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Cryptocurrency Cryptocurrency Difficulty

BITCOIN
By JAKE FRANKENFIELD | Updated Apr 1, 2021
CRYPTOCURRENCY
STRATEGY & EDUCATION
What Is Cryptocurrency Difficulty?
Cryptocurrency difficulty is a measure of how difficult it is to mine a block in a
BUYING & SELLING
blockchain for a particular cryptocurrency. A high cryptocurrency difficulty means
INITIAL COIN OFFERINGS it takes additional computing power to verify transactions entered on a blockchain
—a process called mining.
BLOCKCHAIN

Cryptocurrency difficulty is a parameter that bitcoin and other cryptocurrencies

use to keep the average time between blocks steady as the network's hash power
changes. Cryptocurrency difficulty is important since a high difficulty can help
secure the blockchain network against malicious attacks.

KEY TAKEAWAYS
Cryptocurrency difficulty is a measure of how difficult it is to mine a block
in a blockchain for a particular cryptocurrency.
A high cryptocurrency difficulty means it takes additional computing
power to verify transactions entered on a blockchain.
The higher the difficulty needed to create a block improves a
cryptocurrency network's security since attackers would need enormous
resources to take control.

Understanding Cryptocurrency Difficulty

Bitcoin and other cryptocurrencies that use proof-of-work blockchains are
maintained through the process of mining. Miners verify transactions that are
done on a blockchain and perform the duties of auditors to prevent fraud and
ensure the legitimacy of the transactions. Mining was conceived by bitcoin's
founder, Satoshi Nakamoto.

In this system, miners—who run the cryptocurrency's software on their computers

—compete to find a new block, adding the most recent batch of transaction data to
the chain. When enough transactions have been verified, a new block is added to
the blockchain. Miners may get paid a fee for their efforts but there are other
requirements before a miner can receive compensation if any at all. The extent of
the computing power needed to mine a block is represented by cryptocurrency
difficulty. The time it takes to find a new block is subject to the level of
cryptocurrency difficulty and random chance.

In order to measure the cryptocurrency difficulty of a new block, it's important to

understand hash power, which represents the combined computational power
being used to mine and process the transactions on the blockchain.

Random Hashes
A hash is an alphanumeric code that's used to represent words or data. Miners take
a batch of transaction data and run it through a hash algorithm, a one-way
function that—given a particular set of data—will always produce the same output,
but whose output cannot be reversed to show the original data. Hashing
algorithms are used to create these random hash codes. Before new data can be
added to a blockchain, miners must compete to produce a hash that's lower or
equal to a numeric value called a target hash.

Miners accomplish the hashing process by changing a single value, called a nonce
—or a number used once—and each time the nonce is changed, a new hash is
created with its own set of numbers. There is no way of predicting what a hash will
be and since each set of data has only one output for a given hash function, miners
must repeat the process of adding a new nonce to the data until they meet the
hash requirement.

Cryptocurrency Difficulty
The requirement a hash must meet corresponds to the difficulty. A valid hash must
be below a certain target value set automatically (and periodically adjusted) by the
cryptocurrency's protocol. The lower the target value, the more repetitions of the
hash function a miner must go through in order to get an acceptable result—in
other words, the higher the difficulty. A miner can, in theory, get lucky and obtain a
valid hash for a given block on the first try. However, over time, higher difficulty
means that miners must plug through more nonces per block on average.

Individuals and organizations contribute their computational power via their

mining rigs to process the data and produce the hashes. The hash power of a
cryptocurrency network represents the total hash rates of all the mining rigs. The
hash rate is the number of hashes that can be calculated per second.

Since each hash is created randomly, it can take millions of guesses or hashes
before the target hash requirement is met and new cryptocurrency coins are
minted to the successful miner. Only then are the transactions added to a new
block within the blockchain. In a way, the hashing process is similar to a lottery
system. As a result, new coins are issued through this mining process.

FAST FACT
The higher the hash rate, the more difficult it is for a fraudster to gain
control of the blockchain since more hashing power is needed. In
other words, the higher the difficulty, the more secure the network.

Benefits of Cryptocurrency Difficulty

One might wonder why a network's participants would establish a higher
cryptocurrency difficulty if the result meant miners repeating the same
function over and over. There are two key benefits to cryptocurrency difficulty.

A Steady Rate of New Blocks

The bitcoin whitepaper by Satoshi Nakamoto explains how the proof-of-work
difficulty helps to generate a steady production of new blocks added to the
blockchain.

"To compensate for increasing hardware speed and

varying interest in running nodes over time, the proof-of-
work difficulty is determined by a moving average
targeting an average number of blocks per hour. If they're
[1]
generated too fast, the difficulty increases."

Bitcoin is designed to add a new block to the blockchain every 10 minutes on

average. Other cryptocurrencies aim for more frequent blocks; litecoin, for
example, aims for 2.5 minutes. The issue is that the amount of computing power
the network's miners collectively control can vary enormously.

When Satoshi Nakamoto mined the first block, there was only one machine on the
network—likely a simple laptop or desktop. Today there are a number of
sprawling, warehouse-sized ASIC farms. ASICs are machines designed specifically
to plow through hash functions as fast as possible.

In order to ensure that the network produces a new block at a steady average rate,
the software is set to automatically adjust the target hash up or down, which
results in lower or higher difficulty, respectively. When Nakamoto mined the
genesis block, bitcoin's difficulty was one.

Network Security
The overall hash rate provides insight into a cryptocurrency network's security
since fraudsters or bad actors would need to overcome the total hash power of the
network to take control in a malicious attack. Specially designed computers are
used to perform hashing functions, which are able to make trillions of guesses
each second to solve the hashing problem.

The higher the cryptocurrency difficulty, the more guesses or hashes are needed to
reach the target hash requirement. As a result, this process makes it very difficult
and expensive for attackers to gain the majority control—called a 51% majority—of
a blockchain network.

Example of Cryptocurrency Difficulty

As of April 2, 2021, the cryptocurrency difficulty for bitcoin was 23.14 trillion. If we
compare the change in difficulty, we can see that on April 1, 2018, bitcoin's
difficulty was 3.51 trillion. [2]

The chart below plots bitcoin's change in difficulty over the years:

ARTICLE SOURCES

Related Terms
Target Hash Definition
A target hash sets the difficulty for cryptocurrency mining using a proof-of-work (PoW)
blockchain system. more

Nonce
In blockchain technology, nonce means a number added to a hashed, or encrypted block,
that, when rehashed, meets the difficulty level restrictions. Blockchain miners aim to solve
the nonce. more

Understanding Hash
A hash is a function that converts an input of letters and numbers into an encrypted output Partner Links
of a fixed length. more

Proof of Work (PoW)

Proof of work describes the process that allows the bitcoin network to remain robust by
making the process of mining, or recording transactions, difficult. more

What Is the Difficulty Bomb?

Difficulty Bomb refers to the increasing difficulty and time needed to mine Ethereum
blocks, which may eventually make mining unprofitable and impossible. more

Proof of Activity
Proof of activity is the blockchain consensus algorithm based on a hybrid approach. more

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