The concept of centralization relates to the distribution of power and authority in an organization or a network. When a system is centralized, it means that the planning and decision-making mechanisms are concentrated in a particular point within the system.
A governance mechanism is required in any system. Otherwise, no decisions can be made that give direction to the rest of the network. The level of governance can range from laying down the foundational rules to micromanaging each function of the system.
In a centralized system, a central point of power authorizes and enforces decisions, which are then passed down to lower tiers of power.
The opposite of a centralized system is a decentralized system, where decisions are made in a distributed way without the coordination of a central authority.
The key question in the debate of centralization vs decentralization is whether the specifics of decision-making should happen at a central point in the network, or be delegated away from any central authority.
There can be several advantages of centralization:
- Long-term strategy can be tightly controlled.
- Responsibilities are well-defined within the system.
- Decision-making is fast and clear.
- The central power has an interest in the prosperity of the entire network.
Some of the disadvantages of centralization can be:
- Miscommunication and discrepancies between the center and other places.
- High chance of corruption.
- Requirement to retain power at the top level.
- Excludes actors at the local level with specific knowledge or expertise.
Before the birth of Bitcoin, it was commonly believed to be impossible to design a decentralized network where consensus is achieved without significant drawbacks.
However, with the introduction of Bitcoin, a decentralized network has become a valid alternative to centralized ones. This made the debate between centralized and decentralized more elaborate and provided a potential alternative to the existing power structures.
