The main idea of digital money is distributed processing of financial transactions. The blockchain functions through the actions of ordinary users. Cryptocurrency network participants connect to Bitcoin and other chains through a software client and become nodes of the system. They perform the main work – they process transactions, create new links, and so on. This is called the decentralization of cryptocurrencies. The capacity of a peer-to-peer network depends on all nodes, not a single server.
However, one should understand where and how decentralization is applied in the field of virtual money. By the end of 2021, 5 main areas of use have formed:
- Applications (DApps).
- Organizations (insurance, financial).
Fiat is issued by the relevant government authorities. Usually, these are the central banks of countries. Cryptocurrencies, on the other hand, are issued by the network participants themselves who have connected to the blockchains. Independent users release new coins into circulation through various mechanisms embedded in the selected projects.
The most popular mechanism for issuing crypto assets is mining. It works thanks to the Proof-of-Work (PoW) algorithm. According to the rules of this mechanism, you need to use the computing power of your own computer equipment to process data in the system.
In 2015, the Ethereum project appeared. The main task of the developers was to create an ecosystem that would give users the opportunity to deploy decentralized applications (DApps) based on blockchain technology. They work in the cryptocurrency chain thanks to smart contracts. Information from DApps is processed by blockchain participants.
The client interface can be in any programming language that supports the communication protocol with the decentralized system.
Distributed ledgers are used in various online industries, for example:
- Gaming applications.
By the end of 2021, decentralized trading platforms (DEXs) have become popular. Their activities are not controlled by regulators (government agencies or non-profit companies).
Centralized exchanges (CEXs) have liquidity providers. These are large companies that cooperate with cryptocurrency trading platform. Liquidity providers have various assets in stock to organize sales. It is these companies that allow you to make instant trading transactions on exchanges. In DEX, the clients themselves act as liquidity providers. Decentralized exchanges do not require customers to undergo identity verification due to the use of the principle of distribution.
In 2016, The DAO platform appeared in the Ethereum ecosystem. It allowed developers to create decentralized autonomous organizations (DAOs). Although the Ethereum project The DAO was not the only one, its concept was entrenched in the cryptocurrency community for a long time. In 2021, most DAOs run on smart contracts in the Ethereum ecosystem.
Decentralized Finance – blockchain-based financial projects. Their performance is supported by peer network participants. There are no supreme controls in DeFi.
In 2021, DeFi was considered one of the main ways to make money from tokens. The price of such altcoins was actively growing. This is due to the gradual increase in the shortage of DeFi tokens.
Benefits of cryptocurrency decentralization
The principle of distribution in digital assets is important for various reasons. For example, the main advantage of cryptocurrency decentralization is the absence of state control.
Source: Plato Data Intelligence: PlatoData.ai