The Serb, rarely troubled on his serve, won 6-3, 6-2, 6-3 for his biggest victory in a major final over his great rival, BBC Sport reported.
Spanish second seed Nadal, 32, looked rattled by the world number one's intensity and made 28 unforced errors.
Djokovic, 31, won in two hours and four minutes to move clear of six-time men's winners Roy Emerson and Roger Federer.
The reigning Wimbledon and U.S. Open champion claimed his 15th Grand Slam title, moving him outright third ahead of American Pete Sampras in the all-time list, closing in on Switzerland's Federer (20) and Nadal (17).
Djokovic has now won 13 of his past 16 meetings with Nadal, who has not beaten the Serb on a hard court since the U.S. Open final in 2013.
He leads 28-25 in their record 53 meetings between two male players.
Djokovic continued his fine record of going on to win the tournament every time he has reached the semifinals, while Nadal lost for a fourth time in the Melbourne showpiece.
The result meant the 2009 winner was unable to become the first man in the Open era to win all the Grand Slams at least twice and was the first time he had lost a major final in straight sets.
Outclassed but positive
Nadal had not dropped a set on his way to the final but, having come into the tournament without competitive action since September's U.S. Open, he was nowhere near the level required to cause problems for an in-form Djokovic.
The Spaniard won 53 points compared to Djokovic's 89, and took only 13 receiving points.
"I have been going through tough times over the past year. I only played in nine events and had to retire from two, and I was not able to play professional match since the US Open," said Nadal.
The Spaniard, who cut short his 2018 season with an abdominal muscle problem and to have ankle surgery, retired injured in the quarterfinals in Melbourne last year.
"Even though tonight was not my night, it was very important for me in coming back from injury," he said.
"I believe I played a good two weeks of tennis and it is a great energy and inspiration for what is coming.
"I will keep fighting and keep practicing to give myself better chances in the future."
Australian great Rod Laver, watching in the arena which bears his name, said before the final he felt Djokovic would eventually overtake both Federer and Nadal in terms of Grand Slam titles.
On the evidence of this victory, and his performances over the past six months, few would disagree.
Djokovic was ranked outside the world's top 20 in July after coming back from elbow surgery.
But he showed he was back to his best with victory at Wimbledon and followed up that performance with another triumph at the US Open in September.
Now Djokovic, who reclaimed top spot in the rankings in November, will go to the French Open in May aiming to hold all four major titles simultaneously for the second time.
Victory over Britain's Andy Murray in the 2016 French Open final meant Djokovic became the first man since Laver in 1969 to hold all four Slams at once.
"I'm trying to contemplate on the journey in the past 12 months. I had surgery exactly 12 months ago," Djokovic said.
"To be standing now here, in front of you today, managing to win this title and three of the four Slams is truly amazing."