Are you brand new to crypto and not sure where to begin to learn about it? Check out my intro to cryptocurrency and intro to blockchain posts or my cryptocurrency blog to learn more about this fascinating new technology!
Bitcoin, known for having a rather stable software code, recently underwent a rather significant change that was pre-programmed and anticipated days in advance. In the early morning hours of July 3rd, as much of the United States was eagerly anticipating the upcoming celebration of the Independence Day holiday, the programmed difficulty level within the Bitcoin code experienced the largest drop in its history, decreasing by nearly 28% from one block to the next. While this event may seem detrimental to Bitcoin and its security in the short run, it’s important to note that Bitcoin kept operating without fail throughout the adjustment, just as it has through several hundred other adjustments in the past, and just as it will well into the future:
Bitcoin Mining: Transaction Processing and Blockchain Security All In One
The Bitcoin blockchain is a work of art. Since the genesis block was mined in January 2009, Bitcoin’s blockchain has operated with hardly a hiccup to speak of, transferring hundreds of billions of U.S. dollars worth of value and giving self-sovereignty back to millions of its users. In large part, the Bitcoin blockchain owes its success to the tens of thousands of miners that work to process transactions and secure the network from external risks, like 51% attacks, or internal failures, like double spend transactions.
Bitcoin’s blockchain operates on a “Proof-of-Work” consensus model, which is the original blockchain consensus model since Bitcoin’s blockchain was the very first in existence. Proof-of-Work relies on the brute processing power of machines (“miners”) running its software code to secure the network. The more processing power that each miner can muster, the greater the chance it has of confirming a block on the blockchain and receiving newly minted Bitcoin as its reward. In the early days of the Bitcoin blockchain, block confirmations could take place using the processing power of everyday laptop and desktop computers. However, the underlying difficulty level of the Bitcoin blockchain, that we’ll learn more about below, is so high these days that specialized machines called “ASICs” (i.e., Application-Specific Integrated Circuits) are required in order to have more than a passing chance at successfully confirming a block on the blockchain.
On a separate note, you may be wondering what keeps miners on Bitcoin’s blockchain from co-opting the network for their own benefit so they can rewrite transactions and spend Bitcoin multiple times. The simple answer is that Bitcoin’s blockchain employs game theory to incentivize Bitcoin miners to protect rather than attack the network. In a nutshell, mining Bitcoin is so energy-intensive and expensive, and the reward in new Bitcoin is so lucrative, that it would actually cost more in real terms to use one’s processing power to attack the network, than it would to just use one’s processing power to secure the network and, by so doing, generate new Bitcoin and associated transaction fees. Not to mention that successfully attacking the Bitcoin blockchain would destroy it over the long-term, meaning that any value obtained by hackers would be eliminated over time as people lost trust in Bitcoin and stopped using it.
What is Network Difficulty and Why Does It Change?
The original creator of Bitcoin’s software code, Satoshi Nakamoto, wanted to ensure that blocks on the blockchain would be confirmed on a somewhat regular schedule of one block every ten or so minutes. In practice, ensuring that each block was mined exactly ten minutes after the preceding block would be nearly impossible given that Proof-of-Work mining essentially consists of ASIC computers randomly guessing trillions of numbers successively until the correct number is found (for example, sometimes a block is confirmed only two or three minutes after the prior block and other times it can take fifteen to twenty minutes or longer to confirm a subsequent block).
However, Satoshi’s goal was not ensuring that blocks would be confirmed every ten minutes on the dot. No true Proof-of-Work system would ever be able to provide that level of consistency since there would be no way to ensure that a random number could be identified at a specified time without a centralized way of releasing that number (and, as we know, Bitcoin eschews centralized systems in favor of a fair and decentralized network). Instead, the Bitcoin blockchain attempts to maintain an average block confirmation time of ten minutes. Most blocks will either be confirmed more quickly or more slowly than ten minutes; however, the goal is that the average confirmation time will move towards ten minutes over a large number of blocks.
Since miners are free to enter and leave the network at any time depending on energy costs, Bitcoin price, ASIC availability, and much more, the network needs a way to adjust its Proof-of-Work algorithm to maintain the desired average confirmation time. This is where network difficulty comes into play. As more miners (aka processing power) enter the network, the difficulty level goes up and it becomes harder and takes longer to confirm successive blocks on the blockchain. The reverse is also true: as miners leave the network, the difficulty level decreases and it takes less time to add a new block to the blockchain.
The underlying code of Bitcoin’s blockchain is programmed to perform the difficulty adjustment automatically and without interference. There is no third party who is needed to adjust the difficulty or who has the authority to adjust it even if they wanted to. However, the network difficulty is not constantly in flux as miners enter or leave the network. The software code is programmed to perform a self-analysis every 2,016 blocks and then move the difficulty higher if the average confirmation time is less than ten minutes or move it lower if the average confirmation time is above ten minutes. On average, this adjustment to network difficulty is meant to occur every two weeks.
More Power, More Money
While a higher network difficulty makes it more unlikely that any one person or computer will be able to confirm a block on the Bitcoin blockchain, higher network difficulty means that the blockchain itself is more secure. After all, network difficulty correlates directly to the amount of processing power on the blockchain, and higher processing power makes it more difficult for anyone to execute a 51% attack against the blockchain, which is the main external attack vector that a blockchain like Bitcoin’s needs to worry about these days.
The stronger the Bitcoin blockchain, the more people will trust it and use it. And the more people who use it, the more valuable the blockchain and its native token (i.e., Bitcoin) become. In a certain sense, the security of the Bitcoin blockchain, and the underlying network difficulty adjustment that helps define it, can be directly tied to the massive increase in use and price of Bitcoin and its blockchain over the twelve years since it was originally created.
If you found the above post to be helpful, please consider supporting me by providing a small tip below.
Interested in learning more about Bitcoin, Blockchain, and Cryptocurrencies?
The links throughout this article are provided for informational purposes only. I am not an affiliate of these companies, I make no recommendation regarding the companies or their services, and I have not received any compensation for linking to their content.
