In this article, we will explain what cryptocurrency difficulty is. We will also briefly cover its benefits and drawbacks.
What Is Cryptocurrency Difficulty?
To understand cryptocurrency difficulty, we must first take a quick look at how Proof-of-Work blockchains function. Such systems are maintained through mining, with miners competing against each other for limited block rewards. They must solve a cryptographic problem whose difficulty increases as the power of the network increases.
As a cryptocurrency becomes more popular, the number of computers that participate in its network increases. This further leads to a rise in the network’s hash power, which is the combined computational power that is used to mine and process the transactions on the blockchain. You can find more details about mining and hashrate in our articles on these topics.
Cryptocurrency difficulty is a measure of how much time it takes and how difficult it is to solve a complex cryptographic puzzle and thus mine a block. The mining difficulty is essential because it ensures that the rate of coin issuance remains constant.
A high difficulty means that more computing power is needed to mine the same number of blocks. This also means that the network is more secure against attacks.
Difficulty Adjustment
Each block within a blockchain is generated at a rate that is determined by the blockchain protocol. This rhythm must remain steady. That’s why Bitcoin and other cryptocurrencies use this parameter to keep the average time between blocks steady as the hash power of the network in question changes. A network’s mining difficulty increases and decreases over time since it depends on the number of participating miners.
In the case of Bitcoin, it is automatically adjusted in order to maintain the time it takes to process one block at around 10 minutes. Such adjustments may be upwards or downwards, depending on the number of participating miners and their combined hash power.
Miners with a lot of computing power can break the average time of 10 minutes. Without this readjustment, a miner with enough computing power could mine a high number of blocks. To avoid this, the complexity of the mathematical problem to be solved is increased, and the block time is stabilized to 10 minutes on average.
For example, if the Bitcoin network generates new blocks in less than 10 minutes, the difficulty will be automatically adjusted to a higher degree. If, on the contrary, it generates blocks more slowly than desired, that is, in more than 10 minutes, then the mining difficulty is reduced.
Advantages and Disadvantages of Cryptocurrency Difficulty
The major benefits of cryptocurrency difficulty include the following:
- A steady production of new blocks – by automatically adjusting the target hash up or down and thus increasing or decreasing the difficulty, a network ensures that a new block is generated at a stable average rate.
- Higher network security – a higher difficulty level means that more hashes are needed to meet the target hash requirement. This means that it is more difficult for bad actors or fraudsters to overcome the network’s total hash power and thus gain the majority control of the blockchain network.
However, some may argue that this system tends to lead to centralization. Crypto mining is done for profits. As long as a miner can profit from this activity, they will keep it going.
When the difficulty increases, though, so does the electricity needed for mining. So, when the costs to cover the electricity consumption are higher than the rewards, the miner is forced to stop mining. This enables bigger miners, that is mining farms and pools, to remain active and mine more, which translates into centralization. Moreover, large mining farms can further take advantage of this to run attacks against a network.
Conclusions
Cryptocurrency difficulty is a measure of how difficult it is to mine a new block for a particular cryptocurrency blockchain. Its importance lies in the fact that it helps maintain the integrity and stability of the blockchain network.
This parameter is adjusted according to network conditions and varies from one blockchain to another. Therefore, blocks are generated at a predetermined speed, which helps the network remain resilient even as more miners join it.