blockchain, a decentralized network as of the right moment. If you are planning to trade bitcoins, you might consider using a reputable platform like Bitcoin Sprint.

Using a distributed ledger eliminates the need for third-party permission or limits. Approval from a third party is not required for this type of engagement. Because it is decentralized, it can be used for various purposes beyond Bitcoin transactions.

Transactions on the Bitcoin Network

A bitcoin transaction does not require the approval of a central counterparty, like a bank, because it is validated and cleared by the Bitcoin network. Verifying the sender’s possession of bitcoin is a necessary step in completing a bitcoin transaction; this means that all bitcoin transactions are entered into a publicly accessible database (called the Blockchain).

Several aspects of Bitcoin impact how decentralized this system can be in practice. To ensure the validity and integrity of the messages, bitcoin employs an exceptionally secure encryption technique. This process, known as “proof of work,” is used by miners to ensure the integrity of the Blockchain.

To begin, the only way to figure out a difficult arithmetic problem is by trial and error, which uses a lot of processing power and energy. The “winning” miner gets to add the block to their collection. If 51% of the network’s miners believe that a transaction is legitimate, it is considered verified.

Networks that Aren’t Centralized Can Have Advantages

Adding a third party with decision-making ability to a payment system might lead to issues. The third party’s interests can conflict with those of the users. To enhance the amount of revenue a government receives from producing currency, it may opt to inflate it, notwithstanding the wishes of those who use it (the “seigniorage” principle).

There are various methods in which payment systems strive to reduce the problems caused by divergent agendas. Decentralizing some authority from the central authority is a standard solution. For example, a national currency’s inflation rate may be controlled by an independent central bank not directly linked to the tax collection agency. Introducing systemic changes becomes more complicated when powers are segregated (deciding to inflate in this example).

Such remedies may not be enough to prevent a system’s aims from diverging from its users over time. “Time inconsistency” is a term used in economics to describe a situation where decision-makers have conflicting aims. The crux of the problem lies in the arbitrary power of a single decision-maker to make decisions. The ability of a small group to change the rules of the game in a currency like bitcoin is reduced because such decisions are made by the whole payment system’s user base.

An additional benefit of Bitcoin’s decentralized decision-making system may be seen in the open-source code it uses. It is possible for a large enough group of people who use open-source software to maintain and develop it, and these decisions are made public. It’s also possible for the software to be changed or even abolished at the discretion of a centralized decision-maker, with little recourse for the product’s end-users.

Another reason a program can be shut down is that it competes with a different company’s product or that a company has decided that it no longer fits with its new business strategy after purchasing it. As a result, they may not put in the time or money necessary to learn and implement new software. Bitcoin’s open-source code eliminates this time-inconsistency concern because the code is maintained by its users.

In Terms of Decentralization, Is Bitcoin the Best Cryptocurrency?

In short, Bitcoin is not the most decentralized form of digital currency. Its mining and mining pool structure allows a single organization to control a significant percentage of the network’s computer capacity.

Sharding and proof of stake are two methods used by other coins to validate transactions that increase decentralization. These solutions distribute power on the Blockchain among a more significant number of people, limiting the amount of influence that any one organization can wield.

Conclusion

There are both costs and benefits to centralizing decision-making. The drawbacks include arbitrary decisions, and the benefits include the ability to make quick decisions in an ever-changing environment.

Advertisement
Notice: The information in this article and the links provided are for general information purposes only and should not constitute any financial or investment advice. We advise you to do your own research or consult a professional before making financial decisions. Please acknowledge that we are not responsible for any loss caused by any information present on this website.