Key Concepts of Blockchain: Centralization vs Decentralization vs Distributed

When discussing cryptocurrencies and blockchain technology, the term 'decentralization' frequently comes up. Decentralization goes beyond a simple technical concept; it is a crucial element that brings fundamental changes to the way we store and manage data and make decisions. In previous articles, we learned that blockchain is a powerful data repository that prevents data tampering. In this article, we will delve deeper into the differences between centralized, decentralized, and distributed systems. By understanding these differences, we can comprehend the meaning of decentralization, the most significant feature of blockchain, and explore the blockchain technologies that utilize these characteristics.

How Centralized Systems Work

1. Central Server

Centralized systems operate around a central server. This server manages all the data and functions of the system and processes user requests. The central server performs various roles, including database management, application logic, and user authentication. All users and clients connect to the central server to exchange data. The overall performance of the system depends on the performance and stability of the central server.

2. Centralized Data Management

In centralized systems, all data is stored and managed centrally on the server. This facilitates data consistency and integrated management, but if the central server is hacked or physically damaged, all data is at risk. Therefore, database backups and enhanced security measures are essential.

3. Single Point of Failure

If the central server experiences problems, the entire system can be disrupted. This is known as a single point of failure. For instance, if a bank's central server goes down, all services such as ATMs, online banking, and card payments can be halted. To prevent this, redundancy and disaster recovery plans for the central server are necessary.

4. Rapid Decision-Making

Centralized systems have the advantage of enabling rapid decision-making by central authorities. When issues arise, the central authority can quickly respond and take action. For example, if a bank encounters a system error, the IT department can immediately address the problem.

Examples of Centralized Systems

Banks

Banking systems are a prime example of centralized systems. Customers can open accounts, deposit and withdraw money, and obtain loans through the bank. All transactions are processed by the central server, which the bank manages and records. Bank systems are under strict control of central management authorities and pay close attention to security and data protection.

Centralized Exchanges

In addition to traditional financial exchanges for stocks, bonds, and futures, centralized cryptocurrency exchanges manage all transactions and maintain user accounts through central servers. For example, in November 2022, FTX, which was once the second-largest cryptocurrency exchange globally, declared bankruptcy. This incident was due to poor management, risk management failures, opaque fund misappropriation with Alameda Research, lack of internal controls, and a liquidity crisis that failed to meet customer withdrawal demands. This event caused significant losses for many investors and eroded trust in the overall cryptocurrency market. In centralized systems, the failure of a specific institution can lead to the collapse of the entire system.

How Distributed Systems Work

1. Distributed Servers

Distributed systems operate with multiple servers or nodes interconnected. Each server stores and manages part of the system’s data and can independently process user requests. This approach provides higher availability and scalability by preventing the system's overall performance from relying on a specific server.

2. Distributed Data Management

In distributed systems, data is stored and managed across multiple servers. This maintains data consistency while enhancing system durability. If a particular server encounters issues, other servers can maintain the data and prevent service interruptions. Data replication and synchronization mechanisms are crucial.

3. Prevention of Single Point of Failure

Distributed systems ensure that even if a specific server fails, other servers can continue to operate, preventing the entire system from going down. For example, cloud services have servers in multiple regions, ensuring that if one region's servers are disrupted by a disaster, servers in other regions can maintain service.

4. Distributed Decision-Making

Distributed systems involve multiple servers or nodes collaborating on decision-making, which can take more time than the rapid decisions of a central authority. However, this contributes to the system's transparency and reliability.

Examples of Distributed Systems

Cloud Services

Cloud services are an example of distributed systems. Data centers distributed across various regions store user data and provide continuous service without interruption. For instance, if an East Coast data center in the US is incapacitated by a disaster, a West Coast data center can maintain the service. This ensures high availability and data protection.

Power Supply Systems

Power supply systems use distributed designs to prevent blackouts. The power grid consists of multiple power plants and substations interconnected to ensure that issues in specific regions do not affect the overall power supply. This enables stable and sustainable power delivery.

How Decentralized Systems Work

1. Distributed Ledger Technology

Decentralized systems use distributed ledger technology, like blockchain, to store and manage data. Without a central authority, network participants collectively verify and record data authenticity. Each participant holds a copy of the ledger, and new transactions are verified through consensus algorithms.

2. Autonomous Participation

In decentralized systems, anyone can freely join and contribute to the network. This increases the system's openness and transparency while allowing it to operate without depending on specific institutions or companies. For example, anyone globally can participate in the Bitcoin network through mining or transactions.

