What is the Difference between a Centralized Network, Decentralized Network, and Distributed Ledger?

February 19, 2019

The increasing interest in cryptocurrencies across the globe has led to new terminology. Technocrats are under pressure to deliver robust solutions to buy, sell, use, and store cryptocurrencies.  

Exchanges have a major function in the cryptocurrency world, with different types popping up across the crypto sphere. While the community is supportive of the development of decentralized exchanges, centralized exchanges hold an iron grip on most traders. Both kinds of exchanges have their own set of advantages and disadvantages. But first, what is a distributed ledger?

What is a Distributed Ledger?

In the simplest context, a distributed ledger is a shared ledger that is not controlled by a central administrator. A distributed ledger is decentralized by nature and acts as a database for financial, physical, electronic or legal assets. It can be shared across a network of computers, and each node will receive an identical copy, as a distributed ledger is always updated in real-time.

Blockchain is a perfect example of a distributed ledger. There is no central or governing authority that can control the transactions. Such decentralization eliminates single points of failure for the network.

👉 Advantages of a Distributed Ledger

  • Users have full control of all their transactions
  • Consistent data is maintained across all the nodes accurately and instantly
  • Stronger insulation to malicious attacks, as there is no single point of failure
  • Trustless ecosystem, where transaction or information sharing between two parties occur without intermediaries
  • Transparency without sacrificing security

Centralized Network

The word “centralized” gives away how these networks are structured. A centralized network has a middleman to facilitate its operations, like a bank of all your transactions and information. This means it holds all your data, and therefore, trust is paramount.

👉 Advantages

  • Consistent and efficient
  • Requires less infrastructure support, making it an affordable network

👉 Disadvantages

  • Users need to give up control of their data
  • Has a single point of failure that can compromise the availability of the entire network
  • Scalability limitation, as it is dependent on a single server
  • Bandwidth limitations, as the server become a bottleneck in cases of multiple transactions

Decentralized Network

A decentralized network is a “trustless environment,” where there is no single point of failure. The nodes connected in the network are not dependent on a single server point and each node holds the entire copy of the network configurations. As the information never passes through a single server, a decentralized network is highly secure.

👉 Advantages

  • Setup ensures anonymity and privacy
  • Highly scalable
  • Bandwidth is never an issue, as there is no single server that can create an operational bottleneck
  • Efficient and high-speed operations

👉 Disadvantages

  • More machines needed to support the system, driving up infrastructure costs

A decentralized cryptocurrency exchange is the one where atomic swaps happen between the two nodes. Your cryptocurrency never passes or is held by an escrow service. It is close to a peer-to-peer transaction, but you cannot enter a decentralized exchange with fiat currencies and can only conduct crypto-to-crypto exchanges.

Comparison Chart

Comparison Parameters

Centralized Exchange

Decentralized Exchange

Control

Asset needs to be transferred to central servers; users lose control of the data. Your data stays with you. All transfers occur in an atomic manner, just like proxy tokens.

Third Party Involvement

Yes, a centralized exchange functions as a middleman between the buyer and seller. It charges operations fees, due to third party involvement. No, a decentralized exchange functions as a trustless platform to authorize the transactions. Transactions do not incur middleman costs.

Hackable

Centralized networks are more susceptible to hacks, as the data leaves the security of the individual node. Decentralized networks are difficult to hack, as there is no single point of entry.

Single Point of failure

Yes, a centralized network has a single point of failure that can compromise the security of the entire network. No, a decentralized network does not have a single point of failure, as the information is distributed over multiple blocks appended together.

Ease of use

Easy and intuitive to use, even by non-techs. Complex to use, and not very intuitive.

Exchange Fee

Higher Fees Lower Fees

Anonymous

Centralized networks cannot keep you or your data anonymous. Decentralized networks are all about anonymity.
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