Nakamoto Coefficient: An Accurate Indicator for Blockchain Decentralization?

If you're interested in blockchain decentralization, you've probably come across a few discussions on the Nakamoto coefficient. This concept might sound very complex, but once you understand it, it's quite simple. Our guide will tell you everything you need to know about the Nakamoto coefficient so you can use it in your financial decisions.

What Is the Nakamoto Coefficient?

The Nakamoto coefficient measures decentralization and represents the minimum number of nodes required to disrupt the blockchain's network. A high Nakamoto coefficient means that a blockchain is more decentralized.

The Nakamoto coefficient was first formally described in 2017 by former Coinbase CTO Balaji Srinivasan. This measurement is named after Satoshi Nakamoto, the presumed founder of Bitcoin. However, the Nakamoto coefficient isn’t a Bitcoin-only measurement. Instead, a Nakamoto coefficient can be used for analyzing a variety of blockchains.

Srinivasan's initial plan was to find a quantitative way of determining exactly how decentralized any system was. To calculate this, he proposed a method that combined the Gini coefficient and Lorenz curve. These measurements are generally used to look at inequality and non-uniformity within an economic population, but Srinivasan had the revolutionary idea of applying them to blockchain decentralization concepts. The Nakamoto coefficient is created by combining these inequality measurements with blockchain subsystem analysis.