Centralized vs. decentralized digital networks: Key differences

Find out what differentiates centralized and decentralized digital networks—and which structure is right for your organization.

Disadvantages of centralized and decentralized networks

Censorship, limited scalability and security issues are some of the downsides of centralized networks. Meanwhile, lack of clarity, high setup and maintenance costs, and volatility are the weak points of decentralized networks.

In a centralized system, there is often a single point of failure. If the central authority is compromised, it can bring down the entire system — a major disadvantage, especially in systems where security is critical.

As for scalability, a centralized system can often only grow as fast as the central authority allows it. Restrictive development could be disheartening when users are clamoring for more features and functionality.

Censorship is another disadvantage. In a centralized system, the central authority has the power to restrict content. This is a major con for those looking to share information freely.

However, in a decentralized system, lack of clarity can often be an issue. Since decentralized network governance doesn’t rely on key authorities, such a structure could be its undoing in times of crisis when decisions need to be made quickly.

Decentralized systems are also more expensive to set up and manage since they need systems with automated communication capabilities.

And lastly, the prices of decentralized digital currency are known to be volatile, making them a risky endeavor for more conservative investors.

Advantages of centralized and decentralized networks

The merits of a centralized network are a clear chain of command, inexpensive setup and easier task delegation. Decentralized networks, on the other hand, are immutable, censorship-resistant and provide users with complete control and security.

There is a clear chain of command in a centralized network, and everyone knows who is in charge. This can be helpful in times of crisis when decisions need to be made quickly and efficiently.

Centralized networks also tend to be less expensive to set up and maintain as only one server or mainframe needs to be managed. In addition, it is easier to delegate tasks with clear-cut lines of authority. This ensures that tasks are completed timely and efficiently.

Meanwhile, in decentralized networks, users exercise complete control over their data and information. They are also immutable, i.e., once data is entered into the system, it cannot be changed or altered. This ensures data integrity and fraud prevention.

Another pro is that decentralized networks employ cryptography to guarantee the safety of data ledgers. Because the current block’s data must be validated using cryptography, it relies on data from the adjacent block, thus making the data incredibly secure.

Lastly, in a decentralized network, no central authority exists to censor or restrict content. This is appealing to those wanting to share information without fear of reprisal.

The basic difference between centralized and decentralized networks

Aside from the locus of control, the key differences between centralized and decentralized networks inextricably lie in what they stand for.  

Simply put, a centralized network is used to maintain control and stability. In contrast, a decentralized network is geared toward user freedom and collaboration.

If you’re in the mood to get into the philosophical and theoretical underpinnings of centralization vs. decentralization, we have a great thought piece on that here.

In the meantime, let’s dive into the basic differences between the two:

• Third-party involvement:  In a centralized network, a third party or middleman is required to facilitate communication between different nodes. There is no need for a third party in a decentralized network. Each node can communicate directly with every other node on the network.
• Transparency: Centralized networks are less transparent because all data and information are stored in one central location. Decentralization, however,  increases transparency through distributed ledger technology (DLT).
• Security: Centralized networks are more vulnerable to attacks as hackers only need to target one central point to gain access to the entire system. Decentralized networks are more secure because even if one node is compromised, the others are not affected.
• Scalability:  Centralized networks are easier to scale just by adding more servers to the system. This is more difficult to pull off with decentralized networks since each of their nodes needs to be capable of handling more traffic.
• Exchange fees: Centralized networks tend to have higher fees (think of banks and financial services) as more middlemen are involved in the process. Such actors are not present in decentralized networks, resulting in lower fees.

How does a decentralized network work?

Rather than rely on a single central server, a decentralized network distributes information-processing tasks across multiple devices. 

In a decentralized network, even if one of the master nodes fails or is attacked, the remaining servers may continue to grant data access to users. Consequently, the overall network will continue to work without disruption.

Recent technological advancements have endowed computers and other devices with large amounts of processing power, which can be synced and used for decentralized computing. This is what makes decentralized networks possible.

It’s essential to remember that while decentralized networks are distinct from centralized networks, they are still reliant on main servers, although in more than one per network.

What are decentralized networks?

A decentralized digital network is not controlled by a central authority.

Instead, control is distributed among its users. There is no single server or point of command. Rather, the network is run on a peer-to-peer basis, with each user wielding equal power and responsibility.

A great example of a decentralized network is the internet, itself, which is not controlled by one authority. Rather, it is distributed among its users. However, some argue that the internet is moving toward centralization due to the monopoly of big names within the space—Google, Facebook, WordPress and the like.

How so? Data is concentrated within these big players’ servers. As such, everything one needs to access online goes through any one of them. So to answer the question, “Is the internet centralized or decentralized?” 

Technically, it’s decentralized, but the argument that it is slowly but surely becoming more centralized cannot be downplayed or understated.

Another example is Bitcoin (BTC), the first cryptocurrency. Bitcoin’s network architecture was born after the Great Financial Crisis of 2007–2008. Briefly put, Bitcoin was launched as a decentralized network precisely because centralized institutions (banks, financial firms) “had failed the people.”

The creator(s) of Bitcoin realized that if a single point of control or failure exists, the entire financial system is at risk. Therefore, they designed Bitcoin to be decentralized and distributed. No single entity or group controls it. Instead, it is managed by its users.

How does a centralized network work?

In a centralized network, a central server handles major data processing and network management functions.

This server is responsible for storing all the data and running all the processes on the network. It may be situated in a single location or spread out over multiple locations.

Workstations within the network, which have less processing power, connect to the central server. Instead of directly performing specific functions (data storage, applications, utilities), these workstations submit their requests to the main server for processing. 

The central server typically features a robust computing power and a huge storage capacity. It also has a high-speed connection to the internet. These allow for handling a large number of users and a lot of data traffic.

What are centralized networks?

A centralized digital network is one in which a central authority controls the network.

The authority may be an individual, a group of individuals or a corporation. Usually, the centralized authority is responsible for maintaining the network, managing users, and setting rules and regulations.

A centralized network’s architecture is built around a single server where all significant processes are run. If the server fails, the network goes down. Many digital platforms that we interact with daily, like Facebook and YouTube, are centralized. In these examples, a single entity (the company) is in charge of all the data and processes on the network.