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Understanding The Results In The EDI Dashboard

Published 4.3.2024

A team of dedicated researchers from the University of Edinburgh has developed the Edinburgh Decentralization Index (EDI), a pioneering tool designed to provide real-time insights into the decentralization of major blockchain projects. Recently, the team has made the first results of their work available to the public. An interactive EDI Dashboard has been launched, offering users a detailed view of the decentralization metrics of several leading blockchain projects, including Bitcoin, Ethereum, Cardano, and others. These initial findings focus specifically on the decentralization of consensus, one of the key aspects of blockchain technology. While the researchers have already provided valuable insights, it’s important to note that this is just the beginning. In the article, we will examine the results and explain how to interpret them.

About The Edinburgh Decentralization Index

The EDI is a significant stride towards bringing transparency and objectivity to the blockchain sector. It offers a practical and data-driven solution to what can often be a subjective evaluation. The EDI aims to provide a benchmark for quantifiable decentralization.

The EDI dashboard serves as a valuable resource for anyone interested in understanding the blockchains' decentralization levels.

The team continues to work diligently on this project, and we can expect more comprehensive results in the future as they delve deeper into the multifaceted dimensions of blockchain decentralization. We can expect more leading projects to be added to the dashboard.

The EDI is a collaborative project involving several university teams. Transparency is a core value for the EDI team. They rely solely on public APIs and on-chain data, steering clear of any private data or APIs.

The EDI project embraces the open-source ethos, inviting anyone to contribute, offer fresh insights, or tailor the EDI to their specific requirements. The team is committed to making information about their methodology accessible and will publish all their findings.

The EDI caters to a wide audience, ranging from decentralization enthusiasts and investors to regulatory bodies, legal systems, and governments. It aspires to be a pivotal source of information in discussions about the quality of decentralization.

The EDI project was funded by Input Output Global (IOG), one of the builders of Cardano. This accompanies a $4.5m donation by IOG to the University of Edinburgh. The collaboration between IOG and the University of Edinburgh aims to create a standard of measurable decentralization for the blockchain industry.

To date, no other organization has financed a project akin to the EDI. There's a pressing need for such initiatives in the cryptocurrency sector. Some critics suggest that the EDI may be biased towards Cardano due to funding from IOG. However, the team's commitment to transparency and openness effectively dispels these apprehensions.

Visit the EDI Dashboard pages.

Understanding The Results In The EDI Dashboard

The EDI Dashboard presents seven distinct graphs, each showcasing the results for seven prominent blockchains: Bitcoin, Bitcoin Cash, Cardano, Ethereum, Litecoin, Tezos, and ZCash. Let’s embark on a detailed exploration of each graph.

The first graph in the EDI Dashboard represents the Nakamoto Coefficient.

The Nakamoto Coefficient is a measure of a blockchain’s decentralization. It’s determined by counting the minimum number of entities that collectively produce more than 50% of the total blocks within a given timeframe. The output of this metric is an integer.

A higher Nakamoto Coefficient signifies a higher level of decentralization.

Conversely, if the Nakamoto coefficient were 1, it would imply that a single entity, such as a single pool, produces more than half of all blocks in the network, indicating a high level of centralization.

The result refers to entities (nodes) that can produce blocks, irrespective of the resources that may be delegated to these entities by several other entities (for instance, miners delegate hash rate to a pool, stakers delegate coins to a pool, etc.).

Cardano, with a Nakamoto coefficient of 58, surpasses other blockchains in this metric. In comparison, Bitcoin and Ethereum have a significantly lower Nakamoto coefficient of just 2. Tezos, with a coefficient of 7, comes in second place.

However, it's intriguing to note that community tools often report a Nakamoto coefficient of around 35, which is approximately half of what is reported for Cardano by the EDI dashboard. This discrepancy between the scientists' results and the community tools warrants further investigation.

Typically, newer blockchains exhibit greater decentralization. It’s anticipated that as Avalanche, Polkadot, Solana, and other such projects make their appearance on the EDI dashboard, they will surpass the decentralization of traditional projects. The real question, however, is how these projects will stack up against Cardano. Despite its current dominance, Cardano’s position may not remain as unassailable as it seems now.

The Gini coefficient represents the degree of inequality in block production. The output of the metric is a decimal number in [0,1]. Values close to 0 indicate equality (all entities in the system produce the same number of blocks) and values close to 1 indicate inequality (one entity produces most or all blocks).

In a perfect scenario of absolute equality, each node in the network would generate an equal number of blocks over the same timeframe and receive identical rewards. However, this would necessitate a one-person-one-vote system, which is unattainable in a decentralized network. The number of blocks produced by each entity is contingent on the resources it has at its disposal, whether owned directly or delegated to it.

It's noteworthy that a majority of blockchain networks tend towards increased inequality.

Cardano topped this metric with a score of 0.906. Tezos followed closely in second place, scoring 0.967. Bitcoin secured the third position with a score of 0.974.

