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All You Need to Know About Bitcoin Hashrate and Mining Difficulty

Diving into cryptocurrencies can be tedious. This still rather new industry has produced so much technological, economic or social niche that even the brightest minds in this world would have a hard time keeping up.

With constant innovations, developments and new systems being created at all times, it can get excessively difficult for newcomers to join and go down the rabbit hole , as it contains an extreme amount of new ideas. For instance, just looking at Bitcoin leads to concepts such as blockchain, Proof-of-Work consensus mechanism, block subsidy, Lightning Network, halving, mining difficulty or hashrate. And the last two concepts will be explained in this article as they are crucial in understanding Bitcoin.

What is Bitcoin hashrate (hash rate)?

To put it very simply, the Bitcoin hash rate is a metric that shows how healthy, resilient, but most importantly, secure, the whole Bitcoin network is. It represents a number of times per second that computers that are on the Bitcoin network (miners ) hash data to verify transactions. They also perform the encryption (hashing), which essentially leads to the security of the network.

To better grasp the concept of hash rate and why is it important for Bitcoin, here is an explanation of a few basic ideas connected to it:

  • Hash – an alphanumeric code of a fixed-length that is used to represent data of any length
  • Nonce – a change in a single value that is generated during the production of a hash
  • Block – set of transactions taking place in a given “time slot” (on average 10 minutes)
  • Block subsidy (reward) – amount of newly mined bitcoins that the miner of the given block receives after successfully finding the block

While there are other more technical parameters or terminologies connected to hash rate, these should be sufficient for a simple explanation of it.

During the mining process, before a new transaction is added to the block, miners compete using their mining equipment to guess a random number. They are trying to produce a hash , whose value is lower or equal to the numeric value of the “target” hash. To do this, they are changing the value called nonce and each time this is done, a completely new hash is created.

New hashes are like “lottery tickets,” with each new hash representing a unique set of numbers which are impossible to predict. That is why it usually takes millions of guesses (in this case known as hashes) before the target is met.

Once that happens, the “winner of the lottery,” in our case the miner who fills the block with transactions is rewarded with block subsidy (and miner fees). After that, a block is added to the blockchain and all the transactions on it are confirmed and stored forever in the public and transparent ledger.

All of this is important and closely connected to hash rate as the more miners join the network, the harder it is to guess the hash that will lead to “winning the lottery.” This is due to the mining difficulty and difficulty adjustment, which will be explained in a while. However, as of now it is important for you to understand that the hash rate can be thought of a measure of the overall strength and security of the network.

Why is the hash rate rising?

Hash rate is probably one of the most significant metrics for Bitcoin. It is almost constantly on a rise. Currently it is fairly close to its ATH, considering how far the Bitcoin price is from its ATH. While the price of BTC is one of the most common metrics of showing how “well” is Bitcoin doing, it would be much more reasonable to use Bitcoin hash rate instead . Here is the reason behind it.

Bitcoin total hash rate (blue) in (TH:s) and price (black), Source: blockchain.com

The Bitcoin hash rate shows how much people believe in Bitcoin and its future. Of course, the miners who join the network are incentivized by the block reward that they receive, to join and mine Bitcoin. So, it is not solely about their belief, but there is also a financial element to it.

However, they would not be mining Bitcoin if they did not believe in its long-term value and thesis. Most huge Bitcoin miners and their pools are trying to hold on to the bitcoins that they mine, as in the long run, Bitcoin tends to outperform all the other assets in price (denominated in dollar terms).

Thus, more miners join the Bitcoin network to mine bitcoins. During that process they validate the transactions making sure that the whole network is stable, secure and powerful. The more miners that join the network, the better for the overall health of it. Thus , the hash rate increase is considered a positive sign.

However, one might ask, how is it possible for Bitcoin to produce the same amount of blocks as well as rewards across time, when there are more and more miners joining the network? Shouldn’t the fact that there is bigger and stronger computational power connected to mining (higher hash rate) lead to faster blocks and thus unpredictable release schedules of newly mined coins?

While the logic of this is perfectly sound, Satoshi Nakamoto, the creator of Bitcoin, was well aware of it, which is why he introduced mining difficulty adjustment. But before we explore what it is, let’s see what mining difficulty means.

What is mining difficulty?

As the name suggests, mining difficulty is a measure of how difficult it is for miners to produce a hash that is below the target hash and leads to a production of a single block. Technically speaking it is done by reducing the numeric value of the hashed block header.

In its essence, the mining difficulty is however just a measure that uses an internal score. It begins with 1 and rises or falls exponentially solely based on how many miners are active on the network competing for the block subsidy.

Bitcoin difficulty chart, Source: coinwarz.com

Mining difficulty was programmed straight into Bitcoin and assures that on average, blocks should be found every 10 minutes. To make sure that this happens no matter the size of the current “pool” of miners and thus the hash rate, the difficulty of mining adjusts periodically and automatically. This happens every 2,016 blocks (or around 2 weeks) and is known as the difficulty epoch.

What is mining difficulty adjustment?

Mining difficulty adjustment works as follows. If the average time of the mined blocks that have taken place in the previous difficulty epoch (2,016 blocks or approximately 2 weeks) is lower than 10 minutes it means that it is “too easy” for miners to find the block. This could for instance happen when there is an influx of new miners or mining pools. However, to make sure that Bitcoin maintains its block production at around 10 minutes on average, the protocol adjusts the mining difficulty. The protocol will make it more difficult for miners to mine blocks in the next epoch.

On the contrary, if the average time of mined blocks is higher than 10 minutes, it means that it is too difficult for miners to find new blocks. This might happen when the hash rate suddenly drops due to miners capitulating or disconnecting mining devices from the network. If that is the case, the protocol automatically adjusts the difficulty after the 2,016 blocks to make it easier for miners to find the block in a time period that is close to 10 minutes on an average.

The importance of mining difficulty adjustment

The importance of mining difficulty adjustment is enormous. Thanks to it, the release schedule of new bitcoins is extremely predictable, since the average of 10 minutes holds well. The predictability of it is one of the most important features, since it shows that people do not have to trust one entity with the power to change the release schedule and emit new coins based on their decision.

This means that it is known that the last Bitcoin will be mined around the year 2140. Due to difficulty adjustment and halving , which are hard-coded into the protocol of Bitcoin, there is no option of “money printing” in the form of quantitative easing just as is visible in the current financial system. The stability and predictability of the whole system that are achieved especially thanks to adjustment of mining difficulty make it very desirable for many.

While there have been few rules that are connected to the mining difficulty adjustment, the following might be the most intriguing. The upper limit for each epoch is +300% change, with the lower limit being -75%. This ensures that there are not Any abrupt changes in the mining difficulties in case of black swan events as the adjustment cannot be altered above or below four times the current level.

Conclusion

Bitcoin hash rate and mining difficulty are not terms or metrics that would often be cited in the mainstream media. However, they are crucial to the whole protocol and they tell us incredible amounts of data about how the Bitcoin network is doing both in the present, but also over the long run. Thus, at least basic understanding of these terminologies is necessary, should people want to grasp Bitcoin properly.

 

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