The summarised and simplified edition of The Difference Between Centralisation and Decentralisation, with a focus on ledgers.

In today’s digital world, financial transactions and data management have become increasingly important. Centralised and decentralised ledgers are two essential concepts that underpin the way these transactions are recorded and managed. In this article, I’ll jot down the differences between these two types of ledgers, their history, and the risk profiles associated with each.

Centralised ledgers are record-keeping systems where a single central authority or institution holds and manages the ledger. This authority has the power to make changes, verify transactions, and maintain the overall integrity of the ledger. Examples of centralised ledgers include traditional banks, financial institutions, and government bodies.¹

Decentralised ledgers, on the other hand, operate on a distributed network of participants, often referred to as nodes. Each node in the network maintains an identical copy of the ledger. Instead of relying on a central authority, consensus algorithms are used to validate transactions and maintain the ledger’s integrity.² Blockchain technology, which underpins cryptocurrencies such as Bitcoin, is a prime example of a decentralised ledger.

Centralised ledgers have been in use for centuries. The concept of a central authority maintaining records dates back to ancient civilisations, where governments and religious institutions would maintain records of transactions, taxes, and other important information.³

The first decentralised ledger, on the other hand, emerged with the invention of Bitcoin in 2009. The anonymous creator, known as Satoshi Nakamoto, developed blockchain technology to create a secure, transparent, and tamper-proof record-keeping system that eliminated the need for a central authority.⁴

Individuals and organisations seeking to leverage these technologies should carefully consider the risk profiles of both centralised and decentralised ledgers.

Centralised ledgers have been the traditional choice for many institutions due to their ease of management and control. However, they are also more prone to hacking, corruption, and system failures, making them a less secure option in some instances.⁵ On top of that, centralised ledgers can be subject to regulatory or political interference, which, as can be seen in the financial markets currently, may impact the stability and efficiency of the ledger.

Decentralised ledgers have gained significant traction in recent years, largely due to the increased security and transparency that they offer. Their distributed nature makes them less susceptible to attacks and data manipulation. However, they are not entirely immune to risks, as they can be vulnerable to network congestion due to the use of consensus algorithms, much slower transaction times,⁶ and at risk of ‘51% attacks’ where a malicious actor gains control of more than 50% of the network, allowing them to manipulate the ledger.⁷

Understanding the differences between centralised and decentralised ledgers is crucial in today’s rapidly evolving financial landscape. While centralised ledgers have been the traditional method for record-keeping, decentralised ledgers like blockchain technology offer increased security, transparency, and freedom from manipulation. Both systems come with their own set of risks, and it’s essential to consider these when evaluating which type of ledger best suits your needs.

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¹ Mougayar, W. (2016, 1 June). The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology. Wiley.

² Swan, M. (2015, 6 February). Blockchain: Blueprint for a New Economy. O’Reilly Media.

³ Scott, B. (2016, 10 February). How Can Cryptocurrency and Blockchain Technology Play a Role in Building Social and Solidarity Finance? United Nations Research Institute for Social Development. https://www.unrisd.org/en/library/publications/how-can-cryptocurrency-and-blockchain-technology-play-a-role-in-building-social-and-solidarity-finan

⁴ Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. Bitcoin. https://bitcoin.org/en/bitcoin-paper

⁵ Croman, K., Decker, C., Eyal, I., Gencer, A. E., Juels, A., Kosba, A., Miller, A., Saxena, P., Shi, E., Sirer, E. G., Song, D., & Wattenhofer, E. (2016, 31 August). On Scaling Decentralized Blockchains. Springer. https://doi.org/10.1007/978-3-662-53357-4_8

⁶ Voshmgir, S. (2019, 27 June). Token Economy: How Blockchains and Smart Contracts Revolutionize the Economy. BlockchainHub.

⁷ Eyal, I., & Sirer, E. G. (2018, July). Majority is not Enough: Bitcoin Mining is Vulnerable. Communications of the ACM, 61(7), 95─102. https://doi.org/10.1145/3212998

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