Why Mining Gets Harder as Bitcoin Crashes

Posted Nov 16, 2022 9:30 AMUpdated Nov 16, 2022 12:18 PM

It is the cornerstone of cryptocurrency mining. The hash rate, which represents the work force deployed by all active miners on a blockchain, has reached record levels in recent days. Subject to the number of active machines, it reflects the difficulty they have in integrating new transactions into said blockchain – miners must solve a cryptographic problem to have the right to validate them.

“In traditional finance, security is provided by banks. In blockchain, this work is done by users themselves., explains Hugo Estecahandy, doctoral student at the French Institute of Geopolitics and researcher within the Geode project (Geopolitics of the datasphere). In the case of bitcoin, the algorithm requires a lot of computing power for each block of transactions, which is constituted every 10 minutes.

Monitor electricity prices

The protocol automatically adjusts the chopping difficulty every two weeks. “The first miner to find the answer to the cryptographic problem associated with a transaction is paid [en bitcoin, N.D.L.R.] in return for the time he devoted to it and the electrical energy he used. When the power is important, it means that many machines are active. The difficulty is increased.”, exposes Hugo Estecahandy. The hash rate has recently seen some ups and downs, while managing to stay at record highs – around 270 million terahash/second (TH/s).

While the value of cryptocurrencies has fallen in the wake of the FTX affair, miners have yet seen their income drop. “We could have expected a drop in the hash rate: when profitability drops, machines are disconnected”emphasizes the doctoral student, recalling that “mining is only interesting when the value of the mined asset is greater than the mining costs”. The variation in the hash rate can therefore have a technical origin, when it is influenced by the expectations made regarding the number of active miners. Saimi Barragan, founder and managing director of the company Startmining, suggests that there is “an effect of inertia”.

“We reap today what was sown in 2021explains the leader. The market, then on the rise, encouraged new players to invest in mining farms. » However, these smaller miners are getting started as electricity prices soar in some parts of the world. This could force them to disconnect in a hurry, especially since the difficulty of validating blocks is high. The electricity tariff will therefore have to be monitored over the coming months. “Energy efficiency is as important as the price of energy”notes Saimi Barragan, according to whom “a drop in the hash rate in 2023 would not be a surprise”.

The halving – the fact that the reward granted to the validator of each block is halved every four years, as provided for in the Bitcoin protocol – also explains that the activity becomes less profitable for “small” miners. The remuneration per validated block currently stands at 6.25 bitcoins, compared to 50 a decade ago. Note that the evolution of the hash rate can also be influenced by political decisions. Thus, a stall occurred in the summer of 2021, after many miners unplugged their machines due to China’s mining ban. A correction then took place, when the latter reconnected abroad or were replaced elsewhere.

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