The mining difficulty of a cryptocurrency such as Bitcoin indicates how difficult and time-consuming it is to find the right hash for each block.
- Mining difficulty is a measurement unit used in the process of Bitcoin mining
- Difficulty indicates how difficult it is to solve a complex cryptographic puzzle
- The difficulty of mining new units increases or decreases over time, depending on the number of miners in the network
- Increases in difficulty are necessary in order to keep the target block time
In this lesson, you will learn the basics of mining difficulty.
Ready to receive free BEST? Test your knowledge here!Beginners' Quiz
As a cryptocurrency like Bitcoin becomes more popular, the number of computers participating in its peer-to-peer network increases. Miners compete against each other for limited block rewards. With more participants and more computing power, the so-called “hashpower” of the entire network increases accordingly.
This is also referred to as the mining difficulty or difficulty, which is easier to understand once you grasp the basics of Bitcoin mining. You already learned that Bitcoin transactions are stored in blocks, which are added to the blockchain every 10 minutes (= 600 seconds).
To maintain the time it takes to process one block at around 10 minutes, difficulty has to be adjusted periodically.
Mining difficulty in the Bitcoin network is adjusted automatically after 2,016 blocks have been mined in the network. An adjustment of difficulty upwards or downwards depends on the number of participants in the mining network and their combined hashpower.
Mining equipment has evolved considerably since the beginnings of Bitcoin
- In the early days, the first miners used the CPUs of their PCs to mine Bitcoin.
- Miners eventually realised that graphics cards are better suited for mining Bitcoin. However, graphics cards also need more energy.
- In recent years, special “ASICs” (application-specific integrated circuit chips) have been developed specifically for Bitcoin mining.
- Presently, Bitcoin and other digital currencies are mined via mining pools, where lots of miners join forces and combine their hash rates in the quest for block rewards.
Solving the mathematical puzzles for valid block creation requires huge amounts of computational power. Because the difficulty is rising continually, miners join forces in Bitcoin mining pools and solve the mathematical puzzles together. The first individual miner or the mining pool that finds the right hash gets the block reward.
Usually, block rewards consist of new coins or tokens native to a blockchain network such as Bitcoin. In a mining pool, block rewards are split among participants in proportion to their share of computing power in the mining pool. This way each participant is adequately invested in the process.
Bitcoin mining is like searching for a needle in a haystack. Many hashes are created by Bitcoin code, but only one of them is the right one.
We already know that “mining” for digital currencies is like searching for a needle in a haystack rather than actually digging for gold. There are other differences, too.
Unlike gold, of which there are still undiscovered deposits all over the planet (and in space), Bitcoin has a limited and finite number of 21 million units. As of now, more than 85% of all bitcoins have already been mined, and it is estimated that the last bitcoin will be mined by 2140.
What happens to difficulty when the last bitcoin has been mined?
After all 21 million bitcoins have been mined, miners will still need to contribute to the Bitcoin network in order to keep it running. New blocks will still be generated, but the rewards will change. Instead of getting new coins as a block reward, miners will receive a share of the transaction fees spent by people who send transactions within the network.
Are you ready to buy cryptocurrencies?Get started now
- Daniel Drescher - Blockchain Basics: A Non-Technical Introduction in 25 Steps
- Brenn Hill - Blockchain Quick Reference: A guide to exploring decentralized blockchain application development
- Anthony Lewis - The Basics of Bitcoins and Blockchains: An Introduction to Cryptocurrencies and the Technology that powers them
This article does not constitute investment advice, nor is it an offer or invitation to purchase any crypto assets.
This article is for general purposes of information only and no representation or warranty, either expressed or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of this article or opinions contained herein.
Some statements contained in this article may be of future expectations that are based on our current views and assumptions and involve uncertainties that could cause actual results, performance or events which differ from those statements.
None of the Bitpanda GmbH nor any of its affiliates, advisors or representatives shall have any liability whatsoever arising in connection with this article.
Please note that an investment in crypto assets carries risks in addition to the opportunities described above.