TD₿: Difficulty Adjustment is Why Bitcoin Will Never Die by David Z. Morris
TL;DR The difficulty adjustment is not the reason Bitcoin is useful day-to-day, but it is the reason that Bitcoin is nearly immune to true destruction.
Hey Bitcoiners,
Recently there seems to be trouble brewing in the Bitcoin mining land and it’s not hard to see why. Due to a combination of Bitcoin’s price action, rising energy costs, and hash rate remaining high compared to last year, these miners’ profit margins are being squeezed.
As a result, we are seeing Bitcoin’s hash rate drop and an uptick in Bitcoin miners selling their Bitcoin holdings in order to pay for operational costs and service their debt obligations.
In bear markets like this, inevitably a Bitcoin critic comes out and says that Bitcoin will soon collapse from a “miner death spiral”, meaning that miners will go offline because it is not profitable to run their operations, and then Bitcoin’s hash rate will fall, causing its security to be weakened, and for the system to ultimately collapse.
What this fails to take into account is Bitcoin’s difficulty adjustment. Bitcoin’s difficulty adjustment changes roughly every two weeks. The protocol adjusts the difficulty of finding blocks by changing the range of the possible solutions that miners are trying to guess in response to the current amount of hash rate.
In other words, as the hash rate falls as unprofitable miners go offline, the difficulty will adjust downwards, making it relatively more rewarding for the miners that stay online. This assures blocks will continue to be mined every 10 minutes and that Bitcoin will live to see another day.
David Z. Morris wrote this excellent blog post that explains why the difficulty adjustment is the real reason that Bitcoin is so hard to kill (11/26/2018).
This is exactly what we are seeing happen today. 2 weeks ago, the difficulty adjusted 2.35% downwards, and this week another downward difficulty adjustment is expected of around 1.48%.
Satoshi’s difficulty adjustment is working just as intended, keeping miners incentivized to stay online in order to secure the largest monetary network in the world. It is a beautiful thing to see in action.
Tick tock next block,
Cory Klippsten
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Quote of the Day
“Bitcoin's difficulty adjustment is perhaps the greatest monetary innovation in any of our lifetimes. It seems like few appreciate this key piece of the protocol and overlook Satoshi's genius in developing the DA to create a formulaic and hyperinflation-proof supply schedule.” - Blake Davis, Equity Analyst at Blockware Solutions
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