Decentralization is a fundamental feature of crypto assets. Cryptocurrencies, tokenized assets, and the networks they run on — blockchains — are decentralized by design.
There’s no single body with ultimate decision-making authority to act as gatekeeper. Instead, the system runs by distributed consensus. Put simply, a transaction is approved when a mathematical calculation is completed successfully and it’s accuracy is verified by the entire network.
The rationale for decentralization is that it makes the financial system more resilient, efficient, and democratic. By contrast, systems that rely on a central authority have a single point of failure. Should things go wrong at that point, the negative effects would inevitably spread to the whole system.
Over the years, the concept of decentralization has been extended beyond cryptocurrencies and crypto assets to other blockchain-based applications.
Here are four key terms worth getting familiar with:
- Dapps, or decentralized applications
Unlike traditional apps, which typically run on a few dedicated servers, Dapps run on the excess power of thousands of servers. They’re also fully autonomous. Their operation is governed by mathematical calculations, so they don’t need to be overseen by humans.
- DeFi, or decentralized finance
This is a catch-all term for blockchain-based apps that cut intermediaries out of financial transactions, whether direct — that is, purchases of goods or services — or contract-based transactions like loans, mortgages, and insurance.
- DEX, or decentralized exchange
DEXs are a type of DeFi. They’re exchanges that exist on the blockchain and aim to make trading more transparent.
When you trade on a DEX, orders are completed using smart contracts — digital agreements written in code that are enforced automatically when predetermined rules are met. Crucially, unlike traditional exchanges, you don’t give up custody of your funds until a trade is complete.
- DAO, or decentralized autonomous organization
This is an organization that uses the blockchain as a replacement for human management. For example, a shop could store its inventory on the blockchain and smart contracts could manage stock based on historical demand, including triggering purchase orders, specifying delivery dates, and settling supplier invoices.
- Bitcoin is often regarded as the first fully-functional DAO. But it was the Ethereum blockchain that brought wider attention to DAOs by perfecting the environment in which smart contracts could be developed, tested, and deployed
- While the Ethereum blockchain was crucial in popularizing smart contracts, the concept dates back to the mid-90s. Computer scientist Nick Szabo first described smart contracts in 1996 and spent several years developing the idea, publishing a number of papers in the process
- Interestingly, Szabo has been mooted as the true identity of Bitcoin’s inventor Satoshi Nakamoto. Szabo has categorically denied this.
Want to know more?
This article on CoinTelegraph is an excellent primer on DAOs and Dapps.
You can also learn more about decentralized exchanges on Binance Academy. What’s particularly noteworthy about this article is that it acknowledges that, despite their many advantages, decentralized exchanges aren’t always the cheapest or most practical option.
The Metaco view
“Decentralization creates complete transparency, and that means a fairer, more inclusive financial system for all. But the concept has the potential to be revolutionary well beyond finance.
DAOs, for example, can negate the need for any admin, freeing up businesses so they can focus on more important tasks… including having more time to spend with their loved ones.”
Seamus Donoghue, VP of Sales & Business Development at METACO.