What is the Nakamoto coefficient?
In short, the Nakamoto coefficient represents the smallest number of players who, by collusion, can affect the blockchain and disrupt its normal functioning. The higher the coefficient value relative to the total number of players (most often considered among validators in PoS or nodes in PoW), the lower the risk of something like this and, therefore, the more decentralized the network is.
This index was developed and offered to the public by former technical director of the Coinbase crypto exchange Balaji S. Srinivasan and Andreessen Horowitz general partner Leland Lee in 2017. The coefficient was named in The honor of the creator Bitcoin Satoshi (Satoshi) Nakamoto.
Why do we need the Nakamoto coefficient?
The Nakamoto coefficient helps:
Measure the degree of decentralization of a particular blockchain. Get a tool to compare the decentralization of different networks. To determine how much the modification of the system improves or reduces the decentralization of the network. Develop optimization algorithms and architecture for maximum decentralization.
How is the Nakamoto coefficient calculated?
The methodological foundations were the Gini coefficient and the Lorentz curve. Both of these tools are traditionally used in assessing economic inequality, but the statistical and mathematical models contained in the two tools are suitable for other purposes.
As a result, using these tools, it turns out to do the following:
To list the main subsystems of a decentralized system. Determine how many objects need to be compromised in order to control each subsystem. And finally, use the minimum of them as a measure for effective decentralization of the system.
It turns out that the Nakamoto index operates with the category of subsystem and system. What is it?
Decentralized systems
A decentralized system (for example, Bitcoin) consists of a set of decentralized subsystems. These include: mining, developers, exchanges, code base, nodes and BTC owners. Actually, all subsystems must be decentralized, otherwise we will not be able to talk about the decentralization of the entire system.
Of course, some of these decentralized subsystems may be more important than others; for example, mining is absolutely necessary for the functioning of Bitcoin, whereas exchanges (no matter how significant trading platforms actually are) are not really a critically useful subsystem for the functioning of the blockchain. Nevertheless, the coefficient assumes that all subsystems should be decentralized.
To calculate the coefficient, you will have to determine: how many objects in each subsystem do unscrupulous players need to control in order to begin to pose a threat to decentralization? The more of these objects there are, the higher the coefficient will be in the end.
That is, all subsystems are calculated separately, and already on the basis of these indicators – for the weakest subsystem and the required number of unscrupulous players there – the Nakamoto coefficient is formed.
Blind spots of the Nakamoto coefficient
Problems arise on many levels at once.
Firstly, the allocation of subsystems seems to be a rather weak point: from the point of view of decentralization, different subsystems have different weights. Therefore, any allocation of subsystems and the assignment of which one is more important is the introduction of an element of arbitrariness in the index. In principle, the authors of the coefficient themselves It is recognized.
Secondly, not everything can be reliably calculated. How to determine, for example, that two nodes are not actually secretly controlled by one player?
Thirdly, methodological problems often arise with regard to indisputable subsystems. Such as, for example, mining. Yes, decentralization in mining is the main thing, it determines the level of decentralization of the blockchain. The question arises – how to calculate the coefficient for mining? Take Bitcoin, for example. To compromise the network, you need to take 51% of the hashrate. How many players do you need for this?
According to current data, there are two pools: Foundry USA and AntPool. Their total share in the hashrate is 54.5%. It turns out that Bitcoin's Nakamoto coefficient = 2? Yes, but not really. Miners are free to leave the pools, they have the opportunity to refuse to participate in unfair actions at any time. That is, everything does not really depend on the decision of two players. Then how to count? You can, in principle, take half the number of nodes in the network. But there is actually a problem with this approach: the nodes are not equivalent to each other. In general, which calculation method should not be chosen, there will still be questions about it.
Top 3 Blockchains by Nakamoto Coefficient
Nevertheless, despite all the conventions, experts are trying to seriously calculate the Nakamoto coefficient. By last measurements The Humanode blockchains are in the lead with an indicator of 236, Mina (155) and Polkadot (92).
Conclusion
The Nakamoto coefficient is an interesting, but far from indisputable, way to quantify the level of blockchain decentralization. Despite the apparent simplicity (it is necessary to calculate the minimum necessary number of unscrupulous players to create problems for the blockchain), it is hardly possible to calculate the index with at least a hint of objectivity for all blockchains at once. At the same time, as a point tool, with reasonable use, it can perform quite well.