Bitcoin’s Backbone: Understanding Mining and Difficulty Adjustment

Bitcoin's Backbone: Understanding Mining and Difficulty Adjustment

Mining is the backbone of the world’s most popular cryptocurrency network, Bitcoin. Too many enthusiasts understand too little about mining and difficulty adjustments, and why both are integral. In fact, miners are shutting down machines, turning them off, due to insufficient rewards against costs associated with finding blocks, and it could be a real problem going forward. Experts have explained a difficulty adjustment in finding blocks is right around the corner, potentially providing relief. To help sort it all out, spoke with Canadian mining whale, checksum0. 

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Mining Expert checksum0

The world of cryptocurrencies has been shaken by an extended bear market, and among the hardest hit are mining operations. The Bitcoin network is so well designed that it has a self-protecting mechanism against this kind of situation: difficulty adjustments. To help everyone understand the process better, turned to Canadian mining whale, checksum0.

Bitcoin's Backbone: Understanding Mining and Difficulty Adjustment

Checksum0 has been a bitcoin miner since 2010, back when Satoshi Nakamoto was still lurking around forums and receiving emails (checksum0 corresponded with Satoshi via email, actually). The mining expert currently operates a 200ph/s+ mine in Canada, which equates to about a million dollars a month worth of energy, enough for 10,000 homes powered by $100/mo bills. We asked him about the importance of mining now and going forward.

The Principal Process Behind Proof of Work

CoinSpice: For the sake of our readers, how would you define bitcoin mining?

Checksum0: Bitcoin mining is the principal process behind proof-of-work, what makes bitcoin tick and ensure its security. What we call miners are individuals, or organizations, operating computer equipment. Their role is to validate the transactions they received and timestamp them.

Each miner competes with each other to be the one that has the authority to emit a block, and confirms the transactions at the same time. Your chance of being the block emitter for this particular round of block is proportional to your hashpower ratio versus the network as a whole.

When a miner finds a block, they receive a significant reward for it. This is what makes bitcoin secure and decentralized as miners are incentivized into making a valid block because of that reward, and the significant cost required to mine a block.

Bitcoin's Backbone: Understanding Mining and Difficulty Adjustment

As Prices Drop, Miners Need to Work Harder for Profit

Why are miners going through rough times now?

The reward per block is set to 12.5 BTC until 2020. Miners have operational expenses set in fiat, therefore they must sell their mined bitcoin over time to pay expenses.

As the value of bitcoin goes down, the proportion of what miners need to sell increases up to a point where the least profitable miners need to shut down their operations or take a step to become more profitable.

But there is a way for the Bitcoin network to adapt itself to these types of situations, right?  

Mining difficulty is a representation of how much work is necessary to find a block on Bitcoin. The network is designed to find a block every 10 minutes, and as mining operations become larger, they are able to find blocks faster. Every 2,016 blocks (about two weeks), an algorithm is run and a new difficulty level is calculated to bring back the network on the 10 minutes target.

Bitcoin's Backbone: Understanding Mining and Difficulty Adjustment

The target can also be lowered like we are seeing right now. We need to make it so it is easier for miners to find blocks to keep the target at 10 minutes.

Diminishing Returns

So, as hashrate diminishes, like we are seeing right now, difficulty also diminishes?

Exactly. It makes sure the network is reliable at all time.

What are your predictions for this next adjustment, now that hashrate has dropped so much?

The next adjustment should be -10% to -20%. Most miners are still unprofitable and a lot of old hardware is getting shut down. We can expect it to continue to go down as price does not stabilize.

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