Nakamoto Coefficient Explained: What It Reveals About Blockchain Decentralization
Nakamoto Coefficient Explained: What It Reveals About Blockchain Decentralization
Key Takeaways
- The Nakamoto Coefficient provides an impartial way to measure decentralization, highlighting the minimum number of entities required to control a blockchain network’s consensus, governance, or validation processes.
- By identifying the concentration of control, the Nakamoto Coefficient helps assess vulnerabilities such as single points of failure, susceptibility to censorship, and potential for collusion in a blockchain network.
- It allows stakeholders to compare different blockchain networks quantitatively, providing insights into the relative decentralization of systems like Bitcoin, Ethereum, and Solana.
- The metric informs developers, investors, and users about the decentralization status of a network, encouraging improvements in governance models, consensus mechanisms, and scalability solutions to enhance decentralization.
Decentralization is frequently regarded as the foundation of the technology’s promise in the realm of blockchain and cryptocurrencies. The theory is that we may build a more transparent, safe, and censorship-resistant system by sharing authority, decision-making, and validation among a network of participants.
However, the question of how decentralized a blockchain network truly is remains complex. In response, the “Nakamoto Coefficient” has become a valuable tool for measuring decentralization, providing a more impartial way to evaluate how decentralized a blockchain works.
What Is the Nakamoto Coefficient?
The smallest number of organizations (individuals, mining pools, validators, or other stakeholders) required to collectively undermine or control the blockchain network is known as the Nakamoto Coefficient (NC). The term is named after Satoshi Nakamoto, the pseudonymous creator of Bitcoin, who created the first decentralized cryptocurrency with the intention of dispersing power among numerous participants and removing single points of failure.
To put it simply, the Nakamoto Coefficient measures the amount of control that a single actor or a small number of actors can have over the blockchain. A network that has a larger Nakamoto Coefficient is more decentralized, meaning that more independent participants are needed to influence the system. Conversely, a lower Nakamoto Coefficient indicates that a small number of participants could undermine the consensus, security, or integrity of the network.
How Is the Nakamoto Coefficient Calculated?
In order to calculate the Nakamoto Coefficient, one must evaluate the level of concentration in important areas of the blockchain network, such as governance influence (for more decentralized application blockchains), validator stakes (for proof-of- stake blockchains), or mining power (for proof-of-work blockchains like Bitcoin):
- Mining power or hashrate (PoW): The concentration of mining power is used to calculate the Nakamoto Coefficient for Bitcoin and other proof-of-work (PoW) networks. The Nakamoto Coefficient decreases when more mining power is concentrated in a small number of mining pools. Finding the least number of mining pools that collectively control more than 50% of the network hashrate (or mining power) is how you calculate the NC. The network is more susceptible to manipulation or attacks if a small number of mining pools control the majority of the hashrate, as indicated by a low Nakamoto Coefficient.
- Staking power (PoS): The concentration of staked tokens is the main emphasis of the Nakamoto Coefficient in proof-of-stake (PoS) networks. Fewer organizations are needed to manage the network’s consensus process when there is a greater concentration of staked tokens. For example, if a small number of large stakers control more than 50% of the total staked tokens, then the Nakamoto Coefficient is low. The calculation here involves determining how many independent entities hold enough tokens to influence or control the network’s governance and validation process.
- Governance and voting power: By examining voting power, the Nakamoto Coefficient for blockchains with governance features (such as decentralized autonomous organizations, or DAOs) can be evaluated. Finding the number of parties or addresses with sufficient voting power to control the outcome of proposals is how the Nakamoto Coefficient is computed in these systems. A low Nakamoto Coefficient indicates a less decentralized governance system when a small number of addresses control a significant fraction of the governance votes.
Why Is the Nakamoto Coefficient Important?
Knowing the Nakamoto Coefficient makes it easier to determine whether a blockchain actually satisfies the principles of decentralization. The key benefit of decentralization is its ability to reduce risks such as:
- Single points of failure: In a decentralized network, the system’s integrity shouldn’t be at risk due to the failure or compromise of any one individual or group.
- Censorship Resistance: It is more difficult for any organization (like a government or corporation) to filter transactions or change data in a more decentralized network.
- Security: Since it would take cooperation from several individuals to launch a successful attack (such a 51% attack), a higher Nakamoto Coefficient usually indicates that the network is more safe.
- Trustlessness: Decentralized systems reduce the need for trusted intermediaries, as control is spread across multiple parties. A low Nakamoto Coefficient implies that trust is concentrated in the hands of a few, undermining this principle.
An objective method for assessing these variables and determining the degree of decentralization in a network is provided by the Nakamoto Coefficient. Based on the inherent risks of centralization, it enables consumers, developers, and investors to make informed decisions.
How Decentralized Are Blockchain Networks?
Despite the theoretical ideals of decentralization, many blockchain networks exhibit significant degrees of centralization. Let’s understand how decentralization varies across various blockchain networks.
