What is Nakamoto Coefficient

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Nakamoto Coefficient is a quantitative measure of a system's decentralization, especially for blockchain networks. The minimum Nakamoto coefficient refers to the minimum number of nodes or entities one needs to compromise the whole system.

The concept was introduced by Balaji Srinivasan, the former CTO of Coinbase, in 2017. This approach is inspired by the Gini coefficient and Lorenz curve, which are used to measure the centralization of wealth and power in society. Srinivasan divided the measurement of a system's decentralization into six parts (Mining, Client, Developer, Exchange, Node, and Ownership). Measuring the minimum Nakamoto coefficient for each piece, and then using the minimum result of these parts as the minimum Nakamoto coefficient of the system.

The influencing factors of the six parts are as follows:

  • Mining is measured by the block reward over the past 24 hours
  • Client is measured by the number of different client codebases
  • Developer is measured by the distribution of commits that developers made
  • Exchange is measured by the value of the coin traded across exchanges
  • Node is measured by the node distribution across countries
  • Ownership is measured by the coin distribution across addresses

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