Decentralization

Bitcoin is a decentralized cryptocurrency, which means that Bitcoin’s supply, demand, transactions, mining, and software are not controlled or manipulated by a central agency. Moreover, unlike centralized currencies, transactions over the Bitcoin network do not pass through intermediaries or central agencies that control, approve, disprove these transactions. However, Bitcoin transactions are peer-to-peer.

So why does decentralization matter?

Decentralization adds fairness and trust to any monetary system. After the introduction of fiat monetary systems, many people lost trust in the governments and central banks. Centralized systems like the fiat monetary system allow the central agencies controlling these currencies to increase the supply of money easily. In CBS’s news 60 minutes program, the current chair of the federal reserve, Jerome Powell admitted that they flooded the system with money by increasing the money supply digitally in 2020

Moreover, the following chart shows how the U.S. Dollar money supply has increased during the last few decades as a result of the federal reserve policies:

The main problem that is caused by increasing the money supply so rapidly is inflation. The term inflation simply describes the decrease in purchasing power of a currency.

To explain inflation better, let’s imagine that your annual income doubles, this would allow you to buy and consume twice as much as you were doing before. However, if everyone else’s income also doubles, you would not be able to purchase twice as much because the number of products and services is limited. It’s much cheaper for a central bank to duplicate its currency supply than for a car manufacturer to duplicate its car production. Let’s take this example one step further, imagine your annual income doubling while the annual income of 50% of the society tripling, because there is a limited number of products and services, you will not even be able to consume and buy products at the same rate as before.

This is a flaw within the current monetary systems that Bitcoin succeeded in solving. Due to decentralization, no party has the authority or is able to increase the supply of Bitcoin and inflate its value.

The rate of new Bitcoin production is pre-programmed and can not be manipulated, this blue line in this chart denotes the exact number of Bitcoins (in millions) that will exist each year. Mathematically, one can calculate how many Bitcoins will exist in any future year. This is particularly important because it helps Bitcoin investors know what their ownership percentage is, which is calculated by dividing the investor’s number of Bitcoins by the total number of Bitcoins that exist.

Calculating future ownership percentage of other currencies like fiat money is quite impossible because the central banks can increase the money supply whenever it seems suitable to do so. Such unpredictable increases in money supply cause many people to live with the fear that their money will lose its purchasing power in the future. However, with a monetary system based on Bitcoin, people do not have to worry about their currency losing it’s purchasing power in the unpredictable future since the supply rate is pre-programmed.