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    The Nakamoto Coefficient: An accurate way to measure the decentralisation level of a project

    The Nakamoto Coefficient: An accurate way to measure the decentralisation level of a project

    The Nakamoto Coefficient: An accurate way to measure the decentralisation level of a project
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    By CNBCTV18.com  IST (Updated)

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    The Nakamoto Coefficient was created in 2017 by former Coinbase CTO Balaji Srinivasan. It measures decentralisation within a project and ascertains the least number of nodes required to disrupt the blockchain network.

    Decentralisation is the cornerstone of blockchain technology. After the 2008 financial crisis, pseudonymous Bitcoin creator Satoshi Nakamoto decided to build an economic system that would work without central authorities, such as banks and governments. This is how Bitcoin came to be: a network where users can transact without any intermediaries, which is the main premise of decentralised blockchain technology.
    However, as blockchains and cryptocurrencies have progressed, large investors have begun to build massive crypto stockpiles. Moreover, giant mining companies have entered the fray, leaving little to no room for individual miners. The result? A concentration of power in the hands of a few, which is against the promise of decentralised blockchains.
    Therefore, measuring the level of decentralisation within the project is essential before you put your trust and money behind a blockchain and its corresponding cryptocurrency. This is where the Nakamoto Coefficient can help. Tag along as we describe this measure of decentralisation and how it works.
    What is the Nakamoto Coefficient?
    Judging by the name, one might think that it is a measure developed by Satoshi Nakamoto himself. However, this is not the case. The Nakamoto Coefficient was created in 2017 by former Coinbase CTO Balaji Srinivasan. It measures decentralisation within a project and ascertains the least number of nodes required to disrupt the blockchain network.
    A node is one of the computers that run the blockchain software and helps validate and store the complete history of transactions on the network. More nodes mean more decentralisation. It also means that a bad actor would have to control a greater number of nodes to win a majority in the system and tamper with transactions.
    The importance of measuring decentralisation
    Decentralisation, with all its inherent positives, is not absolute. Blockchains can be decentralised and centralised to an extent. A blockchain like bitcoin focuses more on decentralisation at the cost of scalability. On the other hand, blockchains like Solana are a bit more centralised to ensure scalability.
    When you're trusting blockchains because of their decentralisation and the inability of anyone else to gain total control, you need to know how decentralised a blockchain is, and there arises the need for measuring it.
    Of course, there was never a barometer to measure decentralisation until the former Coinbase CTO Balaji Srinivasan developed the Nakamoto Coefficient.
    How does the Nakamoto Coefficient work?
    The Nakamoto Coefficient ascertains the number of nodes that must be compromised to affect the blockchain and obstruct it from functioning correctly. A higher Nakamoto measure indicates a more decentralised network. This means that the network has a large number of nodes. Therefore, anyone looking to compromise the system would have to affect at least 51 percent of these nodes to prevent the blockchain from functioning correctly.
    How is the Nakamoto Coefficient calculated?
    To calculate the decentralisation of a blockchain, Srinivasan derived a method that combined the Gini Coefficient and Lorenz Curve. These two socio-economic measures are used to ascertain the inequality and non-uniformity within an economic population.
    Srinivasan's idea was to combine the Gini Coefficient and the Lorenz Curve and use the resulting method to study several subsystems of a blockchain to arrive at a number denoting decentralisation. These subsystems include nodes, miners, clients, exchanges, developers and more.
    Decentralisation in popular cryptocurrencies
    The highest Nakamoto Coefficient on any given day goes to Bitcoin, which has a score of 7,349, signalling immense decentralisation. A distant second is Avalanche, with 26 for all of its validators. We have Solana at 19, which compromises on parts of its decentralisation to bring up scalability. The score for Ethereum is quite tricky as it is challenging to find the total validators in its extensive network.
    Conclusion
    The Nakamoto Coefficient gives us a way to measure decentralisation. With it, we have a way to analyse the risks that come with blockchains. It is also a guide for blockchain developers on what's needed to ensure decentralisation. Measuring the Nakamoto Coefficient remains a complicated process, unlike a formula where you just input numbers. Still, it's what we have until a better alternative comes along.
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