Bitcoin Mining Difficulty - What is it And How Does it Work?

 

If you’re a cryptocurrency geek, there is one thing you should definitely know about – and that’s called Bitcoin Mining Difficulty. But before we can begin to comprehend what bitcoin mining difficulty entails, we must first understand how bitcoin mining works. 

The Bitcoin network has a number of specialised nodes known as "miners," who utilise specialised equipment to solve cryptographically difficult challenges. If they are successful, they will be able to successfully add blocks to the Bitcoin network. 

Why Does BTC Difficulty Increase?

To Protect the Network's Integrity:

The degree of Bitcoin mining difficulty rises or falls in accordance with the protocol's ease of mining. Keep in mind that Bitcoin requires a steady block time of 10 minutes. 

Simply put, fresh BTC may be injected into the supply already in circulation about every 10 minutes. 

To ensure that the Bitcoin protocol is not affected by this timing: when it gets easier for miners to mine, increases network difficulty; when it becomes harder for miners to mine, decreases network difficulty. A global block difficulty exists on the Bitcoin network. 

Relationship With Hash Rate:

The hash rate is one of the most important indicators of a proof-of-work network's health. Simply put, the hash rate indicates how powerful the network's miners are. 

The hash rate of the bitcoin network determines its overall security and performance. However, in order to produce consistent blocks, these networks must maintain their hash rate under control. 

This is why, when the hash rate rises, the bitcoin difficulty rises as well, making it more difficult for miners to mine efficiently inside the network. It's also true in reverse.

The network difficulty will drop when Bitcoin's hash rate lowers. The following factors may cause the hash rate to drop:

• Bitcoin's difficulty is now high, causing miners to have a difficult time mining in the system 
• The price of BTC has dropped, causing many miners to stop mining

The network difficulty dropped by 16 per cent from 16.55 trillion to 13.9 trillion around March 26, 2020. This drop happened as a result of the Bitcoin price slump, which drove many miners to shut down their operations.

The Importance of Difficulty in the Nakamoto Consensus

You must first grasp how the Nakamoto consensus works in order to appreciate how important difficulty is to Bitcoin's ecology. Consensus protocols are the only means to sustain any sort of governance in a wide area network with no centralised body. 

Traditional consensus algorithms, such as Raft, are not well suited to the maintenance of a wide-area crypto-economic system. This is why Satoshi Nakamoto, the Bitcoin founder, devised the Nakamoto consensus method. 

The Nakamoto consensus is based on the underlying idea that there is a cost to participating in the system. Miners pay a fee with "work" in the event of proof-of-work (POW)-Bitcoin consensus. 

In this context, work refers to the significant amount of processing energy required by a miner to mine one Bitcoin. 

This is where the challenge begins. The difficulty is the parameter that makes Bitcoin mining difficult, and it's also how Nakamoto consensus solves the double-spending problem.

What is Double Spending?

Before Bitcoin, all attempts to create a decentralised cryptocurrency had failed horribly due to double-spending. Simply said, it's a bug that allows a single Bitcoin to be spent several times at the same moment. 

When dealing with real currency, we never had this problem. After all, if you purchase something with a $10 note, you can't buy anything else with the same bill, right?

A digital token, on the other hand, has digital files that may be readily reproduced, resulting in unavoidable double-spending. As you may expect, double spending can have a number of negative consequences for the ecosystem's economy:

• For starters, it inflates the overall amount of coins in the ecosystem, causing the supply-demand relationship to become unbalanced.
• Second, enabling anybody, everywhere, to spend the same coin limitlessly will destroy people's faith in the currency's integrity.

All transactions must be included in the blockchain without fail in Bitcoin. This ensures that every user on the network can trace each Bitcoin back to its origin.

Because of the great level of transparency, no one will be able to double spend without the entire network knowing.

Let's consider something a little more sinister. Assume someone tries to hijack the blockchain by forking off and spending all of the Bitcoins twice. So, what happens next?

As it turns out, the number of resources and money required by the attacker to take over the chain will be exponentially owing to network complexity. 

As a result, acting against the system's interests will simply not be economically viable. This is how Nakamoto Consensus obtains the firepower it requires to ensure network security and integrity.

So as you’ve read, Bitcoin Mining Difficulty is an integral part of the crypto world, and it is important for any crypto enthusiast to know about it before investing!

Written By – Devika Mishra