Bitcoin Difficulty Explained: A Beginner’s Guide

Bitcoin difficulty is a measure of how difficult it is to mine a block on the Bitcoin blockchain. This metric ensures that blocks are added to the blockchain at a consistent rate, regardless of the network’s mining power. This article will explain the Bitcoin difficulty, how it is calculated, and why it is an integral part of the Bitcoin network.

First, let’s define mining. Bitcoin mining refers to adding new transactions to the blockchain. This process involves solving complex mathematical problems requiring significant computing power. Miners compete to solve these cryptography problems and are rewarded with newly minted Bitcoin, known as the block subsidy.

The block subsidy plus transaction fees incentivize miners to continue contributing their computing power to the network, ensuring that the blockchain remains secure and reliable.

WHAT IS BITCOIN DIFFICULTY?

Now, let’s talk about Bitcoin difficulty.

Bitcoin difficulty is a measure of how difficult it is to mine a bitcoin block.

To be more precise, Bitcoin difficulty is a measure of how difficult it is for a miner to generate a valid hash below a specified 256-bit target number determined by the Bitcoin network. A miner finds and mines a new block when their hash is equal to or below this target number.

This difficulty level adjusts every 2,016 blocks or approximately every two weeks, known as the difficulty epoch. This ensures that the average time to mine a block remains constant at 10 minutes.

When the network first started, the difficulty level was set at 1. Any miner with basic computer hardware could quickly begin mining bitcoin. But, as more people joined the network and more mining power was added, the difficulty level increased to ensure that blocks continued to be mined at a consistent rate.

At the time of writing, the difficulty level reached an ATH of over 37 Trillion. So to be competitive in the mining process, miners use specialized computer hardware known as ASICs (Application Specific Integrated Circuits). ASICs are specifically designed for mining Bitcoin and are a thousand times more efficient than obsolete computer hardware used in the early days of Bitcoin mining.

HOW IS BITCOIN DIFFICULTY CALCULATED?

A non-technical way of calculating the Bitcoin difficulty is using the formula:

Difficulty Target / Current Target = Difficulty Level

With the difficulty target being 1, the highest possible difficulty target, and the current target being the 256-bit target number determined by the network.

The Bitcoin network recalculates the current target hash at the start of every difficulty epoch. It is calculated by:

(Total minutes it took to mine the last 2,016 blocks) / (desired goal of 20,160 minutes)

The answer is then multiplied by the current difficulty level to find the new difficulty level for the next 2,016 blocks.

HOW IS BITCOIN MINING DIFFICULTY ADJUSTED?

A non-technical way of calculating the Bitcoin difficulty is using the formula:

Difficulty Target / Current Target = Difficulty Level

In simple terms, If a block is mined every 10 minutes, it should take 14 days to mine 2,016 blocks.

2,016 blocks * 10 minutes = 20,160 minutes = 14 Days.

If it took longer than 14 days to mine 2,016 blocks, the current difficulty was set too high. The difficulty level will then be lowered, making it easier to mine the following 2,016 blocks to try and maintain the 10-minute average block time.

However, if it took less than 14 days to mine 2,016 blocks, the Bitcoin difficulty is set too low, which will then increase for the following 2,016 blocks.

It’s important to know that while a 10-minute block time is the desired goal, the mining difficulty cannot be increased or decreased more than four times the current difficulty level. This means after each difficulty epoch, the Bitcoin difficulty can increase up to +300% or decrease by -75%. This rule is implemented to eliminate extreme volatility in mining difficulty.

WHAT HAPPENS TO BITCOIN DIFFICULTY WHEN THE LAST BITCOIN IS MINED?

The Bitcoin difficulty process will remain the same. But the way miners are rewarded will change.

The block subsidy will eventually reduce to zero, and the block reward will only consist of the transaction fees. But why does the Bitcoin subsidy reduce to zero, and what happens when all the Bitcoin is mined?