Cryptocurrency difficulty in simple words

Cryptocurrency difficulty in simple words

For many people, who are far from cryptography, complex mathematical calculations and programming, it is hard at first to understand what bitcoin, hash or cryptocurrency difficulty is. It is not necessary to accuse them of illiteracy and ignorance. Until some time, all these concepts were the prerogative of specialists, and now they are being gradually included in the everyday life.

Table of content

  • Gold mines of the modern world: a digger and a bookkeeper in one
  • Scientific and psychological background of the difficulty
  • Technical explanation of the difficulty intensive growing
  • Some figures as a conclusion: pattern of growth in 2017

Digital gold mines

Each of us saw movies or read books about gold mines. The most successful hot heads got the golden nuggets. The unexplored land filled with dangers and challenges, cold and hunger did not stop the gold diggers. The first of them found gold placers and became fabulously rich at a second. News about it quickly spread and more and more prospectors went in search of a wealthy life. Once the desert land was filled with thousands of people. They lived in tents, under the open sky and indulged in everything for a spoon of gold dust.

Every day the search for a gold mine became more difficult. These artistic essays from the past are so similar to the situation in the modern mining of cryptocurrency! The first miners who were being laughed at and openly criticized, became owners of large amounts of crypto gold, when now beginners have to get tiny satoshis, if there are no funds for expensive equipment. It in the literary form describes the concept of difficulty. This index is an indicator of how difficult it is to get a block and make a profit.

However, it is not necessary to dramatize the situation so much as to compare the miners’ work with the inhuman labor that gold seekers had to do. Cryptocurrency mining works "on its own". Its meaning is to generate new blocks in the blockchain and transaction record. The work of miners in this case is similar to the accountant’s business. They constantly monitor the maintenance of up-to-date account books and records transaction data in them. For this a miner receives a certain award in the form of cryptocurrency.

The scientific and psychological basis of cryptocurrency difficulty

Inflation is the enemy of any financial system. It destabilizes the economy, lowers its development and affects the quality of ordinary people life. Cryptocurrency has a deflationary nature. The amount of mined coins is not able to exceed the number defined by the program code. As for bitcoin, it is equal to 21 million. The last coin will be received in the year 2140. Every 10 minutes, 12.5 BTC is mined, which are divided between miners depending on the computational power.

The reward for a found (signed) block not only increases, but becomes less than 2 times every 4 years. The more miners join the search for the block, the smaller reward they have, and that's when we talk about increasing of the difficulty. This indicator demonstrates how difficult it is to solve a mathematical problem to find a block. Each cryptocurrency has the different index. Recalculation of bitcoin difficulty runs through every 2016 blocks, i.e. every two weeks. The program code does not allow to search a block breaking the limits of 10 minutes.

However, it is not possible to achieve the ideal. The increase in computing power leads to the search term of 2016 blocks reduction. In other words, it happens that they can be found faster than 2 weeks. The difficulty in this case is raised. Conversely, if 2016 is found over a longer period of time, the rate becomes lower. All this gives us the right to say that the difficulty of mining is a dynamic indicator that is recalculated from time to time. Difficulty indexes are published on official websites of a certain cryptocurrency or aggregators websites. The latter also informs about capitalization, hashrate, profitability, number of transactions, etc.

The difficulty could not be spoken about at all and left for programmers and mathematicians . But the problem is that the difficulty determines the income, namely the number of coins produced. With an increase in difficulty by 10%, respectively, the profit decreases by 10%. Even powerful ASICs, such as the Antminer s7 and higher allows you to mine 0.06 BTC per month in mid-2017. In November, this figure decreased to 0.026 BTC. But this does not reduce the attractiveness of mining and does not scare away investors, since the exchange rate of cryptocurrency against fiat money is growing.

Growing difficulty instead of reducing the popularity of mining, attracts interest in it. In this case, it is more a psychological factor than a regularity. The excitement, curiosity and numerous stories about successful miners, who had managed to make a fortune in a short time on just a few graphic chips, encourages. The popularity of cryptocurrency and its rate are enlarging due to the increasing demand. Even the owners of relatively small capacity try mining by connecting to pools. So, to make the point, in the middle of 2017, BTC exchange rate was 2.400$, and on November 1, quotations rose to almost 6.700$.

Technical background of cryptocurrency difficulty

In simple words, it is clear that the difficulty is growing due to the increasing number of miners when each of them tries taking advantage with the help of powerful equipment. What does the difficulty depend on in technical terms?

Hash rate of the network

The computational power and the number of all miners determine the hashrate of the network. If the hashrate has increased, it means that new members joined the mining and competition became more intense. The increasing number of miners reduces the block time. As soon as the 2016 block is found, the difficulty is recalculated.

Evolution of equipment

Does someone else believe that it is still possible to mine bitcoins by means of graphic chips or on a homemade rig? Around the world there are huge farms, the level of which corresponds to the modern data centers. They can provide themselves in full, and their owners initially took care of a cheap source of electricity and can do business solo.

An average user, even if he makes a purchase of several ASICs, has only one opportunity to make a profit. We are talking about pools. And it is not necessary to concentrate all attention on the bitcoin. There are a lot of coins that can be obtained on the computer equipment with the help of graphics chips or processors. It is not difficult to build a rig yourself and don’t forget about cloud mining.

Some figures as a conclusion

Let's take bitcoin as an example and see how its difficulty changed in 2017. On January 1, 2017, it was 317.688.400.354 at the rate of $1,000. For 11 months of 2017 it had grown to 1.452.839.779.145, i.e. 4.6 times. But the BTC/USD exchange rate also changed from $ 1,000 to$ 6,600, which is 6.6 times. Only in August 2017, for the first time in the year, there was a decrease in the indicator. Probably, it was affected by SegWit bitcoin in August, that forced some miners to switch their power to the altcoins.

The cryptocurrency difficulty escalation is more likely explained by the growth of the rate in relation to the dollar. The growing rate makes it attractive to invest in equipment. The increase in difficulty and decrease in income in the cryptocurrency is compensated by an approximately proportional rise in the price of BTC. ASICs pay off in 8-12 months, which attracts investors.



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