What Does "Decentralized" Actually Mean

You've for sure heard the expression that "Crypto is Decentralized". And it sounds cool without a doubt, but what does that actually mean? Well, in order to explain, first we need to define what "Centralized" means.

In short, "Centralized Finance" refers to the financial world as we know it today. It involves Governments, exchanges, banks, Paypal, Payoneer and similar payment options. This is referred to as Centralized Finance because, whenever there's a transaction to be made, there's a centralized body acting as an intermediary.

If Bob wants to send $100 to his friend Sara, he cannot do it directly, not in the real sense of the word. What actually happens is, Bob needs to access his account in his bank, and transfer $100 to Sara's account in Sara's bank. In this case, bank(s) act as intermediaries, and it's similar to how other centralized bodies work, such as Paypal or Revolut.

These centralized bodies offer certain protections, protection against fraud, scams, and indeed potential mistakes made by Bob and Sara. In exchange, they require private information from Bob and Sara. As a result, these transfers take time, usually a few business days. In addition, you need to pay fees to the banks, as a form of payment for their service.

Now, let's go back to the original question. Unlike Centralized Finance, Decentralized Finance allows direct control of your assets (essentially, crypto currencies). It means there are no intermediaries, and nobody apart from you has access to your assets. Nobody even knows your name, date of birth, nationality and the like.

If Sara wanted to return the favor and send $100 in Bitcoin to Bob, she would simply use her own Crypto Wallet, enter in Bob's unique Crypto Wallet address, and send Bitcoin directly to him. The transfer would be much faster (usually in a manner of minutes), and Bob would see the Bitcoin in his wallet. No-one else would know about this transaction, apart from Bob and Sara. Even Bob couldn't know who he received the Bitcoin from just by looking at his Crypto Wallet, the only way he would know is if Sara told him it was from her.

The benefits of this are rather immense. There's no intermediary you have to go through, you don't have to wait for days for the transaction to finalize, and the fees are substantially smaller (the fees go to the validators, which we will explain at a different time), and sometimes fees are even non-existent.

Are there cons to using Decentralized Finance?

Yes, and they boil down to one fact - there's no protection. Since centralized bodies don't act as intermediaries, there's nobody to protect you should you make a mistake.

If you send the crypto assets to the wrong address, those assets are as good as lost. In addition, if you lose access to your password, you're done. Nobody can recover your wallet, along with the assets inside it.

There are real stories about people dying, leaving behind huge amounts of crypto assets, and nobody is able to access them, including their family.

What's the conclusion, should you use decentralized finance or stick to only centralized? It really depends. If you are properly educated and you know how to use decentralized finance, there's no reason not to, as it is objectively the better technology. On the other hand, if you want the safety net of centralized bodies, such as banks and governments, and privacy is not of huge importance to you, there may be no reason for you to delve into the world of decentralized finance.