Centralized vs Decentralized Blockchain

Panaesha Capital Pte ltd.

Blockchain Technology has intrigued investors from all over the world due to the incredible promise of being an incorruptible ledger. When the audience hears the word blockchain, they refer to the decentralized or public blockchains like Bitcoin which anyone can access and participate in. However, blockchain technology is not limited to being just decentralized as the centralized or private blockchains also have some advantages for corporations over the public ones. Private blockchains are useful for corporations who want to use the power of decentralized ledgers to improve the ongoing function.

Similarities Between Centralized and Decentralized Blockchains

If considered from a technological standpoint, both centralized and decentralized blockchains are very similar as both are distributed peer to peer networks where every node is responsible for storing and securing the shared ledger. Both public and private blockchains require a consensus mechanism (like proof-of-work or proof-of-stake) among nodes to establish a single ledger. Both of these types of blockchains also have to provide upper and lower bounds on the security and efficiency of the network.

Differences Between Centralized and Decentralized Blockchains

The main factor that distinguishes public blockchains from private ones is the pool of nodes that can take part in the network, and make administrative changes to the network. So, for example, Bitcoin which is the largest public blockchain in the world has no barrier to entry when it comes to accessing the ledger and sharing computer power to execute its proof of work algorithm. By contrast, IBM’s HyperLedger Fabric is more customizable in the sense that the organization that is deploying the blockchain has a say in every aspect of blockchain participation. Private blockchains are typically more restrictive in who they allow making changes to the ledger as they use the blockchain for the internal records.

Advantages of Decentralized Blockchains

The most popular blockchain in the world is the decentralized blockchain, Bitcoin. This type of blockchain requires very high security because of the enormous amount of mining resources that go in to make the network secure. That means to coordinate a successful attack on the Bitcoin network; a malicious actor would have to acquire a massive amount of resources which is economically unviable. Another advantage is that anyone can use the network to send funds to any part of the world without going through the trouble of the interference of a third party.

Advantages of Centralized Blockchains

Centralized blockchains offer much more customizability and control over the network to the organization using it as they get to decide who gets to participate in the network. Not many resources are invested in securing the decentralized network which makes centralized blockchains more friendly compared to their counterparts. This also means that they have higher overall throughput because they get to decide the hardware that the network runs on. In practice, this means that corporations could use private blockchains to store sensitive information among nodes that they trust. This allows them to use the incredible power of blockchains without having to make sensitive information public.

Disadvantages of Centralized Blockchains

Since there is not as much computing power securing the network as in the case of decentralized blockchains, centralized blockchains are less secure. It only requires a few of the nodes hosting the network to collude by amassing enough resources to hack the network. Also, since transactions are not publicly viewable, it is harder to verify the authenticity of the transactions for an outside party.

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