The Nakamoto Co-efficient

The Nakamoto Co-efficient is a measure of the amount of work needed to produce one unit of currency. The higher the value, the more work it takes to produce an equivalent amount of currency. In other words, if someone has $1 worth of currency and wants another $1 worth, then they’ll have to do more work than someone who has only $0.50 worth of currency because they need two pieces (or units) rather than half a piece (or unit).

It is a measure of the number of nodes on a network. It was originally proposed by Satoshi Nakamoto, and it can be thought of as an average value from which to determine how many nodes there should be in any given network.

Calculating a Blockchain’s Nakamoto Coefficient

The first step is to determine the minimum threshold for taking over a company. Is there a minimum amount of any subsystem required to sway it? The standard number is 51%. However, not all blockchains work on a simple majority system. Some systems might require 60%-75% of the network to be in agreement about altering the system. The Nakamoto coefficient formula uses 51% as its minimum threshold unless otherwise stated.

Next, you have to consider the ways in which each type of blockchain subsystem can be compromised. Any blockchain can be divided into six subsystems: Mining, clients, developers, exchanges, nodes, and owners. Each of these subsystems has a statistical data set you need to consider.

• Mining: The amount of rewards users get for mining within a set amount of time
• Clients: The number of users for each client
• Developers: The number of commits developers make
• Exchanges: The volume of exchanges made within a set amount of time
• Nodes: The node distribution across countries
• Owners: The distribution across individual addresses

Once you have this information plotted, 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 will be the Nakamoto coefficient for blockchain decentralization.

Pros and Cons

Pros:

• Quickly identify decentralized blockchains: The biggest perk of this measurement is that it makes it easy to compare and contrast blockchains. Once you calculate the Nakamoto score, you can tell at a glance which cryptos are decentralized — and exactly how decentralized various cryptos are.
• Analyze a variety of blockchain features: The Nakamoto coefficient is very flexible. You can apply it to a variety of situations, so you can analyze the features that matter to you. For example, if you prioritize decentralized development, you can use the coefficient to find blockchains that don’t only rely on a few devs.
• Highlight potential risks: This measurement is all about identifying how much effort it would take to compromise a system. You can use it to determine the biggest security issue for any crypto. A low Nakamoto score can help you identify potential problems, such as all nodes being situated in a single location.
• Design methods for optimizing decentralization: The Nakamoto coefficient allows you to quickly consider how proposed changes will affect a blockchain. Blockchain users can run several test scenarios, and see which alterations would do the most to improve blockchain decentralization.

Cons:

• Easily manipulated with data set selection: When calculating Nakamoto scores, your data set makes a huge difference. For example, if you’re looking at ownership decentralization, taking the time to account for each wallet with an infinitesimally small amount of currency would make the blockchain seem very decentralized. However, if you only look at owners who have more than $500, the crypto could be extremely centralized.
• Complicated statistical calculations: Nakamoto scores aren’t created by just adding and subtracting a few basic numbers. There’s no simple Nakamoto coefficient formula to use. You have to take the time to obtain large sets of data, graph them on a Lorenz curve and analyze the results.

The higher this co-efficient is for any given cryptocurrency, the more secure it will be because only a small fraction of all users are likely to cheat or collude with one another and tamper with transactions.