In the EDI dashboard, entropy represents the expected amount of information in the distribution of blocks across entities. The output of the metric is a real number. Typically, a higher value of entropy indicates higher decentralization (lower predictability).

In the context of blockchain networks, a higher entropy value is generally considered better for decentralization.

Entropy measures the unpredictability or randomness of data. If the entropy is high, it means that the data is very random and therefore, it’s hard to predict. If the entropy is high, it’s harder to predict which node will produce the next block. This unpredictability contributes to the security and fairness of the network, as it prevents any single node from dominating the block production process.

It ensures that power and control are not concentrated in the hands of a few nodes, but are instead spread out across the network. This is a key aspect of maintaining a healthy and robust decentralized system.

Cardano took first place with a value of 8.12. In second place is Tezos with a value of 5.28. Third is Bitcoin Cash with a value of 3.63.

The Herfindahl-Hirschman Index (HHI) is a measure of market concentration.

It is defined as the sum of the squares of the market shares (as whole numbers, e.g. 40 for 40%) of the entities in the system.

The output of the metric is a real number in (0, 10000). Values close to 0 indicate low concentration (many entities produce a similar number of blocks) and values close to 10000 indicate high concentration (one entity produces most or all blocks).

The closer a market is to a monopoly, the higher the market’s concentration (and the lower its competition).

The U.S. Department of Justice has set the following thresholds for interpreting HHI values (in traditional markets):

  • (0, 1500): Competitive market
  • [1500, 2500]: Moderately concentrated market
  • (2500, 10000): Highly concentrated market

In a regular market, as in decentralization, high competitiveness is a healthy and desirable characteristic.

Cardano, Tezos, and Bitcoin Cash, with values of 82.5, 604, and 1068 respectively, have emerged as the top performers. Their networks exhibit high competitiveness, with numerous entities producing a comparable number of blocks.

In contrast, a moderate level of market concentration is observed in the case of other projects.

The Theil index is another measure of entropy that is intended to capture the lack of diversity or the redundancy, in a population. In practice, it is calculated as the maximum possible entropy minus the observed entropy.

The Theil index measures how far the population is from the egalitarian state of everyone having the same income. In the context of the EDI dashboard, the Theil index is used to measure the distribution of resources (like wealth or income) among the participants in the network.

The output is a real number. Values close to 0 indicate equality and values towards infinity indicate inequality. Therefore, a high Theil Index suggests a highly centralized population.

Cardano emerged as the leader with a score of 2.19. Bitcoin and Tezos shared the second spot with a score of 3.37. Ethereum lagged behind with a score of 7.21, making it the least performing.

The max power ratio represents the share of blocks that are produced by the most ‘powerful’ entity, i.e. the entity that produces the most blocks. The output of the metric is a decimal number in [0,1].

In an ideal decentralized network, no single entity should have a significant advantage in block production over others. However, in reality, we often see the rise of power centers. This allows for a comparison of the strength of the most dominant entity relative to the rest.

In this metric, Cardano leads with a value of 0.049. Tezos follows in second place with a value of 0.150, and Bitcoin Cash is third with a value of 0.162. There seems to be a discrepancy with Bitcoin’s data, as its value has unexpectedly dropped from 0.3 to 0, which could potentially indicate an error in the graph.

The Tau-decentralization index is a generalization of the Nakamoto coefficient. It is defined as the minimum number of entities that collectively produce more than a given threshold of the total blocks within a given timeframe. The threshold parameter is a decimal in [0, 1] (0.66 by default) and the output of the metric is an integer.

This measure bears a resemblance to the Nakamoto coefficient, albeit with a threshold set at 66%. The outcome could closely mirror that of the Nakamoto coefficient but with the potential for a greater value.

Cardano secured the top position with a score of 118, followed by Tezos in second place with a score of 14. Bitcoin and Ethereum were assigned a score of 3, which is merely 1 point above the Nakamoto coefficient.

Conclusion

Cardano won in all measures, a success that can be linked to its status as one of the newest PoS blockchain networks on the EDI Dashboard, alongside the similarly old Tezos blockchain.

Bitcoin, being the oldest blockchain, showed the poorest results in certain metrics and was generally subpar in others.

Ethereum, a relatively older blockchain that transitioned from PoW to PoS, didn’t see substantial enhancements in decentralization following the switch. For instance, the Nakamoto coefficient remained unchanged. The Herfindahl-Hirschman Index (HHI) even experienced a decline. This result shows how significantly PoS networks can differ in decentralization.

As already stated in the article, decentralization is not only about network consensus. Other aspects are important. For example, in governance, Cardano might not be at its best because of Genesis keys. However, the IOG team will address this shortcoming, so Cardano will improve in this metric over time, similar to the significant improvement seen after the Shelley hardfork that brought staking. Metrics related to governance are not yet available in the EDI dashboard.

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