What is Centralization Risk? – WazirX Blog

The idea behind “centralization” can be related to the distribution of power and authority in an organization or a network. A centralized system means the decision-making authority is concentrated at a particular point in the organization.

In this article, let’s learn more about this concept, its advantages and disadvantages, and its associated risks.

What is a centralized network?

The foundation of a centralized network is based on a single, central server/master node, which manages all significant data processing and maintains data and user information that other users may access. From there, client nodes can connect to the main server and send data requests rather than processing them themselves.

A significant portion of web services, such as YouTube, app stores for mobiles, and online banking accounts, are controlled by a single network owner, necessitating third-party authorization verification for all data transactions carried out within these networks.

The form of network that is the most prevalent on the internet is a centralized one. These networks rely on a single network owner to link all the other satellite users and devices, creating a single point of failure that bad actors might intentionally take advantage of.

Advantages of centralized network

  • Simple, rapid deployment:

In centralized networks, command chains are well defined, network delegation is relatively straightforward, and the need for cross-chatter between different levels of authority is also reduced. Furthermore, by creating or deleting connections between the client node and the main server, it is equally simple to add and delete client nodes from the network. The computational power of the network is not increased, though.

One of the most significant advantages of centralization is the reduced cost. This is because the centralized network or system always requires less support and cost. In addition, since the centralized networks are pre-planned, and until and unless you don’t want to expand the centralized network, the cost associated with it will never go out of budget.

Since the centralized network follows a top-down approach, it’s easy to have a standardized interaction between the central server and client nodes. This automatically leads to a more consistent and streamlined end-user experience.

Disadvantages of centralized network

If the primary server crashes, there’s a possibility that the entire centralized system will shut down as they have a sole point of failure. As a result, client nodes will not be able to share, receive, or process user requests independently. Additionally, doing server maintenance may need briefly turning off the primary server, as a result which will probably cause service outages and user discomfort or lower reliability.

Centralized organizations are safe and trustworthy but not entirely safe or trustworthy. The trust is basically an agreement that is set for the end-user by the service provider.

However, agreements are easily breakable. That’s why big organizations suffer from trust issues from their end-users.

When a system’s security is compromised, it sometimes takes some time for consumers to stop using the service until the provider rebuilds confidence by providing solutions and compensation to affected individuals. This happens because of centralization, and all the data are stored in a centralized database.

Centralized systems are hard to scale after a certain point; the only way to do so is by adding more storage, bandwidth, or computing capacity to the central server. In addition, information bottlenecks may develop if network traffic spikes exceed what the network can manage, which would cause users who are further away from the central server to suffer higher delays.

How is centralization risk an issue?

Centralization risks are vulnerabilities that both unethical project developers and outside attackers may use to their advantage. They may be used in various attacks, including rug pulls, endless minting exploits and more.

In the case of a token minting contract exploit, whoever controls the contract’s private key can create as many new tokens as they want and send them anywhere they want. The project’s founder, who had the private key, or an outsider who got hold of the contract’s private key, potentially due to ineffective key management, could be the attacker.

A rug pull is another type of exploit that takes advantage of centralized contract ownership. Every rug pull is distinct. For instance, in certain rug pulls, the project founders merely sell all of the tokens they possess out of malice, which effectively depletes the liquidity of a decentralized market.

Other rug pulls can entail founders taking tokens from a contract, such as a presale lockup contract, where users invest funds like Ethereum before launching a new currency. Again, decentralized exchanges are ideal for rug pulls since they don’t charge a fee to list new tokens and don’t need a smart contract audit.

Bottom line

A centralized network has a central server that manages all the critical data processing and user information that other users can have access to. Although the centralized network is trusted and secure, they are vulnerable to unethical project creators and outside attackers who may use this to fund their advantage. So be alert and keep a regular check on your networks!

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn’t represent any investment advice or WazirX’s official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.

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