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What is the Nakamoto Coefficient?

The Nakamoto coefficient is a metric that has gained increasing attention in the cryptocurrency world as a way to measure the level of decentralization and security of a particular blockchain network. The metric is named after the mysterious creator of Bitcoin, Satoshi Nakamoto, and measures the minimum number of entities that control more than 50% of the total hash power of a cryptocurrency’s network. In this article, we will explore the concept of the Nakamoto coefficient and its relevance to Australia’s cryptocurrency landscape.

First, it is important to understand what the Nakamoto coefficient represents. In a blockchain network, the hash power refers to the computing power that is required to solve the complex mathematical problems that are necessary for mining new blocks and maintaining the integrity of the network. If a single entity or group controls more than 50% of the total hash power, they could potentially launch a “51% attack” on the network, giving them the ability to double-spend coins and manipulate transactions. The Nakamoto coefficient, therefore, measures the minimum number of entities needed to collude in order to achieve this level of control.

So how does Australia fit into this picture? While the country is not necessarily a major player in the global cryptocurrency market, it has seen significant growth and adoption of cryptocurrencies in recent years. In fact, a 2021 survey conducted by Finder found that 17% of Australians now own cryptocurrency, representing a significant increase from previous years. With this growth in adoption comes the need to consider the security and decentralization of the various blockchain networks that Australians are investing in.

One notable example is the blockchain network powering Bitcoin, which currently has a Nakamoto coefficient of around 4. This means that if four mining pools were to combine their hash power, they could potentially control more than 50% of the network’s total hash power. While this may not seem like a significant risk, it is important to consider that the majority of the world’s Bitcoin mining occurs in China, which has raised concerns about the potential for centralization and censorship.

Another example is the blockchain network powering Ethereum, which currently has a Nakamoto coefficient of around 16. This is a much higher level of decentralization than Bitcoin, as it would require at least 16 entities to collude in order to launch a successful 51% attack. This level of decentralization is one reason why Ethereum has become a popular platform for decentralized finance (DeFi) applications and smart contracts.

Overall, the Nakamoto coefficient is an important metric for understanding the security and decentralization of blockchain networks. As Australians continue to invest in and adopt cryptocurrencies, it is important to consider the level of decentralization and security of the networks they are participating in. While Australia may not be a major player in the global cryptocurrency market, the growing adoption of cryptocurrencies within the country highlights the need to consider the potential risks and benefits of different blockchain networks.