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What is Decentralized Transactions?

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Nowadays, the most common term used is a virtual currency, the currency that is only available virtually like bitcoins, ether. So, all these virtual currencies are mined by the miners and created a new block which then added to the existing blocks thus creating the blockchain. So, it’s the rough idea of what blockchain is. Before discussing more over blockchain, firstly discuss decentralized transaction since blockchain uses such types of transaction 

What is Decentralized Transaction?

In our real world, there are two types of transaction that exists, centralized transaction and decentralized transaction. The centralized transactions are the one that is controlled by the one authority like RBI in India, all the transactions are controlled by the RBI. The user makes a payment through the bank payment gateway and the bank then processes the request and sends you the response for that request which is either failure or success. 
While in the decentralized transactions, the transaction is not controlled or authorized by one authority but all the peer members available in the network at that time. So, in this type of transaction, the user sends the request in the form of a block. The block is then broadcasted to every party in the network which then approves the transaction and only then the money is transferred to Merchant’s Account. 

History of Decentralized Transaction

Before the internet was popular or less used. All the applications and services were decentralized. The HTTP protocol connected everyone with a computing device and the Internet. 
But as the need grows, the system becomes more centralized since it is easy to implement both conceptually and programmatically. A group of people was paid to maintain that server. Almost all banks use a centralized system. 
As the HTTP web grew larger, Bram Cohen introduced BitTorrent.The BitTorrent used Peer to Peer or decentralized systems to download the larger files. In this, the person which uploads the files gets the higher speed for download and the one which only downloads the file only receives a limited speed, and hence once again decentralized system comes into play and since then, it is growing larger and larger. 

Features of Decentralized Transaction

  1. Open Source: It is a completely open-source system, which means each and everyone can see all the transactions happen in the past. The scope is not limited to only one user account but also to anyone’s account making it completely transparent.
  2. Internal Currency: In this type of system, they have their own currency commonly called the virtual currency of AppCoins. Users need this AppCoin to use the network. Owners of the resources are paid in AppCoins. In the Bitcoin network, the owners (miners) of the resources (computing power) are paid with transaction fees for mining the transaction by using their computational power.
  3. Decentralized Agreement: Before the Decentralized system, the transaction has to pass from various departments for the clearing like a clearing of a check in the bank, this takes a significant amount of time. By the introduction of the decentralized transaction, it is valid by the peers in the network and the transaction is done within seconds.
  4. No Collapsing Of The System: Since each node is independent and each peer in the network maintains the record, so if one node fails due to some reason, it has no effect on the overall system, thus prevent it from collapsing.

Example of Decentralized Transaction

Bitcoin or Ethereum Transaction: The best example of the decentralized transaction in today’s world is the transaction of bitcoins or Ethereum in the virtual network. All these transactions happened with the help of blockchain where the peers in the network mine the block resulting in the decentralized transaction. 

Advantages of Decentralized Transaction

The blockchain uses decentralized Transaction over centralized Transaction because of its great advantages such as it is more secure, reliable, and transparent. A decentralized transaction is not easy to hack since there are many peers in the network who don’t know that you validate the transaction making it more transparent than ever. 
Let’s list down all the advantages below with more details. 

  1. Fraud Prevention: It prevents one from the fraud transaction since it is open-source and anyone can see any transaction. If anyone tries to change any block within the transaction all the latter blocks will get also changed and it becomes invalid thus informing all that any invalid transaction occurs within the block.
  2. Protection From Government Interference: Since the decentralized transaction is not controlled by one organization, therefore the government has no control over these transactions. The rules created by the government of any country is not applicable over it, thus preventing bad things that can happen to currencies if government meddle too much with them like making the currency invalid at any time and so on.
  3. Faster Transaction Rate: The transaction time of a decentralized transaction is much faster than a band transaction, it takes seconds to get the transaction done.
  4. Increased Financial Stability: Since all the transaction is done person to person without the involvement of any third party which results in the increase of financial efficiency.

Disadvantages of Decentralized Transaction

Let us discuss some disadvantages of decentralized transactions. 

  1. Crime: Due to the anonymous nature of these transactions, it becomes a financial criminal tool for some criminals. It is not easily possible to make a wrong transaction or alter any transaction, but somehow if someone able to do that, it is not possible to track that criminal, in short, if fraud happens, one has to lose his cryptocurrency.
  2. Undo Transactions: Since this transaction is not controlled by any organization, so it is not possible to revert any transaction that happens by mistake. For example, if you made the payment to the wrong address by mistake, then the money is gone, no one can revert that transaction back if the receiver wants to give that money back then only you can get your money back, otherwise, it is gone and you cannot do anything about it.

So, these are some benefits and risks of using decentralized transactions. It is only 8-9 years old but it is growing at a very high speed and in the future maybe it changes the way of banking we are doing today.

Last Updated : 30 Sep, 2022
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