Fear not death for the sooner we die, the longer we shall be immortal.
— Benjamin Franklin (1706-1790)
Bitcoin death spiral is a meme
You’ve probably heard some folks referring to something called a “Bitcoin death spiral.”
i.e., Like this article from MarketWatch.
Side note: You should probably never get your Bitcoin insights from MarketWatch.
Another side note: Top-tier phrase. Very primal, sounds cool when you say it, elicits an emotional response, etc…
So wtf are they talking about?
Let me give the MarketWatch author a chance to explain.
Alright, let me try to explain
The author is referring to what might happen if there is a sudden and sustained drop in hash power on the Bitcoin network.
Bitcoin is designed to add a new block to the blockchain every 10 minutes on average.
Difficulty* is effectively a measure of how difficult it is to find and add a new block to the blockchain (more accurately, its a measure of how difficult it is to find a hash below a given target, but don’t worry if you don’t understand what exactly that means).
The Bitcoin network varies its difficulty levels after the discovery of every 2016 blocks to ensure a constant output.
The important take-away here is that difficulty is not calculated on time, but every 2016 blocks.
Below is why folks say there is a difficulty adjustment about every two weeks.
2016 blocks times 10 minutes = 20,160 minutes
20,160 minutes divided by 60 minutes = 336 hours
336 hours divided by 24 hours = 14 days (2 week)
So every 2016 blocks (or about every 2 weeks) the Bitcoin network recalibrates its difficulty.
If the average time to find those 2016 blocks was less then 10 minutes, it means the network hash rate is high the network will increase the difficulty level (proportionately, to increase the block discovery time to 10 minutes).
If the average time to find those 2016 blocks was more then 10 minutes, it means the network hash rate is low the network will decrease the difficulty level (proportionately, to decrease the block discovery time to 10 minutes).
Below is a chart of some previous difficulty adjustments (source).
Average block time is below 10 minutes? You will see a positive tick in difficulty.
Average block time is above 10 minutes? You will see a negative tick in difficulty.
Alright, I realized I didn’t explain this death spiral thing, let me try again
The argument is this.
So because difficulty is not calculated by time and instead calculated every 2016 blocks, if miners suddenly stopped mining and there was a 50% decrease in hash power, blocks would now be getting found every 20 minutes, instead of every 10 minutes.
Now, it would take you 4 weeks to recalculate the difficulty to adjust that back to 10 minutes.
Reduction in hash power → Increase in time to find blocks → Increase in the interval to next difficulty adjustment.
The next assumption is that miners would now turn off their mining rigs because hashrate dropped 50% and they’re not making enough profit, so we would see another sudden reduction in hash power, and things would get even slower, repeat loop, etc…
We would see a death spiral because the network will not be able to properly adjust.
This all sounds really stupid, why is even in the news?
Because we’ve seen the biggest difficulty adjustment since 2011.
This is a solid way to fear monger and get clicks.
Wait a second, why is this whole thing stupid, sounds legit to me?
First, we’ve already seen this type of sudden reduction in hash power in other chains. They didn’t die. Everything was okay.
Second, this argument has been hashed and rehashed since 2011 (no pun intended). It’s just seeing a timely resurgence and it’s being sensationalized.
Third, in his article, Arjun points a few common misconceptions about miners and their relationship with the difficulty adjustment:
The “break-even cost of mining” is much lower for many miners than is often quoted by analysts.
Miners have a set of constraints that may rationally force them to mine at a loss (long-term power purchase agreements, hardware purchase agreements, facility leases, hosting agreements, etc…).
Rational miners want to mine Bitcoin to accelerate the time to the next difficulty adjustment.
Fourth, Arjun may have mentioned rational constraints that may force miners to mine at a loss, but there are also irrational constraints (i.e., ideological reasons).
TL;DR - Just look at the helpful guide below.
Now here’s an interesting take on why the difficulty retarget algorithm in Bitcoin is terrible
Recommended Readings
You can read the article here.
If you have any questions or want to discuss, start a conversation in the Telegram group.
Cheers!