What is meant by mining difficulty?

All miners on the Bitcoin network are in a battle to be the first to solve a cryptographic puzzle.   The winner can add their block to the Bitcoin blockchain, and earn the block reward and transaction fees.  This compensates them for the investment made in hardware equipment and energy.

The ‚mining difficulty‘ determines how difficult it is for the miners to solve the puzzle.

How is the mining difficulty determined?

The level of the mining difficulty depends on the computational power (referred to as the hashrate) being provided by all the miners on the network.  When new miners join the network, the hashrate goes up, and as miners leave the network, the hashrate goes down.

Over the last decade, the performance of the mining machines (also known as rigs) has improved dramatically in computational power.    At the same time, there has been a sharp increase in the number of mining rigs on the network.  This has led to an ever-increasing amount of computational power being put towards solving the cryptographic puzzle.

The mining difficulty was set at 1 at Bitcoin’s launch in January 2009, increasing to around 100 billion, just 7 years later.  Today the mining difficulty rate is 29.57 trillion, down from the all-time-high of 31.25 trillion in May 2022.

When are mining difficulty adjustments made?

Mining difficulty adjustments are made every 2016 blocks (approximately every 2 weeks).  This adjustment is written in to the Bitcoin protocol, and happens automatically.

Why are mining difficulty adjustments made?

The Bitcoin network is designed such that a new block is added to the blockchain on average every ten minutes.  This ensures the steady, pre-determined issuance of new Bitcoin in to the system.      When the computational power on the network increases, the time it takes to solve the cryptographic puzzle will decrease, and new blocks will be added to the blockchain at a faster rate.    To avoid this happening, a regular adjustment to the difficulty of the puzzle is necessary.

Adjusting the mining difficulty ensures that the average time taken to solve the puzzle remains at around 10 minutes, irrespective of any increase or decrease in the hashrate.

Why would the mining difficulty decrease?

When more miners leave the network than join the network, leading to a decrease in the hashrate, the mining difficulty is adjusted downwards, so that it becomes easier for the remaining miners to solve the puzzle.

Miners leave the network for a number of reasons, such as: a government issuing mining bans (China, July 2021); or mining restrictions (New York, June 2022); or after a marked reduction in Bitcoin’s price in a bear market, which could lead to the unprofitability of older, less powerful mining machines.