Nakamoto Coefficient of PoS Blockchains
Ethereum’s Nakamoto Coefficient stood at 2 in February 2024, indicating a high concentration risk. This is due to a few large entities controlling significant portions of the network’s staking power. For instance, Lido held approximately 33% and Coinbase around 15%, raising concerns about centralization.
Here is a table showing the Nakamoto Coefficient data for various PoS blockchains as of November 18, 2024, sourced from Nakaflow. Notably, the values are updated every six hours:
| Name | Previous Value | Current Value (as of Nov. 18, 2024) |
| Algorand | 10 | 10 |
| Aptos | 20 | 20 |
| Cosmos | 7 | 7 |
| Avalanche | 24 | 24 |
| Agoric | 6 | 6 |
| Binance | 7 | 7 |
| Polkadot | 132 | 132 |
| MultiversX | 8 | 8 |
| Hedera | 8 | 8 |
| Juno | 8 | 8 |
| Polygon | 4 | 4 |
| Mina | 0 | 11 |
| Near | 11 | 11 |
| Osmosis | 10 | 10 |
| Pulsechain | 12 | 12 |
| Regen Network | 5 | 5 |
| Thorchain | 33 | 33 |
| Sei | 8 | 8 |
| Solana | 18 | 18 |
| Stargaze | 11 | 11 |
| Sui | 17 | 17 |
| Celestia | 7 | 7 |
Comparison
The table showcases the Nakamoto Coefficients for a variety of PoS blockchains, both in their previous and current values. Most of the blockchains exhibit a stable NC, reflecting consistent decentralization across their respective networks. Polkadot, with an NC of 132, stands out with the highest value, suggesting a relatively decentralized governance and validation process.
Solana, Avalanche, and Thorchain also show strong values at 18, 24, and 33 respectively. Meanwhile, Mina, which initially had an NC of 0, saw a significant jump to 11, indicating a recent increase in decentralization or changes in its staking distribution. Blockchains such as Algorand, Aptos, and Cosmos maintain consistent NC values, reflecting a steady balance in their network’s control.
Bitcoin’s Nakamoto Coefficient
As of May 2024, Nakamoto’s coefficient for Bitcoin reflects growing centralization risks, with two major mining pools, Foundry USA Pool and AntPool, controlling over 56% of the network’s computing power.
While Bitcoin remains the most decentralized network, the concentration of mining power poses a threat to its resilience. The Nakamoto coefficient is typically calculated at around 9,601 individual nodes, but mining pool dynamics can alter this figure. Despite risks, Bitcoin’s network continues to resist corruption due to its decentralized nature.
The Nakamoto Coefficient and Blockchain Networks of the Future
The Nakamoto Coefficient of different networks is probably going to continue to change as blockchain technology develops. Technologies like sharding, layer-2 solutions, and privacy improvements, as well as new governance models and consensus processes, might contribute to or hinder decentralization.
Layer-2 alternatives such as optimistic rollups and zk-Rollups, for instance, seek to improve scalability and lower transaction costs without compromising decentralization, which could raise the Nakamoto Coefficient of underlying layer-1 networks like Ethereum.
Likewise, the creation of more effective governance structures and consensus processes may contribute to the more equitable distribution of power throughout the network, hence enhancing decentralization over time.
However, pressures to centralize will persist. Over time, the Nakamoto Coefficient may decrease due to factors including network scalability, performance requirements, and the concentration of capital and resources in particular industries or geographical areas.
Conclusion
The Nakamoto Coefficient help quantify the minimum number of entities required to control a network; it provides an objective metric for understanding the risks and strengths of decentralized systems.
The Coefficient makes it easier to comprehend how power and control are allocated throughout a network, which is essential for assessing the system’s security, resilience, and reliability even though no blockchain is fully decentralized.
Maintaining the integrity and principles of decentralization will require a high Nakamoto Coefficient as blockchain technology develops.
FAQs
In PoW networks, the Nakamoto Coefficient is calculated based on the distribution of mining power, typically by analyzing the concentration of hashrate across mining pools. In PoS networks, it focuses on the concentration of staked tokens among validators or staking pools. The key difference lies in what controls network consensus—computational power in PoW versus token ownership in PoS. No, a high Nakamoto Coefficient indicates greater decentralization and reduced risk of control by a few entities, but it doesn’t guarantee complete decentralization. Other factors, such as geographical concentration, infrastructure centralization, and external influences (e.g., regulatory pressures), also affect how decentralized a blockchain network truly is. A low Nakamoto Coefficient means that a small number of entities control the majority of the network, making it more vulnerable to attacks like a 51% attack or governance manipulation. This centralization can compromise the blockchain’s core principles of trustlessness, censorship resistance, and resilience against single points of failure. How does the Nakamoto Coefficient differ for proof-of-ork (PoW) and proof-of-stake (PoS) networks?
Can a high Nakamoto Coefficient guarantee complete decentralization?
Why is a low Nakamoto Coefficient considered a security risk?