3. Trust-Based Operation

Decentralized systems operate on fair standards without a central trusted authority, achieved through cryptographic algorithms and consensus mechanisms. In the case of blockchain, consensus algorithms like Proof of Work (PoW) or Proof of Stake (PoS) ensure transaction reliability.

4. Transparency and Immutability

Decentralized systems provide high transparency as all transactions are recorded on a distributed ledger that anyone can verify. Once data is recorded, it cannot be altered, ensuring immutability. This plays a crucial role in maintaining data integrity.

Examples of Decentralized Systems

Bitcoin

Bitcoin is a prime example of a decentralized system. Network participants verify transactions and maintain the blockchain without a central authority. This is made possible through distributed ledger technology and the PoW algorithm, ensuring trustworthy transactions. Bitcoin marked the beginning of decentralized infrastructure.

Ethereum and Decentralized Applications (DApps)

Ethereum provides smart contract functionality, enabling the development of various DApps. The Ethereum network operates various forms of DApps, such as decentralized exchanges (DEX), decentralized autonomous organizations (DAO), and decentralized finance (DeFi), offering users more freedom and transparency.

Five examples of Decentralized Applications (DApps)

Applications running on decentralized networks like blockchain are being developed in various fields. These DApps are driving innovative changes across multiple sectors and have the potential to solve many issues that may arise in centralized systems. Below are types and examples of representative DApps.

1. Decentralized Exchanges (DEX)

Decentralized exchanges (DEX) enable direct virtual asset transactions between users without a central server. DEX uses smart contracts to automatically execute and verify transactions, ensuring safe and transparent trades without central authority intervention, offering lower fees and greater freedom. Examples include Uniswap and SushiSwap.

2. Decentralized Autonomous Organizations (DAO)

DAOs operate without central management entities and are governed by smart contracts. All decisions in a DAO are made through participant voting, ensuring transparent and fair operations. DAOs are exemplary of decentralized governance, where participants collectively manage and advance projects. Examples include MakerDAO and DAOstack.

3. Decentralized Finance (DeFi)

DeFi implements traditional financial systems on decentralized networks. DeFi applications use smart contracts to provide various financial services, such as loans, deposits, and trading. This allows users to access financial services without going through central institutions like banks. Examples include Compound and Aave.

4. NFT Marketplaces

NFT marketplaces enable trading of non-fungible tokens (NFTs). NFTs use blockchain technology to prove ownership of digital assets, including artwork, music, and game items. NFT marketplaces operate in a decentralized manner, offering greater transparency and ownership to users. Examples include OpenSea and Rarible.

5. Play-to-Earn (P2E) Games

P2E games allow players to earn cryptocurrencies or NFTs while playing. These games, based on blockchain technology, decentralize ownership of in-game assets and provide real economic benefits to users. Examples include Axie Infinity and The Sandbox.
DApps offer users more freedom and transparency and are innovative technologies that complement the drawbacks of centralized systems. They create new opportunities in finance, gaming, art, and other fields.

How to Use Decentralized Applications (DApps)

To use various DApps, a wallet is crucial. To use DApps, you must have a blockchain address on the network, which can be created with a supported wallet. Wallets connect to DApps, allowing you to receive deposits and withdrawals on decentralized exchanges, participate in voting, receive airdrops, and perform staking, among other functions. They are also used for trading or storing NFTs. When using DApps, always prioritize security. Use official websites and applications, and be cautious of phishing sites. Carefully check details before submitting transactions to avoid mistakes. Reliable wallets like D’CENT make connecting with DApps easier, allowing users to conveniently use decentralized services. Through this, users can experience the benefits of decentralization in finance, gaming, art, and other fields, enjoying a freer and more transparent digital environment.

Conclusion

Decentralization aims to overcome the drawbacks of centralization and distribution, showing its applicability across various industries with the advent of blockchain technology and Bitcoin. Decentralized systems enable safer and more transparent transactions by eliminating dependence on specific institutions, greatly enhancing trust and security. Additionally, all transactions and data are recorded on a distributed ledger, allowing anyone to verify them, increasing system transparency and preventing fraud.

Another advantage of decentralization is its openness and autonomy, providing fair opportunities for anyone to participate and contribute to the network. However, decentralized systems are not perfect, facing challenges such as decision-making delays, unclear accountability, and difficulties in design and maintenance. Continuous research and improvement are necessary to address these issues.

Decentralization holds the potential for fundamental changes in social and economic structures beyond mere technological innovation, paving the way for a fairer and more transparent future. In the next article, we will explore how Bitcoin achieved decentralization in detail.