# 5.12 Centralized vs Decentralized Systems

**1. Centralized Systems:**

Centralized systems are systems controlled by a single central authority or entity. Examples include traditional banking systems and government-run databases.

Advantages: Centralized systems can offer efficiency and streamlined decision-making.

Disadvantages: Centralization can lead to a single point of failure, lack of privacy, and potential abuse of power.

2\. Decentralized Systems:

Decentralized systems are systems that are distributed across multiple independent nodes or entities. Examples include blockchain networks and decentralized cryptocurrencies like Bitcoin.

Advantages: Decentralization enhances security, transparency, and resistance to censorship.

Disadvantages: Decentralized systems may face challenges related to scalability and coordination.

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Central Bank Digital Currencies (CBDCs)

**CBDCs are digital currencies issued by central banks, designed to complement or replace traditional fiat money. They are digital representations of a country’s currency and are backed by the central bank.**

**Characteristics of CBDCs**

1. Fully Digital: CBDCs exist solely in electronic form, with no physical counterpart like bills or coins. They are accessible through digital wallets and can be used for transactions electronically.
2. Centralized Control: Unlike decentralized cryptocurrencies such as Bitcoin, CBDCs are issued and regulated by central banks, providing governments with direct oversight and control over monetary policy.
3. Enhanced Monitoring: CBDCs enable unprecedented visibility into financial transactions. Governments and central banks can monitor transactions in real-time, potentially improving regulatory oversight and combating illegal activities like money laundering and tax evasion.
4. Policy Tools Utilization: CBDCs facilitate more precise deployment of monetary and fiscal policy tools. Central banks can adjust interest rates, control money supply, and influence economic activities with greater efficiency and speed.
