Investing In Altcoins: Centralized vs Decentralized Coins

There are hundreds of different coins available on the market. Bitcoin is the most popular coin out of all cryptocurrencies. Decentralization is one of the reasons behind the popularity of bitcoin. It is also one of the reasons why Satoshi Nakamoto created Bitcoin in the first place.

Nakamoto published a white paper that introduced bitcoin in 2008, when people all over the world could feel the debilitating effects of the world financial crisis. One of the reasons for the crisis was subprime mortgage crisis in the United States, which occurred because major banks were investing in assets they knew nothing about. To deal with the crisis, many governments and central banks all around the world started to engage in quantitative easing. In simple terms, quantitative easing means printing more money. This led to large-scale fluctuations of currencies and currency wars, which is a race to devalue a currency and make the economy of a country more competitive.

Fundamentally, both the subprime mortgage crisis and the quantitative easing were actions by a few big players, yet it was the public purse and future taxpayer liabilities that paid for these actions.

Bitcoin offered a solution in the form of a completely decentralized system that no central bank or government can control. There will be 21 million bitcoins by 2140. Every reference software client of bitcoin contains a log of all the transactions that have occurred on the network since its inception, which means that if something were to happen to a computer or a group of computers on the network, the network won’t suffer because other machines would still have a full log of all the transactions. The bitcoin network gets new coins through a process called mining. Any person in the world can become a bitcoin miner, which is why while a government can issue laws about using bitcoin and other cryptocurrencies in the county, there is nothing it can do about bitcoin as a currency.

Most other coins followed bitcoin when it comes to decentralization, yet there are some coins that run on centralized systems. Some experts would argue that centralized coins are not cryptocurrencies at all because they violate one of the most important principles of bitcoin.

At any time that you give control over your funds to an entity or a third party, such as a bank or a cryptocurrency exchange, you are not taking advantage of some of the most fundamental benefits of cryptocurrencies, including privacy and complete independence. If are not in a possession of a private key to a wallet, you do not own the funds. An exchange may tell you that it is storing your funds for you and the funds are safe, but if hackers attack the exchange, your funds may be gone and you may not even learn about it for some time.

This is exactly what happened to many of the customers of Mt. Gox, which was the largest bitcoin exchange in the world by 2013 and into the beginning of 2014. Evidence that surfaced in April of 2015 showed that about 850,000 bitcoins that belonged to customers of the company were stolen over time, starting in 2011. The CEO of the company was arrested in 2015 by the Japanese police and charged with embezzlement and fraud.

The upside of centralization and centralized coins is that they are very easy to identify. Centralized currencies will rarely have wallets that look similar to the bitcoin core wallet. Most often, they will be offering cloud wallet solutions, not standalone software that you can install on your devices and use independently. Some of the distributed ledger coins may also suffer from the same weaknesses as coins that use centralized ledgers. Developers typically distribute these coins via giveaways and the coins lack the concept of proof of work, which is an important part of bitcoin.

The concept of proof of work came into life in 1993 as an economic measure to decrease spam, denial-of-service attacks and other abuses of networks. Cynthia Dwork and Moni Naor were the authors of the concept. Markus Jakobsson and Ari Juels formalized the term “proof of work” in 1999. One of the key features of the system was that work needed to be hard, yet feasible to complete and easy to check by the provider of a service. The bitcoin network uses proof of work based on the SHA-256 algorithm. The concept and the algorithm are what makes it possible for anyone to mine bitcoins and participate in the creation of new coins.

If you see a coin that you can’t mine and that is solely distributed in giveaways, it is possible that there’s no decentralization or proof of work behind it and developers can do whatever they want, just like a government or central bank.

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