Decentralization is key to the success of blockchains. By eliminating the need for a third party, users can transact with each other securely and without concern for censorship or malicious interference.
Decentralization means that no entity has control over the blockchain, no one can make decisions on behalf of the network, and this quality results in a more secure and reliable system.
The quality of decentralization and security determine the degree of trust that users place in the network.
In blockchains like Cardano, which have their ledger with public traceability in which each registered transaction can be seen by all users, but without identifying their users on-chain, decentralization also creates transparency. This increases confidence.
Finally, decentralization ensures that the blockchain is resistant to attacks and manipulation. With no single point of failure, the network is more secure and less vulnerable to malicious agents.
Decentralization has different parameters to be measured, but the most important refers mainly to the distribution of decision-making power in consensus, which has a direct impact on security, and this approach is the one I will explain in this article.
Cardano’s Proof of Stake system is designed in a way that guarantees high security, and encourages to maintain a level of decentralization through economic and incentive models, rewarding consensus participants with the ADA cryptocurrency.
The security budget of Ouroboros, the consensus protocol, is made up of the delegated ADAs, and protects the network against 51% attacks, as an attacker would need to own more than half of the delegated coins to be successful.
The security budget also depends on the market price of the coins, and the higher the price the attack is more expensive. In addition, a large number of holders should be willing to sell their holdings to the attacker. Ouroboros encourages people to own ADA coins and delegate them to pools to receive rewards.
The Nakamoto Coefficient and the MAV
The Nakamoto coefficient is a metric that allows measuring the level of decentralization that a blockchain has in the production of blocks, and represents the number of validators (nodes) that would have to come together to slow down, block, or take over the consensus of a blockchain. The higher the Nakamoto coefficient in relation to the total number of validators, the lower the risk of collusion and the higher the decentralization.
You can see a document published by its creator, Balaji S. Srinivasan, Quantifying Decentralization.
In the case of the Proof of Stake protocol, the Nakamoto Coefficient must not exceed 33.4%, or one third of the consensus in order not to run the risk of collusion, compared to 51% for Proof of Work, and this difference is due to the fact that In PoS, staked money has a greater impact on the algorithm for block selection than hashrate does, in PoW.
Thus, preventing a node or group of nodes from having more than 33.4% of the network consensus is essential to maintain the proper functioning of the network and guarantee its resistance to censorship.
At the time of writing this article, the Nakamoto coefficient Bitcoin is 3, with ~15,500 nodes, and it is so low due to the concentration of nodes in mining farms, which come together to have a higher hashrate.
You can see here a site that shows the Nakamoto Coefficient of some PoS networks.
MAV (Minimum Attack Vector) is the minimum number of entities necessary to reach 51% of the total block production capacity, or more simply it can be understood as the number of stakepools that would be needed to reach 51% of the control of the blockchain.
The lower the MAV, the less decentralized the network is.
Dr Michael Liesenfelt, a Nuclear Engineer, a prominent member of the Cardano community, designed a new metric, in my opinion much more representative than the MAV, which he called k-effective, and presented it in his CIP-50.
What is k-effective?
The “average resulting decentralization” or “effective decentralization” taking into account groups or entities of stake pools. One group could be running multiple stake pools, which lowers the realistic, effective decentralization.
The Nakamoto Coefficient is approximately half of k-effective rounded to the nearest integer.
What is k-effective / 2.0?
K-effective / 2.0 represents k-effective halved rounded up to the nearest integer. K-effective provides a higher resolution quantification of network decentralization compared to the Nakamoto Coefficient.
The MAV in Cardano
At the time of writing this article, during epoch 394 and with data from epoch 393, Cardano’s MAV is 20, which although it is relatively much better than other blockchains, the evolution over time shows that it has deteriorated, having registered 28 in epoch 323, in February 2022.
Binance [BNP] with 62 stakepools and Avengers, with different tickers, has 46 stakepools (believed to be Coinbase Cloud / Bison Trails) total 20% consensus, and both are centralized exchanges. These stakepools are using the money of the exchange’s clients, because the number of registered delegations is very few, less than 5, and large sums, that is, they come from the centralized wallets that these exchanges have with the clients’ money.
Currently, and in my opinion, the best web platform to see the MAV and the Staking Leverage is Balance.
The site explains:The name “BALANCE” originated from the core principle in which every transaction in double entry accounting must “balance” ( debit / credit ). This might seem like a simple concept, but in reality is quite complex and oftentimes does not balance. The idea of creating a system which does not allow unbalanced transactions, is what initially drew my attention towards blockchain as this would change how the world processes / audits business transaction records. Luca Pacioli is identified as the creator of the double entry accounting standards that we know and use today. His collaboration with da Vinci on polyhedron paintings is what inspired the current logo and other similar images on the web app.”
What is Leverage?
The ratio between an entity’s pool stake and pledge defined by the parameter L. A leverage-based stake pool saturation is based on pledge rather than a fixed size driven by k-parameter. An entity having high leverage means its total stake is much higher than its pledge.
Although Cardano registers a relatively good decentralization in the production of blocks with respect to other blockchains, we are far from a value that provides a good margin of safety.
An ideal measure would be that given the increase in stakepools in the network, the MAV should increase, to establish adequate security in its coefficient. Suppose there are 3,000 nodes and the MAV is 20, and if the number of nodes increases to 6,000 over time, keeping the MAV at 20 is losing decentralization.
The static photo of the MAV shows us the information of the moment, however, considering the dynamics of the network, it is more important to visualize the evolution over time.
Now that you know the importance and dynamics of decentralization in block production, this article is also intended to raise awareness among Proof of Stake protocol delegators, particularly in Cardano, that the choice of stakepool to delegate stake to consensus it is of relevant importance to maintain security.