When Bitcoin was created, one of the features celebrated by enthusiasts and early adopters is the fact that it is a decentralized network which permits a deregulated transaction system. Breaking down the complexities of the industry, we will explore various aspects in a clarified manner. Our 3 key facts about centralized cryptocurrency will first delve into what is decentralization, look into the relationship between blockchain and cryptocurrency, as well as how a cryptocurrency can be controlled by a central authority.
- What is Decentralization
Charlie Lee, the creator of Litecoin, states “by definition, a decentralized cryptocurrency must be susceptible to 51% attacks whether by hashrate, stake, and/or other permissionlessly-acquirable resources. If a crypto can’t be 51% attacked, it is permissioned and centralized.”
A simple definition describes decentralization as the process by which the activities of an organization, particularly those regarding planning and decision making, are distributed or delegated away from a central, authoritative location or group.
With regards to Bitcoin and several other cryptocurrencies, this was a major factor that differentiated them from fiat currencies that were issued by central banks. This particular class of cryptocurrencies are produced, used and managed by the very users who belong to their networks.
Regular fiat currencies that are issued by central banks are operated within the rules of the said banks. The value attached to them, even though they are based on certain economic standards, are under the control or regulation of the banks. But in the case of Bitcoin and other similar cryptocurrencies, their values are determined both by normal economic forces of demand and supply and as a result of the network activity of its users. Hence power and control does not emanate from any central point. This is what we know as decentralization.
While this system was popular among cryptocurrencies, various debates on the possible cons of a decentralized and deregulated system prompted a different kind of innovation in the cryptocurrency ecosystem. This innovation is not particularly new, but it became popular among establishments who cherished the benefits of the technology behind Bitcoin and other cryptos, but had reservations about decentralization and deregulation. These reservations lead to the inquisition of 3 key factors about centralized cryptocurrency.
Therefore, today we can find a good number of “Closed” blockchain networks that are being used by companies to facilitate internal operations, but are not deregulated or decentralized. In other words, they are blockchains that have central control.
2. What is the Relationship Between Blockchain and Cryptocurrency?
Tokens are a fundamental aspect of blockchain technology. They are the fuel that enable participation and transactions within or across blockchain networks. In order to play any kind of role on a blockchain, whether decentralized or otherwise, you need to have the tokens of such blockchains.
Therefore, when a blockchain attracts reasonable demand, thereby creating value for its tokens based on the economic factors that we have mentioned above, and gets listed in a marketplace where they can be purchased or exchanged for fiat or other cryptocurrencies, then they can be regarded as cryptocurrencies. So, centralized cryptocurrencies can be described as the tokens of those blockchains that are controlled by a central authority. In essence, those cryptocurrencies are controlled by a central authority.
3. How Can a Cryptocurrency be Controlled by a Central Authority?
Just like the example we gave above using central banks, when the minting of a currency and the rules governing its network and community are under the control of a central body, it is centralized. This is exactly the case with centralized cryptocurrencies.
Unlike decentralized networks whose rules are set from the beginning and cannot be changed, centralized networks are subject to change. The tokens are not mined by the participants of the network, they are rather issued by the governing authorities based on agreed terms. These governing authorities are in charge of the centralized server and are responsible for its maintenance.
Although the blockchain industry would easily boast of being a decentralized ecosystem, investigation reveals that majority of the existing cryptocurrencies possess elements of centralization. This simply means that the creators of these cryptos have some level of influence over their networks. As a matter of fact, as much as over 80% of the cryptocurrencies in the market today are either fully or partially centralized. The biggest among them being Ripple’s XRP.
Centralized or not, all of these tokens can be found on Vertex.Market for anyone who wants to participate in the cryptocurrency marketplace. The Vertex platform provides extensive liquidity in a peer-to-peer marketplace for all levels of buyers. A subject of interest is that even tokens that are yet to be listed, but have been properly researched and certified for market viability can be purchased on Vertex. Transactions on the platform are possible using bank transfer or directly linking you to over 20 different payment gateways.
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