Eligible signature (hash) — aka mining difficulty
The difficulty algorithm attempts to produce a block roughly every ten minutes and is proportionately modified by Bitcoin clients every two weeks to the amount of time higher or lower than it took to mine the previous blocks. The difficulty decreases if the previous blocks took longer to find than two weeks and increases if it took less than two weeks to find the last blocks. A higher difficulty target means blocks are easier to produce and a lower difficulty target means that they are harder to mine.
The difficulty started at 1, can never go below that value, and the upper bound is enormous and not relevant right now. Notably, the difficulty adjustment algorithm has an off-by-one bug that leads to the calculation based off of the previous blocks, rather than precisely Further, clients do not exactly determine the difficulty, and it is more of an accurate approximation of a floating average target.
Estimating the next difficulty adjustment is possible, but extrapolating predictions to the longer term is infeasible. In the Bitcoin whitepaper , Satoshi Nakamoto briefly describes the difficulty adjustment as follows:. His description is vital for understanding the consistent issuance of bitcoins at ten minutes — along with its economic impact — and the incentive design within the mining ecosystem.
Proof-of-work PoW is designed so that miners expend resources hardware and electricity to secure the network, which concurrently creates an incentive for miners to secure the network because their reward for mining is received directly in bitcoins and they have invested electricity and hardware into acquiring bitcoins.
The difficulty adjustment plays the role of regulating the issuance of bitcoins into the ecosystem at a fixed and predetermined rate. If there were no difficulty adjustment to make it harder to mine blocks at an increased hash power, then bitcoins would be issued at a continually faster pace than the predetermined ten minutes, making Bitcoin susceptible to a rising stock-to-flow ratio that plagues inflationary fiat currencies and even scarce minerals like silver.
Read: Our Complete Guide to Bitcoin. For instance, when the value of silver rises, mining companies are incentivized to mine more silver, increasing the supply of silver and deflating the price. No matter how much hash power the Bitcoin network aggregates, this problem will never occur because the difficulty target adjusts to make the issuance rate consistent despite more miners contributing computing power to solve PoW.
Over the long-term, the issuance of bitcoins will never change even if the price raises to an astronomical sum. Since the increase in hash power cannot lead to more bitcoins being issued than what is predetermined, the collateral effect is that the security of the network increases by more miners joining the network. As such, the difficulty target increases, making producing blocks easier and providing an incentive for miners to remain on the chain and continue mining to earn bitcoins with reduced competition.
Miners that can operate at a loss have the advantage of mining bitcoins with a higher probability when other miners leave the market, and if they believe in the long-term increasing value of Bitcoin, it creates a ripe opportunity to accrue more bitcoins. Last 12 Months Decline in Bitcoin Price. Many miners do not have this advantage, which is clearly represented by the hash rate declining over the last several months before it rebounded at the end of the year.
If the difficulty adjustment did not exist, the increasing hash power of the network would lead to blocks being mined faster than every ten minutes, leading to a rapidly increasing blockchain size. A larger blockchain requires more storage capacity for regular full nodes, which confers a burden on users who run full clients, eventually forcing many of them to stop running nodes because their consumer laptop or desktop cannot adequately store the blockchain that is characteristic of full nodes.
The long-term implications of the difficulty adjustment, as a result, are vital to the sustainable decentralization of Bitcoin. Users that run full nodes are the drivers of what constitutes Bitcoin as their selection of whether or not to follow new upgrades or forks determines which chain of Bitcoin retains the largest consensus as Bitcoin. The conservative nature of changes to the Bitcoin protocol and its abstract existence as a Schelling point for users are the defining characteristics of its sustainability.
The off-by-one bug contributes to blocks arriving slower than intended even with a consistent hash rate. The result is that the difficulty adjustment does not respond to changes in the hash rate as accurately as it should — or promptly as it creates a delayed response —, leading to scenarios where price movements are amplified in the direction of particularly strong hash rate changes. Further, long-term upward hash rate trends in one direction can cause blocks to arrive faster than intended, causing the Coinbase transaction rewards to halve at faster paces than the intended four-year rate.
Unfortunately, the off-by-one bug can only be corrected with a hard-fork and has been shelved for the time being. If Bitcoin continues to garner adoption, it is likely that the off-by-one bug will need to be addressed to reduce its long-term impact.
It is not a cause for immediate concern, and Bitcoin devs, as well as the broader community, have continually demonstrated a prudent approach for implementing upgrades to the protocol to maintain robustness and sustainability.
Bitcoin has multiple nuanced components that make it a successful and novel technology, and its difficulty adjustment is assuredly one of its most profound. No Spam, ever. Blockchain writer, web developer, and content creator. An avid supporter of the decentralized Internet and the future development of cryptocurrency platforms.
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What is Bitcoin Mining Difficulty?
Put simply, the Bitcoin Mining Difficulty is a way of keeping the average time between new blocks stable, as the hashpower on the Bitcoin network changes. Ul was designed by Satoshi to keep the time between the addition of new blocks to the blockchain at an average of 10 minutes. When the difdculty on the Bitcoin network goes up for example, in order to keep this time constant, the difficulty of mining a new block must go up. The lower the target value set by the protocol, the harder it is to guess. The difficulty adjusts every blocks — on average every 2 weeks. The Bitcoin Difficulty is an important metric for traders and investors to consider for several reasons.