The Nakamoto Coefficient, also known as the Nakamoto coefficient, measures decentralization and represents the minimum number of nodes required to disrupt the blockchain network. A high Nakamoto coefficient means a blockchain is more decentralized.
What is the Nakamoto Coefficient?
The Nakamoto coefficient was first officially defined in 2017 by former Coinbase CTO Balaji Srinivasan. This metric is named after Satoshi Nakamoto, who is supposed to be the founder of Bitcoin. However, the Nakamoto coefficient is not a Bitcoin-specific metric. Instead, a Nakamoto coefficient can be used to analyze various blockchains.
Srinivasan’s initial plan was to find a quantitative way to determine exactly how decentralized any given system is. To calculate this, he proposed a method combining the Gini coefficient and the Lorenz curve. These metrics were often used to look at inequality and disorder within an economic population, but Srinivasan had a revolutionary idea to apply them to blockchain decentralization concepts. The Nakamoto coefficient was created by combining these inequality measures with the blockchain subsystem analysis.
The Nakamoto score takes into account how many subsystems a blockchain has and how many assets you have to compromise before taking control of each subsystem. Simply put, a Nakamoto Coefficient defines the minimum effort required to disrupt any blockchain. A high coefficient means that it is more difficult to break a blockchain because it is a more decentralized structure. Meanwhile, a low coefficient means that a system is highly centralized and the risk of outages is high.
Nakamoto Coefficient Calculation
Calculating a Nakamoto coefficient is a little more complicated than connecting simple numbers to a simple formula. The formal definition of a Nakamoto measure is the minimum number of entities in a given subsystem that can muster proportional amounts of control to gain control of the subsystem. There are several different techniques you may need to use when calculating this coefficient. You should choose your Nakamoto coefficient formulas according to the situation you want to analyze.
First of all, you need to determine the minimum threshold for inheritance. At this point, the standard rate is 51 percent. But the truth is that not all blockchains work on a system where a simple majority takes control. Some systems may require 60 or 75 percent of the network to agree on replacing the system. Unless one score says otherwise, you can assume that the Nakamoto coefficient formula uses 51 percent as its minimum threshold.
Next, you should consider ways in which any type of blockchain subsystem can be compromised. Srinivasin proposes that any blockchain can be divided into six separate subsystems: mining, customers, developers, exchanges, nodes, and owners. Each of these subsystems has its own set of statistical data that you should consider.
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