Decentralization is the cornerstone of blockchain technology. If you are to judge by the name, you will think Satoshi Nakamoto is the leading creator of the Nakamoto coefficient.
The blockchain was created out of the need for a network where users can interact without intermediaries and are secured. That was the blockchain promise, but as more people adopt the technology, we see large investors enter the ecosystem. These investors have built massive crypto stockpiles, and power is now concentrated in a few people's hands.
This has made it essential to measure the degree of decentralization of any blockchain or project you are investing in, and that is where the Nakamoto coefficient comes in.
How Does the Nakamoto Coefficient Work?
The Nakamoto coefficient was created in 2017 by former Coinbase CTO Balaji Srinivasan. It measures decentralization within a project and ascertains the least number of nodes required to disrupt the network. Measuring decentralization is crucial as it helps build your trust in a blockchain and the inability of anybody to gain total control of the system.
As such, Nakamoto Coefficient calculates the number of nodes that must be compromised to affect the blockchain and obstruct it from functioning correctly. As such, the higher the Nakamoto coefficient, the more decentralized the network.
This means that the network has many nodes, and anyone planning to disrupt the system must acquire at least 51% of these nodes. That is the only way you can prevent the blockchain from functioning correctly.
Calculating the Nakamoto Coefficient
The Nakamoto coefficient is calculated using concepts from economics — The Lorenz curve, the Gini coefficient, and Blockchain subsystems.
Balaji proposed six different subsystems that can be used to measure the decentralization of a Blockchain network.
They are Mining (by reward), Clients (by code base), Developers (by software commits), Exchanges (by trading volume), Nodes (by number), and Ownership (by address).
Once this individualized information is plotted as a Lorenz curve on a graph, you can identify the number of entities it would take to reach a minimum threshold percentage for system disruption. You'll need to find the minimum number of entities whose proportionate control adds up to 51% or whatever other disruption percentage you set. This number is the Nakamoto coefficient for blockchain decentralization.
The line that separates a healthy decentralized system from one that is not is generally put at 51% but can be different depending on the subsystem.
For example, when considering the Nakamoto score for Ethereum dev decentralization, you would start by looking up the number of engineers who have made commits. By plotting the number of commits per engineer on a Lorenz curve, if you can see that two engineers alone have made over 51% of all commits, the Nakamoto score for Ethereum devs would be two. This would mean that Ethereum development is heavily centralized.
An example of co-efficient calculations for popular blockchains:
Final Thoughts
The Nakamoto coefficient is very helpful as long as you take the time to analyze the data behind any given Nakamoto score. Using a Nakamoto score to analyze subsystems, you can easily rank various blockchains based on their level of centralization.
This makes the Nakamoto coefficient one of the most valuable tools for determining blockchain decentralization.
Komentarze