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What is Decentralization and Why is it Important?

What is decentralization? In a world where some sort of central authority holds power over everything from our finances to our personal data that we share over the internet, decentralization is a much-coveted concept. Decentralization has given hope to people globally with its aim to distribute the power amongst all stakeholders in any kind of organization or platform. Blockchain is a prime technology in heralding the era of decentralization. 

So, why is decentralization important in blockchain, and what are the advantages of decentralization? In simple words, decentralization distributes power amongst the upper, middle, and lower levels of the chain of command in any organization. Let’s learn more about what is decentralization and the importance of decentralization.

Centralization vs Decentralization
Source: Decentralized Systems

What is Decentralization?

Firstly, as we learn about this concept, we need to know the technical definition of decentralization. If someone asks what is decentralization; you’d want to tell them that it is simply the process of taking the authoritative power from the higher ups in management and distributing it to the lower and middle members of the hierarchy. 

For example, in a software company that has decentralized its authoritative powers, if an employee finds a bug in the software or any discrepancy, they can nullify the discrepancy themselves and clear out the bug without asking for any permission.

Importance of Decentralization

The importance of decentralization can be attributed to the fact that it helps promote initiatives amongst subordinates. The freedom to make decisions boosts confidence and instills a sense of responsibility in the whole organization. Decentralization of authority promotes managerial talent in people. It filters out the people who cannot handle responsibility and will require management. In the technological world, decentralization helps in reducing the reliance on conventional systems. 

Why is decentralization important? Let’s find out:

1. Rapid Decision Making

Decentralization reduces the reliance upon the administration to take important decisions. People at every level can make decisions according to their knowledge and the requirements at that time. This makes the whole management process faster and dynamic.

2. Administrative Development

When administrative power is distributed amongst all the levels in an organization, it helps filter out people who can handle responsibilities. It means that the managerial talent amongst the employees gets highlighted with the decentralization process. This promotes a sense of responsibility among each member in the organization.

3. Development of Executive Skills

Enhancement in the executive skills is also one of the prime aspects when it comes to the importance of decentralization. It provides relief to the top management and ensures that each member has the ability to take important decisions. Executive skills like self reliance, confidence and managerial skills get a boost because of decentralization.

4. Promotes Growth

Another great aspect in the importance of decentralization is the growth that it boosts. The departmental heads get a craving for the growth of their department in the organization. Similarly, each member individually adds to the growth of the overall organization with the power decentralization provides. This promotes healthy competition among the organization and therefore supports growth.

5. Higher Control

In a decentralized organization, the control over each aspect of the organization is increased. Now every member is responsible for the functioning of the organization as a whole. This means that every member works in a way which supports collective control over the organization and supports expansion.

🤔Want to get an in-depth understanding of decentralization? Read this article on Advantages and Disadvatanges of Decentralization.

Types Of Decentralization

Now that you have learned about what is decentralization and the importance of decentralization, you will also require knowledge about its types and how it is implemented. So, let’s analyze the different types of decentralization that are implemented in organizations throughout the world.

1. Democratic Decentralization

In a democracy, it is said that the people have the power over their own country. But the centralized practices of the government have reduced the impact this initial motto of democracy had. Democratic decentralization aims at distributing the powers of taking important decisions amongst the citizens themselves. For example, whether a metro line is required or not, can be a decision taken by the citizens of the country.

2. Administrative Decentralization

Now coming to the decentralization of power amongst an organization, the administrative decentralization aims at the redistribution of the authoritative powers within any organization amongst all the levels of the hierarchy. It provides confidence to the members of the organization and also makes the whole administrative process faster and more dynamic.

3. Fiscal Decentralization

One of the key components of why decentralization is important is fiscal decentralization. It is the transfer of financial responsibilities amongst the lower levels of any organization- along with the governmental structure. Fiscal decentralization is a critical component of any decentralized governance system. 

What are the Advantages of Decentralization?

Decentralization has become a popular concept globally, largely thanks to blockchain technology and the ideals it puts forward. Blockchain promoted the concept of a decentralized organization, where all stakeholders carry a certain amount of power over all blockchain procedures, and decision making. 

Let’s now get into all the various advantages of decentralization, so we better understand why this is a notion useful in our future.

1. Facilitates Smooth Communication

The importance of decentralization lies in its ability to reduce the communication gap in an organization. It means that employees at all levels can easily deliver information to one another and communicate about different decisions. Decentralization makes the whole process of communication faster and more efficient, especially with a system like a blockchain.

2. Promotes Expansion

Since decentralization delivers administrative powers to every member in the organization, they feel responsible for its growth as a whole. This means that the whole workforce collectively tries to expand the organization. 

3. Motivates Subordinates

Another among the advantages of decentralization is the motivation provided to subordinates. As discussed before, every member in the organization becomes responsible for themselves as well as the organization as a whole with decentralization. This helps integrate the feeling of confidence in the decision making of each member. It also keeps their morale high for working in the organization.

4. Better Control and Supervision

Now that every department in the government or any organization has administrative powers, they can control the various aspects related to their work very easily. For example, you will not need to take permission from the central government to install a foot-over bridge in an accident prone road. You can do it by just getting collective agreement from the members of your department. It will also result in better supervision of all the activities in a department.

What are the Disadvantages of Decentralization?

Decentralization is not without its cons, however. The disadvantages of decentralization are even more prominent at the moment since the concept is at its earliest stages still, with a lot of aspects requiring more thought and improvement. Let’s get a clearer idea about the disadvantages of decentralization.

1. External Factors

One of the key disadvantages of decentralization is the influence of external factors over the administration of one organization. The conflicts with government or other organizations can cause changes in the opinion of members in an organization. This can result in major conflicts which will be disastrous for the organization as a whole.

