The concept of cryptocurrency mining difficulty
Many cryptocurrencies are deflationary in nature. This means that the total number of coins issued is limited by the source code of this cryptocurrency and no more coins can be issued.
Limiting the total issue of coins is necessary in order to increase the economic value of one particular coin. Indeed, if people generally need cryptocurrency, it is actively used by the crypto community, and the number of coins is limited and they are mined slowly and hard, then the cost of one particular coin will increase. Such a coin will be needed by people and its price will be determined by increased demand.
The economic model of most cryptocurrencies is based on the basic laws of the economy and the market, which determine their value based on the general usefulness of cryptocurrencies and the breadth of their distribution and application.
Miners issue coins, and each miner, without permission, can start issuing coins, i.e., mining coins. Since there are no restrictions on mining, chaos can occur, since everyone will mine as much as he wants.
So that such chaos does not come and there is the difficulty of mining. It is necessary to ensure that cryptocurrency mining is carried out uniformly and the same number of cryptocurrencies is issued for equal periods of time, regardless of how many miners are connected to the mining and what equipment they use for mining.
Thus, it is the complexity of the hashing algorithm that controls the issue of coins and ensures that there is no anarchy in production and all coins are not issued in a short period of time.
The impact of mining difficulty
The complexity of hashing affects the cryptocurrency exchange rate. If cryptocurrency is popular and in demand, as many miners want to mine it. To be more successful and get more cryptocurrency, miners buy and install more advanced equipment. The more people connected to cryptocurrency mining, the more difficult it becomes to mine, the higher the mining costs. Consequently, the cost of mining coins also increases, this leads to an increase in the rate.
Conversely, if the cryptocurrency exchange rate drops and miners understand that it becomes unprofitable to mine a given coin, they reconfigure their capacities to mine new cryptocurrencies or stop mining altogether. Thus, the number of miners mining this coin is reduced, the total number of mining power is also reduced. But the source code of the coin provides that the block must be generated a certain time. This means that in order to keep the block creation time unchanged, the complexity of coin mining is reduced.
The level of mining difficulty affects the cost of production. That is, we can say that the level of mining complexity affects the rate of the cryptocurrency itself. After all, miners are not a charitable organization and they cannot mine at a loss. If the cryptocurrency market rate is lower than the cost of mining, then miners will reconfigure their capacities for the extraction of other cryptocurrencies.
On the contrary, if the cryptocurrency exchange rate is much higher than its cost, then an increasing number of miners are joining the cryptocurrency mining industry. So, for example, it was with Bitcoin at the end of 2017, when the cost of mining in China, where about 75% of all Bitcoin is mined, was about $ 3,000, and the Bitcoin rate reached $ 20,000. Along with a large number of new miners who joined, the old miners, in order to maintain their income, as well as seeing a huge prospect and big profit, endlessly increased capacities, bought new equipment, created additional farms and, of course, mastered new technologies and opened farms in territories where Mining is more profitable economically. Thus, the emergence of a large number of new miners, as well as the widespread introduction and use of more expensive and energy-consuming equipment, has led to the fact that now the cost of mining at $ 7,000. And the Bitcoin rate fell below $ 6,000.
That is, at the moment, mining Bitcoin is not economically profitable. Thus, miners are forced to reconfigure all their equipment and capacities to mine other cryptocurrencies. But the common problem with cryptocurrencies is that if Bitcoin falls, then the rate of other cryptocurrencies drops even more, since Bitcoin is the most stable cryptocurrency. Switching to other cryptocurrencies also becomes very problematic. Therefore, sales of used mining equipment have increased, as many miners simply leave the cryptocurrency mining market.
On the other hand, cryptocurrency mining is a multi-billion dollar industry in which huge funds are spinning and just like that, miners will not leave. Therefore, many experts predict that the Bitcoin exchange rate will grow, as there are all economic prerequisites for this.
What affects the complexity of cryptocurrency mining
The complexity of mining is affected by two indicators:
- Cryptocurrency mining cost
- Cryptocurrency rate
The cost of production consists of
- Total number of miners
- The equipment and facilities they use
- Hash algorithm
- Economic conditions for mining: the cost of electricity, purchase, installation, depreciation and maintenance of mining equipment, the quality of the Internet
- Climatic conditions for mining: are additional costs required for cooling the equipment
- The financial and legal base: is mining allowed in the country, how is it settled, the tax base, the availability of miners access to exchanges, etc.
Mining is a huge multi-billion dollar industry, which consists of all these components.
Many experts experts doubt that mining is decentralized. Indeed, thanks to the prevailing conditions that determine the cost of mining, 70% of world mining and 75% of Bitcoin mining are concentrated in China. What kind of decentralization can there be if the majority of cryptocurrency mining is controlled by the largest Chinese corporations, which can agree among themselves and impose their terms on the world. Another thing is that while they do not, but who can guarantee that this will not happen in the future.
