Nakamoto coefficient explained: Measuring decentralization in blockchain networks

Measuring decentralization successful blockchain

Decentralization involves spreading power and decision-making crossed a web alternatively of a azygous authority. 

Unlike centralized systems, wherever 1 entity controls everything, decentralized blockchains administer information among participants (nodes). Each node holds a transcript of the ledger, ensuring transparency and reducing the hazard of manipulation oregon strategy failure.

In blockchain, a decentralized web provides important advantages:

• Security: Decentralization reduces vulnerabilities associated with cardinal points of attack. Without a azygous controlling entity, malicious actors find it much challenging to compromise the network. ​
• Transparency: All transactions are recorded connected a public ledger accessible to each participants, fostering spot done transparency. This openness ensures that nary azygous entity tin manipulate information without consensus. ​
• Fault tolerance: Decentralized networks are much resilient to failures. Data organisation crossed aggregate nodes ensures that the strategy remains operational adjacent if immoderate nodes fail. ​

So, decentralization is good, but it’s not a fixed state. It’s much of a spectrum, perpetually shifting arsenic web participation, governance structures and consensus mechanisms evolve.

And yes, there’s a ruler for that. It’s called the Nakamoto coefficient.

What is the Nakamoto coefficient?

The Nakamoto coefficient is simply a metric utilized to quantify the decentralization of a blockchain network. It represents the minimum fig of autarkic entities — specified arsenic validators, miners oregon node operators — that would request to collude to disrupt oregon compromise the network’s mean operation. 

This conception was introduced successful 2017 by erstwhile Coinbase main exertion serviceman Balaji Srinivasan and was named aft Bitcoin's creator, Satoshi Nakamoto. 

A higher Nakamoto coefficient indicates greater decentralization and information wrong the blockchain network. In specified networks, power is much wide distributed among participants, making it much challenging for immoderate tiny radical to manipulate oregon onslaught the system. Conversely, a little Nakamoto coefficient suggests less entities clasp important control, expanding the hazard of centralization and imaginable vulnerabilities. ​

For example, a blockchain with a Nakamoto coefficient of 1 would beryllium highly centralized, arsenic a azygous entity could power the network. In contrast, a web with a coefficient of 10 would necessitate astatine slightest 10 autarkic entities to collude to exert control, reflecting a much decentralized and unafraid structure.

​Did you know? Polkadot's precocious people connected the Nakamoto coefficient is mostly owed to Polkadot's nominated proof-of-stake (NPoS) statement mechanism, which promotes an adjacent organisation of stakes among a ample fig of validators. 

Calculating the Nakamoto coefficient

Calculating this coefficient involves respective cardinal steps:​

1. Identification of cardinal entities: First, find the superior actors wrong the network, specified arsenic mining pools, validators, node operators oregon stakeholders. These entities play important roles successful maintaining the network’s operations and security.
2. Assessment of each entity’s control: Next, measure the grade of power each identified entity has implicit the network’s resources. For instance, successful proof-of-work (PoW) blockchains similar Bitcoin, this involves analyzing the hashrate organisation among mining pools. In proof-of-stake (PoS) systems it requires examining the involvement organisation among validators.
3. Summation to find the 51% threshold: After assessing idiosyncratic controls, fertile the entities from highest to lowest based connected their influence. Then, cumulatively adhd their power percentages until the combined full exceeds 51%. The fig of entities required to scope this threshold represents the Nakamoto coefficient.

Consider a PoW blockchain with the pursuing mining excavation distribution:

• Mining excavation A: 25% (of the full hashrate)​
• Mining excavation B: 20%​
• Mining excavation C: 15%​
• Mining excavation D: 10%​
• Others: 30%​

To find the Nakamoto coefficient:​

• Start with mining excavation A (25%).​
• Add mining excavation B (25% 20% = 45%).​
• Add mining excavation C (45% 15% = 60%).​

In this scenario, the combined hashrate of mining pools A, B and C reaches 60%, surpassing the 51% threshold. Therefore, the Nakamoto coefficient is 3, indicating that collusion among these 3 entities could compromise the network’s integrity. 

Did you know? ​Despite Bitcoin's estimation for decentralization, its mining subsystem is notably centralized. The Nakamoto coefficient is presently 2 for Bitcoin. This means that conscionable 2 mining pools power astir of Bitcoin's mining power.

Limitations of the Nakamoto coefficient

While the Nakamoto coefficient serves arsenic a invaluable metric for assessing blockchain decentralization, it possesses definite limitations that warrant cautious consideration.​ 

For example: 

Static snapshot

The Nakamoto coefficient provides a static snapshot of decentralization, reflecting the minimum fig of entities required to compromise a web astatine a circumstantial constituent successful time. 

However, blockchain networks are dynamic, with subordinate roles and power evolving owed to factors similar staking, mining powerfulness shifts oregon node information changes. Consequently, the coefficient whitethorn not accurately seizure these temporal fluctuations, perchance starring to outdated oregon misleading assessments. ​

Subsystem focus

This metric typically focuses connected circumstantial subsystems, specified arsenic validators oregon mining pools, perchance overlooking different captious aspects of decentralization. Factors similar lawsuit bundle diversity, geographical organisation of nodes and token ownership attraction besides importantly interaction a network’s decentralization and security. 

Relying solely connected the Nakamoto coefficient mightiness effect successful an incomplete evaluation.

Consensus mechanics variations

Different blockchain networks employment assorted statement mechanisms, each influencing decentralization differently. The Nakamoto coefficient whitethorn not uniformly use crossed these divers systems, necessitating tailored approaches for close measurement. ​

External Influences

External factors, including regulatory actions, technological advancements oregon marketplace dynamics, tin power decentralization implicit time. For example, regulatory policies successful circumstantial regions might impact the cognition of nodes oregon mining facilities, thereby altering the network’s decentralization landscape. 

The Nakamoto coefficient whitethorn not relationship for specified externalities, limiting its comprehensiveness.

To sum up, the Nakamoto coefficient is utile for assessing definite aspects of blockchain decentralization. It should beryllium utilized alongside different metrics and qualitative assessments to summation a broad knowing of a network’s decentralization and security.