2. Lack Of Coordination

Another one of the disadvantages of decentralization is the lack of coordination amongst the members in an organization. For the decentralization to prosper, all the departments and all their members should have mutual understanding and respect for one another. Lack of these attributes will easily lead to lack of coordination within the organization and cause several problems.

Difference Between Centralization and Decentralization

Basis For ComparisonCentralizationDecentralization
MeaningComplete authoritative powers lie within the top management of the organizationPower is distributed among all tiers of the organization, and everyone is given equal opportunity
InvolvesReservation of authorityDistribution of authority
HierarchalOpen and free
Decision MakingSlow and sometimes inconsistentComparatively faster
AdvantageLeadership and coordinationResponsibilities are shared equally
Administrative PowerLies with the top managementDistributed amongst all members and departments
Best forSmall organizationsLarge organizations

Decentralization in Workplaces

5000 years back, a group of people used to live together where every individual knew every other individual as the group size used to be small in number. The only activity they did for survival was hunting and gathering hence every member of the group was equal i.e. no one had more power than others and everyone coordinated with each other for common objectives. This changed when agriculture was invented for both right and wrong reasons. The power in the society slowly moved from being decentralized to centralized. All of human history after the agricultural revolution is influenced by the centralization of power in the hands of a few.

Currently, every established organization or corporate in the world has a centralized hierarchical structure, where the power is concentrated at the top. Usually the consensus from the bottom layers of the hierarchy is NOT taken into consideration. Because of this top-down approach to management style, you end up with ‘Principal-Agent’ problem. Here ‘Principal’ is the organization and ‘Agent’ is the employees in the organization.

The Principal-Agent problem is the conflict in priorities between the owner or administrator of an asset and the person to whom the operations of an asset is delegated. Hence the next statement holds true in the present-day context for any organization. “Employers pay just enough that employees don’t quit and employees work just hard enough not to get fired”. This is the ‘Nash Equilibrium’. At this state both the employer and the employees has no incentive to deviate from that state. With this type of structure in place, the true potential of the workforce or an organization can never be reached.

Decentralized Workplace

That’s where DAOs come into the picture. Decentralized Autonomous Organization is an entity represented by rules encoded as a transparent computer program, and controlled by the organization members (the community). They are not influenced by any centralized authority because there is none in this setup. The architecture is setup such that it allows members from different parts of the world to collaborate and achieve a common goal in a trustless way.

In the top-down hierarchical system, the lion’s share of the value created is subsumed by the top management and the remaining is distributed among the bottom placed layers of the hierarchy. In decentralized organizations though, value created gets massaged throughout the community in an even manner. And this helps because it directly solves the Principal-Agent problem seen in centralized setups. Here an individual gets the commensurate reward as per his/her contribution to the ecosystem. Further, you are not expected to please anyone for your increments and bonus. As long as the project you associate with does well, you can expect to do well.

Advantages of Decentralized Structure in Workplace

 1. Job Satisfaction: Since the decision-making power is decentralized, it translates to a better level of job satisfaction as well as community morale. You no longer would mind opening your laptop on a weekend (when it is necessary of course!).

2. Improved Strategies: Since the power of decision-making is distributed, the founder or a technical lead for instance can focus less on day-to-day activities and more on long-term sustainability of the project volunteering in an advisory role. As more people are involved in the vital organizational process like capital raising, hiring, expansion and development, carrying out these processes will be more efficient.

3. Better Accountability and Transparency: A community in a DAO will be motivated to take more ownership as the responsibility increases. Decentralization, further, allows detecting the areas of improvement within the organization swiftly with increase in transparency.

4. Better Leaders of Future: Provides an opportunity to nurture and develop future leaders of the world vested in collective power of people more their individual influences.

5. Quick Decision Making: Decentralization allows the community at the scene to take the necessary action. This leads to quick decision-making since the decisions do not have to be vetted by a management personnel sleeping at 4 AM on the other side of the world.

6. A solution to the Principal-Agent problem: A properly executed decentralized platform aligns the incentives of all the stakeholders from founders, technology leads, developers and the community to coordinate and achieve its collective goals.


You have learned about all the aspects of ‘what is decentralization?’, ‘why is decentralization important?’, and the advantages and disadvantages of decentralization. Decentralization, when matched with proper coordination and a feeling of responsibility, is a great tool for any organization. As for the question ‘why is decentralization important in blockchain?’, the simple answer is that without proper decentralization, there is no formation of a distributed ledger like a blockchain. So decentralization is a core tool for a blockchain, and the same applies to any kind of organization. 

Frequently Asked Questions (FAQs)

1. What is Decentralization and Centralization?

Decentralization stands for the distribution of administrative powers within an organization. Every member from every department gets a fair share of the authoritative power and a part in the decision-making.

Centralization on the other hand is the distribution of administrative power in a hierarchical manner. This means that people at the top enjoy authority while power gradually decreases at lower levels.

2. What is a Decentralized Organization?

A decentralized organization is one where the system of power distribution based on hierarchy is discarded. Here the power of making decisions is distributed amongst all the members.

3. Which is Better, Centralization or Decentralization?

There is no definitive answer to this question as both have importance in the present scenario. For small organizations, it is important to have centralization for initial control and smooth operations. But for larger organizations, decentralization is important for faster decision-making and keeping a healthy sense of competition going among all departments.



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Disclaimers : Opinions expressed in this publication are those of the author(s). They do not necessarily purport to reflect the opinions or views of Shardeum Foundation.

Contributors :

Shuwam Rana, Harsha Karanth, Vishwanath Holin contributed to this blog.

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