The difficulty level of mining various cryptocurrencies
Every 2 weeks or 2016 blocks, the complexity of Bitcoin mining is complicated so that it takes 10 minutes to generate one block stably. Such a long processing time for one block is the main reason for such a long confirmation of payments in Bitcoin and high commissions.
In order for the miner to include the transaction in the block, the user must interest him in the commission, otherwise the miner will choose another transaction for processing. To solve this problem, it was proposed to increase the block size from 1 MB to 2 MB using SegWit technology. But since 75% of Bitcoin mining is concentrated in China, the process of transition to a new technology was very slow and painful. This is the main problem of many cryptocurrencies. In reality, cryptocurrency mining is concentrated not decentralized around the world, but in the hands of large corporations concentrated in China.
The excitement around Bitcoin at the end of 2017 revealed the main problem of Bitcoin. Its economic basis impedes the worldwide adoption of Bitcoin as a universal means of payment, as transactions in Bitcoin are confirmed very slowly and fees are very high. The use of new technologies in the processing of payments in BTC is hindered by the monopoly of China on Bitcoin mining.
Ethereum is a second-generation cryptocurrency that uses a different hashing algorithm. Unlike Bitcoin, Ethereum does not have the same block processing time. Ethereum, unlike Bitcoin, has an official creator and organization that owns all the rights to use and distribute Ethereum. The management of the company itself determines the processing time of the block, as well as the reward for the extracted block. These changes are manually configured in the source code of the cryptocurrency. Thus, by changing the processing speed of the block, you can manually adjust the speed of confirmation of payments over the network, avoiding such large “congestion” as happened with Bitcoin.
When determining the cost of processing a block for miners, Ethereum management can indirectly affect the number of miners mining cryptocurrency and the Ethereum exchange rate. After all, if you make the block price lower, then many miners will leave the market and switch to mining another cryptocurrency. On the other hand, if the usefulness of cryptocurrency grows, the low price of the block will increase the cost of production. Since the miner will receive less for mining the block, the price of the coins themselves will increase. Thus, if in Bitcoin everything is controlled by mathematics and the laws of the market, then in Ethereum, the company’s management itself adapts to these laws of the market and controls the speed and volumes of cryptocurrency mining.
In addition, the Ethereum manual can change 2 parameters. The processing speed of the block and its price, so Ethereum can monitor the processing speed of transactions depending on the network load.
If Bitcoin is unchanged, then Ethereum is flexible and customizable.
Despite its flexibility and customization, the Ethereum network also experienced problems during the cryptocurrency boom, transactions were confirmed for a long time. But the problems of Ethereum were not as obvious as in Bitcoin, and the transaction cost in Ethereum was significantly lower.
Different cryptocurrencies use different hashing algorithms and block confirmation protocols. Also for mining you need different equipment. Despite the various conditions and requirements for mining different cryptocurrencies, there remains a general rule that mining a new cryptocurrency is easier and more profitable, since few miners have joined its mining. Indeed, according to the general laws of the cryptocurrency market, a miner is an enemy to a miner. The more miners mine cryptocurrency, the more difficult it becomes to mine. Therefore, it is simple to mine new cryptocurrencies, since there are not a large number of miners and competition.
On the other hand, many new cryptocurrencies do not have their own support industry – wallets serving exchanges. It is difficult for miners to sell the extracted cryptocurrency, since no one needs it and no one accepts it.
Even if cryptocurrency is served on exchanges, someone must buy it for something. And if cryptocurrency is easy to get and it does not have real value and usefulness, as well as an industry it serves, then nobody needs it, even cheaply.
Therefore, before mining a new cryptocurrency, you need to study it and understand its usefulness and why it is needed. It is necessary to answer the question: why will people buy this cryptocurrency? Who needs it? And if you feel the potential and usefulness of a new cryptocurrency, then it can be mined.
Predictions regarding difficulty level
Engineering and technology are developing, more and more people are paying attention to cryptocurrencies. Miners also do not stand still, and in the conditions of fierce competition, as is the case in Bitcoin and other large cryptocurrencies, miners are constantly increasing capacities and buying more modern equipment.
Therefore, the complexity of mining is growing. An increase in the complexity of mining leads to an increase in the cost of extraction of one particular coin. This leads to an increase in cryptocurrency rates.
Therefore, all experts predict the growth of major cryptocurrencies by the end of the year.
Many cryptocurrencies generally evade mining, since mining and confirmation of transactions alone are not able to provide high-speed payment processing. Cryptocurrencies use decentralization and distributed ledgers, but payment confirmation is instantaneous and miners are not required to participate. In addition, thanks to the various security mechanisms used, such payments are instant, cheap and safe. A good example is Ripple. Cryptocurrency without mining. In 2017, Ripple grew 400 times. Therefore, many developers have paid attention to this technology and many new cryptocurrencies have appeared that use similar principles.
Not surprisingly, some experts predict the sunset of the mining era. Miners are not able to provide instant payments, and the lack of instant payments prevents the widespread and active use of cryptocurrencies in electronic commerce.