The Problem with Centralized Networks

The risk of centralized networks seems to grow larger everyday. 40,000 accounts were just compromised in the latest hack on BMO and CIBC. Credit card fraud and identity theft are simply a fact of life.

A centralized network builds single points of control and failure. One glitch could simply shut down the entire network — which (in some cases) could be disastrous. Centralized networks can also act as honeypots for hackers as all their “secure” data is stored in just one place.

The concept of a bank storing all client data in one location attracts many malicious hackers. A couple of keystrokes on one computer and suddenly millions of dollars are gone.

Centralized exchanges also allow the manipulation of ledgers. The banks on Wall Street manipulating their ledgers in 2008 led to the financial crisis where millions of people became unemployed and homeless in the United States alone.

So where is the solution? The idea of a network consisting of many copies of data, where there is no single-entity in charge, significantly lowers the risk of corruption. Decentralized networks such as the blockchain can contain an infinite number of copies of the data. Each transaction is verified through advanced mathematics known as cryptography. This mathematical structure of cryptography allows for any change in data to be rejected by the network. This is due to the “consensus protocol” where the majority of the other copies of the blockchain must agree upon a change to allow it. The mathematics behind cryptography is incredibly complicated but essentially allows for a fool-proof system.

Removing the entity of a “trusted third party” or a middleman perhaps can save billions of dollars in transaction fees. It can also allow the respective owner of their data to securely access this information without the threat of hacking. In conclusion, decentralization could be the key to reducing the corruption of important data.