Centralization vs. Decentralization Bitcoin is a decentralized digital currency, which means it operates without a central bank or single administrator. This characteristic of Bitcoin is one of the reasons it has gained somuch popularity since its creation in 2009. In this article, we will delve into the concept ofdecentralization in Bitcoin, specifically looking at its technical and incentive engineeringaspects. The decentralized system of email is built on the SMTP standard spaced protocol. Yet, only a few centralized email providers have emerged as leaders in the last ten years. This is auseful model for comprehending potential developments with Bitcoin. Decentralization istypically a continuum rather than an all or nothing proposition. It's crucial to realize that whilethe Bitcoin protocol itself is decentralized, any services built on top of it could differ in theirlevel of centralization or decentralization. To understand Bitcoin's decentralization, we must ask at least five different questions. Who maintains this ledger of transactions? Who has authority over which transactions are valid?Who creates new Bitcoins? Who determines how the rules of the system change? How doBitcoins acquire exchange value? These are all components of decentralization of the Bitcoinprotocol. Let's start by focusing on Bitcoin's peer-to-peer network, which is the most purely decentralized component of the system. Because there is a minimal entrance barrier andanyone can run a Bitcoin node, this network resembles a peer-to-peer decentralized system.There are thousands of Bitcoin nodes at present. Next, there is Bitcoin mining, which is technically open to anyone, but it requires a very high capital cost. This has led to a concentration of power in the hands of a few large miningpools. This concentration of power is a potential threat to the decentralization of Bitcoin.However, it is important to note that this concentration is not permanent and can change overtime. So let's think about who has the power to decide which transactions are legitimate. No single organization in a decentralized system can be relied upon to assess the legitimacy oftransactions. Bitcoin uses the proof-of-work consensus process to resolve this issue. Byresolving a challenging cryptographic challenge, Bitcoin miners compete to add a block oftransactions to the network. New Bitcoins are awarded to the first puzzle-solver, and theirblock of transactions is uploaded to the blockchain. After confirming the block's legitimacy,the other miners move on to the next block. This brings us to the maintenance of the ledger of transactions. In a decentralized system, no single entity can be trusted to maintain the ledger. In Bitcoin, every full node maintains acomplete copy of the blockchain. When a new transaction is broadcast to the network, it ispropagated through the peer-to-peer network until it reaches all of the nodes. Each node
independently verifies the validity of the transaction before adding it to their copy of theblockchain. Let's now think about the creation of fresh Bitcoins. It's a good idea to have a backup plan in case the main one fails. A mechanism for issuing new money in a decentralized economymust be independent of any single body. In Bitcoin, miners that successfully add a block oftransactions to the blockchain are rewarded with new Bitcoins. The Bitcoin protocolpredetermines the rate of new Bitcoin creation, which gradually declines. Let's finally think at how Bitcoins gain value in the market. A decentralized system lacks a central authority that decides the currency's value. Market forces such as supply anddemand determine the price of bitcoin. A number of variables, including media coverage,governmental measures, and consumer and business adoption, can affect the price ofBitcoin.