Cryptocurrency Basics

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Cryptocurrency Basics

Introduction

  • What is Cryptocurrency?
  • How does Cryptocurrency work?
  • Popular Cryptocurrencies
  • History of Cryptocurrency
  • How does a blockchain work?
  • What is "Decentralisation" and why is it important?
  • Mining and Consensus Mechanisms
  • Permissioned vs. Permissionless Blockchains
  • What is the difference between a coin and a token?
  • What are self-custody & non-custodial wallets?

Getting Started

  • How To Buy Cryptocurrency
  • Setting Up a Crypto Wallet
  • Securing Your Cryptocurrency
  • Understanding Exchange Platforms
  • Types of Cryptocurrency Wallet
  • Best Practices for Crypto Storage
  • Common types of Cryptocurrency Scams
  • How to identify a Cryptocurrency Scam?
  • How to avoid Cryptocurrency Scams
  • Do I owe taxes on Crypto transactions?
  • How to Track Your Crypto Portfolio

Decentralized Finance (DeFi)

  • What is DeFi?
  • How DeFi Differs from Traditional Finance
  • Major Use Cases in DeFi
  • What are Smart Contracts?
  • Understanding Liquidity Pools
  • Staking and Yield Farming
  • DeFi Risks and Security
  • What Is Crypto P2P Trading, and How Does It Work?

What is "Decentralisation" and why is it important?

 

In blockchain, decentralization refers to the process of shifting control and decision-making from a single, central entity (such as an organization or individual) to a distributed network of participants. The goal of decentralization is to reduce the need for trust among participants and to prevent any single entity from exerting control over the network, which could harm its functionality.

Decentralization isn't a new idea. When designing a system, three main types of network architectures are typically considered:

  1. Centralized: Control is held by a single authority.
  2. Distributed: Control is shared across multiple nodes, but there may still be some central authority.
  3. Decentralized: Control is spread across the network with no single point of authority.

In the context of blockchain, while the technology often relies on decentralized networks, a blockchain system cannot be strictly labeled as "decentralized" or "not decentralized." Instead, decentralization exists on a spectrum and can be applied in varying degrees to different aspects of a blockchain system. By decentralizing the management and access to resources within a blockchain application, a more equitable and resilient service can be achieved.

However, decentralization comes with tradeoffs, such as lower transaction throughput (slower processing of transactions). Ultimately, the level of decentralization chosen for a blockchain system should strike the right balance between performance and trustlessness.

Benefits of decentralization
Provides a trustless environment:
In a decentralized blockchain network, no one has to know or trust anyone else. Each member in the network has a copy of the exact same data in the form of a distributed ledger. If a member’s ledger is altered or corrupted in any way, it will be rejected by the majority of the members in the network.

Reduces points of weakness

Decentralization can reduce points of weakness in systems where there may be too much reliance on specific actors. These weak points could lead to systemic failures, including failure to provide promised services or inefficient service due to the exhaustion of resources, periodic outages, bottlenecks, lack of sufficient incentives for good service, or corruption.

Improves data reconciliation:

Companies often exchange data with their partners. This data, in turn, is typically transformed and stored in each party’s data silos, only to resurface when it needs to be passed downstream. Each time the data is transformed, it opens up opportunities for data loss or incorrect data to enter the workstream. By having a decentralized data store, every entity has access to a real-time, shared view of the data.

Optimises resource distribution:

Decentralization can also help optimize the distribution of resources so that promised services are provided with better performance and consistency, as well as a reduced likelihood of catastrophic failure.

 

 

 

More articles in this section

What is Cryptocurrency?

How does Cryptocurrency work?

Popular Cryptocurrencies

History of Cryptocurrency

How does a blockchain work?

Mining and Consensus Mechanisms

Permissioned vs. Permissionless Blockchains

What is the difference between a coin and a token?

What are self-custody & non-custodial wallets?