Monday Mining Metrics: Difficulty Adjustment Explained
Bitcoin Mining Update - 2/5/2024
I’ve noticed a few people on Twitter (X) eagerly referencing this topline number with expectations that it is an accurate representation of what the next difficulty adjustment will be. It’s a good time to remind everyone how difficulty adjustments actually work.
Firstly, mining difficulty is “set” by the network requiring a block’s hash to contain a certain amount of leading zeros for the block to be valid. Here’s an example using the hash from block 829052: 00000000000000000001b5c88f4c770a8fc8efa0ddcc017ee6b82f7a44c21b7f
Because SHA-256 is a one-way hashing algorithm, the only way to find an output with the required number of leading zeros is to guess and check. In other words, use more computational power. Hence, more ASICs plugging into the network to mine means that the network automatically adjusts the number of leading zeros required so that blocks are discovered every 10 minutes on average.
The key phrase in the previous sentence is “on average.” Difficulty adjustments are performed every 2,016 blocks based on a moving average of block times. Because there is a luck-based element to mining, you can’t adjust the difficulty every block or every few blocks, a larger sample size is needed. Blocks coming in fast during the initial phase of a new difficulty epoch does not mean that a bunch of new ASICs were plugged in, it just means that miners have been getting lucky and are finding new blocks in less than 10 minutes.
Transaction Fee Surge
Transaction fees surged briefly over the weekend due to BRC20 tokens being minted on-chain. Fees have since returned to orbit.
The only constant about Bitcoin on-chain transaction fees is that they are volatile. As a Bitcoin user, you should be prepared to wait longer for confirmation during times in which fees are high (unless you are willing to pay the high fee for fast confirmation).
Fee volatility gives enormous upside to Bitcoin miners; if you were hashing over the weekend with Blockware’s FPPS pool, your revenue increased from the surge in fees.
The debate on inscriptions, whether they are spam or are a legitimate and encourageable use of Bitcoin, has ramped up in the past few weeks.
Neither statement is necessarily accurate.
In the long run, if the thesis of adoption by nation-states and large financial institutions is accurate, then the use of Bitcoin for monetary transactions will outprice all other potential use cases.
@Mononautical on Twitter (X) accurately described the BRC20 phenomenon.
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