What Is Decentralized?

Decentralized organizations are those that do not rely on a single center of authority to enforce the rules and maintain operation. Instead, they are composed of numerous decision-makers with the same or comparable degrees of authority over the rest of the system and rely on varied consensus mechanisms to reach a common plan of action.

A decentralized organization is one of the two major types of organizational structure, the other one being centralized organizations.

An example of such a system would be a business that relies on franchising to expand, in which willing individuals are allowed to purchase a franchise, open their own branch of the company and make independent managerial decisions in regards to hiring, workflow organization and so on.

Another prominent example of decentralized systems are cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH), which are supported by networks of independent computer-nodes that achieve consensus via algorithms such as proof-of-work (PoW) to infallibly and uniformly process and record all transactions.

By the virtue of not relying on a central point of authority, decentralized organizations become more robust than their centralized counterparts; unlike in the latter, where a malfunction of the governing entity disables the entire organization, decentralized systems continue working even when one or several parts of them cease operation. They are also more democratic and less prone to censorship.

Decentralized organizations have disadvantages too, which mainly stem from a lack of unified vision and a clear separation of responsibilities. This tends to result in reduced efficiency compared to a single-minded centralized organization.

This problem is demonstrated by the fact that in 2020, Bitcoin’s network consumed over 70 terawatt-hours of electricity — comparable to the entire country of Chile —  despite it being able to process only about four to seven transactions per second.