What is Centralized and Decentralized currency?

What is Centralized and Decentralized currency?
What is Centralized and Decentralized currency?

Centralized Currency

A centralized currency requires the presence of a centralized party validating all transactions such as RBI being the central point of authority for all banks.

Decentralized Currency

Bitcoin is a decentralized currency where there is no necessity of a third party validating your transaction.

Pros of Decentralized Currency

  • Prevents counterfeiting — Cryptocurrencies cannot be counterfeited due to strong cryptography techniques and hence remove the problem of counterfeit money which is a huge expense.
  • Speed — Cryptocurrencies work 24/7 and hence can be exchanged without any banking intervention improving the speed of the exchange and also security of transfer.
  • High acceptance — Will increase acceptance amongst citizens of cryptocurrencies as it will be backed by the full faith of the government.
  • Decreased cost of cash — Cash can be eliminated from the system leading to massive efficiencies by removing the costs of transporting cash.
  • Volatility — Since the price of the coin is determined by the Central Bank, the user is not affected by the price volatility.

Cons of Decentralized Currency

  • Centralized — Since there is a centralized governance, the use of a Distributed Ledger Technology is expensive. A database can be used similar to how Banks work on the Rupee today.
  • Security — A central database is bound to be hacked even if it’s based on the Distributed Ledger Technology similar to the recent Tether hack. With Bitcoin, each user’s wallet has to be hacked and funds siphoned off while with a central issuing authority, the central authority can get hacked.
  • Permissioned — Regulated cryptocurrencies remove the core concept of permission-less from cryptocurrencies. This regulates the core idea of permissionless innovation where you do not need anyone’s permission to transfer value.
  • Anonymity — Regulated cryptocurrencies also require heavy governance and KYC requirements removing the anonymous feature of Bitcoin. Since these require Banking and other infrastructure, they will carry the existing limitations of national currencies.

Source – zebpay