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What Is Mining Difficulty? PoW Blockchain Impacts Breakdown

Last Updated February 5, 2024 3:03 PM
Andrew Kamsky
Last Updated February 5, 2024 3:03 PM

Key Takeaways

  • Initially, low mining difficulty encouraged widespread participation using standard computers, encouraging network growth.
  • Mining difficulty adjusts every 2016 block to maintain a 10-minute average block time, stabilizing block production.
  • Rising difficulty in mining led from basic computing to specialized ASICs, professionalizing the Bitcoin mining industry.
  • Difficulty adapts to hashrate changes, ensuring network stability and consistent block creation.

The primary goal of Bitcoin mining is to maintain the integrity and security of the Bitcoin network. Bitcoin mining, or PoW mining, adopts machinery that solves complex cryptographic puzzles to validate transactions before adding a transaction to a blockchain.

The Bitcoin network holds a difficulty adjustment component designed to stabilize a block production rate at one block every 10 minutes, regardless of the total computational power of the network. The Bitcoin difficulty adjustment ensures a predictable issuance of new Bitcoin into the market can be maintained, securing the network at roughly one block every ten minutes.

What Is The Mining Difficulty In PoW Blockchains Like Bitcoin?

The mining difficulty in the context of blockchain refers to how hard it is for miners to find a new block compared to the easiest it can ever be. The difficulty adjustment measures how difficult it is to find a hash below a given target. 

The “target” in Bitcoin mining refers to a specific value that a valid block’s hash must be, which is less than or equal for the block to be accepted by the network. 

How To Calculate Difficulty in Mining?

The target miners need to hit will adjust every 2016 blocks, approximately every two weeks, to ensure that blocks are being mined approximately every 10 minutes. 

If mining power (hashrate) increases and blocks are found faster than every 10 minutes, the target value decreases, making it harder to find a valid hash. Conversely, if the hashrate drops, the target increases, making it easier to find a valid hash.

How Is Hash Difficulty Calculated In Blockchain?

After 2016 blocks the Bitcoin network takes the actual time it took to mine these blocks and compares it to the desired time (two weeks). 

The difficulty target is then adjusted proportionally to ensure that the time to mine the next 2016 blocks remains close to the ideal two-week period. Essentially, it’s a self-correcting system to maintain a consistent block discovery rate.

Early Years Of Bitcoin Mining

Initial Mining Difficulty And Requirements

Around 2009, the mining difficulty was relatively low in Bitcoin’s early years. Early miners could mine Bitcoin using standard consumer-grade computers. 

The computational power required was minimal, and the initial difficulty level was set to 1, the lowest it can ever be in the Bitcoin network.

Purpose Of Low Initial Difficulty

The low difficulty at Bitcoin’s inception was intentional. It is designed to incentivize early adopters and miners to enter the Bitcoin network. A more straightforward mining process allowed the network to grow, as more miners meant a more secure and robust system. 

The reward for mining a block was 50 BTC, a significant incentive considering the low difficulty and the minimal computational resources required at that time.

Bitcoin Mining Difficulty Transition Over the Years

Increase In Miners and Mining Power

As Bitcoin gained popularity and its value increased, more stakeholders started mining, increasing the network’s total hashrate  (computational power). The influx of miners led to a quicker discovery of new blocks. 

The acceleration prompted the network’s difficulty adjustment algorithm to increase the difficulty, ensuring that the average block time remained at about 10 minutes.

Bitcoin Hasrate | Credit: LookIntoBitcoin
Bitcoin Hasrate | Credit: LookIntoBitcoin

Advancements In Mining Technology

The increasing difficulty made mining with standard computers unviable. Miners started using more powerful hardware, like Graphics Processing Units (GPUs), which were more efficient at solving the cryptographic puzzles. 

Eventually, the mining industry saw the introduction of Application-Specific Integrated Circuits (ASICs), which is hardware designed specifically for Bitcoin mining. ASICs are significantly more powerful and efficient than GPUs and more expensive.

