Centralization Vs Decentralization: A Detailed Comparison by The Fortunes Maker

What are the differences between centralization and decentralization, and which is more practical and comfortable for an individual? Many people have diverse opinions about these two concepts; some advocate centralized processes while others favor decentralized ones. These two terminologies actually serve as a means of representation for the work done by any institution. Any institution or business can hold your funds during the centralization process.

Decentralization, on the other hand, is a person-to-person process that is more secure than centralization because there is no involvement of a third party.

💡Table of content:

What is centralization?
How does centralization can be a threat to funds security?
What is decentralization?
What is the role of DAOs in the decentralization process?
Decentralization as a new era of finance
Traditional finance vs decentralized finance
Centralization vs decentralization
Conclusion

What is centralization?

Any institution or group that makes decisions using a process or strategy known as centralization. This institution or group has the authority to impose rules and laws on the neighborhood where people are employed in this process. People are unable to access it or exercise any rights to object to the presence of the regulations and laws. Everyone who lives in the community must abide by the regulations once they are implemented.

Let's say someone is making an investment through or on behalf of any organization. He is required to abide by the community's rules and regulations after investing in that organization. Because the organization in which he invested has put the funds of that person's investment on hold, he is no longer able to access those funds directly; instead, he must make certain appeals to the organization through their assistance center. This time, the decision to accept or reject the investor's appeal rests entirely with the organization.

How can centralization be a threat to fund security?

Although we just addressed this in the header, I'll still try to describe it here in terms that most of you can comprehend. As we previously said, any institute or organization that a person invested in will hold the person's investment fund. What can he do if this company decides to shut down the entire operation or refuses his investor's request? As he had accepted the organization's policies and regulations, he is currently powerless to take any action to obtain his money back. After all of that, this person will suffer a significant loss. We require a third party to hold our fund in accordance with their rules, terms, and regulations during the centralized process. As a result, our funds are not much safer in that regard.

What is decentralization?

Decentralization is simply a space where actions can be carried out without the need for permission. For instance, in a centralized system, transferring assets requires the approval of banks or higher authorities; however, in a decentralized system, payments are made directly between individuals, negating the need for a middleman and thus dispensing with the need for permission. The self-authority of decentralization. How is the idea of decentralization completely different from that of centralization? Decentralization refers to the blockchain, where every person's finances are safer because they may access them directly. Let's imagine someone had some stock. In order to get his money back, he would need to sell some of the shares. As he has direct access to his money, user funds are therefore safer than those of a centralization procedure. Since decentralization is a person-to-person process, no one can track your transaction address. Because it is encrypted and linked to the blockchain, the decentralized system is impossible to hack. Therefore, the security of the public monies is more here than it is in centralized processes.

What is the role of DAO’s in decentralization process?

In essence, a DAO is a group of people who can vote to improve the environment in their community. Their voting power is based on the amount of stock they have in reserve; if they have more stock, they will have more voting power. The rules and regulations that are going to be implemented in that community are determined by the majority vote.

For instance, the term DAO refers to giving priority to its community members, and we can say that greater investment gives a community member greater voting power. For instance, if someone is an investor in the cryptocurrency market, they have greater voting power to decide what should be implemented to foster a positive environment in the community and make it user-friendly.

Decentralization as a new era of finance:

Here, one conceivable question is: How is it possible for decentralization to usher in a new financial era? Therefore, decentralization is a procedure in which there is no need for a third party to complete a transaction; instead, it is a person-to-person process. No third party is required for people to execute their transaction.

Let's imagine someone wants to send money using any centralized banking system. Let's say the amount is $5,000,000. In that case, the bank may conduct any type of investigation into the funds, including asking questions about where the money came from and whether it is black or white money. Another consideration is that the person transferring $5,000,000 may also be required to pay taxes. Decentralization can usher in a new era of finance because there are no audits of your funds or requirements that you pay any kind of taxes in a decentralized process.

Traditional finance vs decentralized finance:

Traditional finance is essentially a centralization process whereby we can obtain loans, carry out insurance, and even transfer funds with the assistance of a third party entity. This third party entity could be the government, a bank, or any other organization through which we wish to carry out our task. Our money are not secure in traditional finance, thus we frequently require outside assistance to perform our tasks.

Decentralized finance, however, differs greatly from traditional money in every way. Here, we may perform our task without the assistance of any third party. Decentralized finance is conducted between individuals. These days, using decentralized finance is a more secure approach to complete any transaction. For example, you can use this method to conceal your transaction's quantity, address, or both. Decentralized finance uses an encrypted mechanism, making it impossible for anyone to hack or disrupt your transactions.