Over the weekend, the Bitcoin hash rate fell off a cliff, leaving many industry participants wondering what had happened. Over the past two days, industry experts have provided information and context on what was behind this sharp drop in the hash rate.
For example, this Twitter thread from Mustafa Yilham does a great job explaining the current situation.
TLDR: A large number of Bitcoin miners in the Xinjiang region had to shut down their machines, due to a water leak at a coal mining plant that brought central and local governments to China to temporarily close the operations of other coal mining operations. Because it is still the “dry season” in China, most Bitcoin mining operations take advantage of overused / oversupplied electricity sources, most of which in China (around 80%) are currently located. in Xinjiang Province, where stops occurred.
Recent decrease in Bitcoin hash rate
Although a drop in the hash rate caused by single-country regulations left many worried about the resilience of the Bitcoin network, the response was largely an overreaction to a small sample size of blogs slow, at the beginning of a difficulty adjustment.
The Bitcoin network has a difficulty setting every 2016 blocks, which calibrates the network to mine blocks at an average time of one every 10 minutes. For example, if blocks were to reach a speed of every nine minutes during the last 2,016 blocks (or about two weeks), the difficulty would be adjusted 10% upwards to make it a little harder to get an additional block. .
Real-time difficulty adjustment calculator for https://diff.cryptothis.com/
A viral loop of incentives
What impact does a large amount of hash power coming out of the network have? Is this a threat to the long-term security model of the Bitcoin network?
We delve into the viral loop of incentives built into the Bitcoin protocol.
When a large proportion of hash rate is turned off, the rate at which blocks are extracted subsequently decreases. The result is that fewer transactions are confirmed in the blockchain and the Bitcoin mempool is filled with unconfirmed transactions. Blockspace on the Bitcoin network is a scarce resource, and if you want to use the protocol and accompanying settlement guarantees, you’ll have to pay.
Recent increase in transaction costs as seen in https://mempool.space/
The mempool functions as an auction block. All transitions include an attached fee and miners select the highest paid fees to include if / when they mine a block, which is their direct financial incentive. As a result of the delayed hash rate in recent days, along with the increased demand to use the Bitcoin network, the total income of miners has reached historic highs.
On April 16, 2021, the miners’ daily income reached an all-time high of $ 77,500,000.
Slower blocks generate fewer transactions, leading to higher transaction rates, which generate higher mining profits, which encourages additional miners to participate and join the network, which increases the hash rate in the future. , which increases network security and protocol settlement guarantees.
In addition, a consistent high-rate environment in the Bitcoin blockchain encourages the development of scale solutions such as the Lightning Network. Also, regardless of what happens to miners joining or leaving the network, after a period of 2,016 blocks, the difficulty will adjust down or up exactly proportional to the amount of slow block extraction or fast compared to an average goal of 10 minutes.
The Bitcoin network works exactly as it was designed and, in a world of entropy, the incentive structure of the protocol ensures that the blocks continue to be exploited and that the most robust network on the planet continues to operate with a time of activity. close to 100%.
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