Current State of Mining

The difficulty level has increased so much that mining with non-specialized hardware is no longer profitable. This evolution in hardware and difficulty has led to the professionalization of Bitcoin mining, with large-scale mining operations dominating the network. The Bitcoin Miner Difficulty  chart can be seen below:

Bitcoin Miner Difficulty | Credit: LookIntoBitcoin
Bitcoin Miner Difficulty | Credit: LookIntoBitcoin

Case Study: China Banning Bitcoin Mining In 2021

In May 2021, China banned Bitcoin mining within its borders, leading to a significant drop in Bitcoin’s global network hashrate by more than 50%. The event serves as a case study in understanding the resilience and adaptive nature of Bitcoin’s difficulty adjustment mechanism.

Even though the hash rate dropped 50%, a complete recovery was made when the network’s hash rate surged approximately 113% in just five months, demonstrating Bitcoins robust rebound and why decentralization is powerful.

Simply put, miners left China to go mine elsewhere and were incentivized along with global miners in the process. Bitcoin withstood a nation-state attack of China banning mining, and the network shrugged it off, highlighting the role of Bitcoin’s difficulty adjustment in maintaining network stability and functionality.

What Is The Difference Between Hashrate And Mining Difficulty? 

Hashrate refers to the total combined computational power that is being used to mine and process transactions on a blockchain network. 

Mining difficulty, on the other hand, is a measure of how difficult it is to find a new block. While hashrate is an indication of the network’s processing power, difficulty is an adjustable network parameter that ensures a stable block production rate. 

As the hashrate increases or decreases, the difficulty adjusts accordingly to maintain balance as can be seen in the case study above involving China’s ban on Bitcoin mining in 2021.

What Are The Benefits And Drawbacks Of Bitcoin’s Mining Adjustment Protocol?

Like with any protocol there are benefits and drawbacks that can be felt by the stakeholders involved in the PoW blockchain. These include:

Benefits

  • Stability: Ensures a consistent rate of new block creation and Bitcoin issuance, irrespective of changes in network hashrate.
  • Security: Maintains network robustness by making it computationally challenging to manipulate the blockchain.
  • Predictability: Provides a predictable inflation rate for Bitcoin, a key aspect of its economic model.

Drawbacks

  • Energy Consumption: High difficulty levels lead to increased computational requirements, escalating energy usage.
  • Centralization Risks: As difficulty increases, small-scale miners might get priced out, potentially leading to centralization in mining operations.
  • Market Volatility: Sudden changes in difficulty can affect miner profitability, potentially leading to market volatility.

Conclusion

The mining difficulty in PoW blockchains like Bitcoin plays an important role in maintaining network integrity and stability. Initially set low to incentivize participation, it has evolved significantly over time due to increased miner activity and advancements in technology. 

This evolution from basic computing to specialized ASICs reflects the protocol’s adaptability to changing network conditions, ensuring consistent block creation and network security. However, this increasing difficulty has implications for energy consumption and potential centralization, posing challenges and opportunities for future blockchain developments.

FAQs

What was the initial mining difficulty in Bitcoin and why has it changed?

Initially, Bitcoin’s mining difficulty was set low to encourage participation, using standard computers. As more miners joined and technology advanced, difficulty increased to maintain network stability and block time.

How does the Bitcoin network calculate mining difficulty adjustments?

Every 2016 blocks, or approximately two weeks, Bitcoin adjusts its mining difficulty. It analyzes the time taken to mine the last set of blocks and alters the difficulty to ensure a consistent 10-minute block time.

What is the difference between hashrate and mining difficulty in Bitcoin?

Hashrate measures the total computational power in the Bitcoin network, while mining difficulty determines how hard it is to find a new block, adjusting in response to hashrate changes to maintain block time.

What are the benefits and drawbacks of Bitcoin's difficulty adjustment protocol?

Benefits include network stability, security, and predictable Bitcoin issuance. Drawbacks involve increased energy consumption and potential mining centralization due to higher hardware requirements and costs.

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