Miner Efficiency and Difficulty Adjustment
The dust has settled following the eventful 4th Bitcoin halving.
Miners continue to chug along despite reduced issuance.
The reduced hashprice (revenue per hash) will likely change the layout of profitable miners.
Simple Mining has a helpful miner revenue calculator with the following fixed values:
Bitcoin Price: $61,749
Current Hashprice: $47.32 (PH)
Calculated Electricity Cost: $0.08/kWh
Note, machines are ramping up in hashrate specs and energy efficiency.
Although this is not an exponential rise, each new model boasts a smaller % increase in efficiency compared to the prior release.
This may also suggest that more recent gen machines like the S21 will stay competitive for longer.
With the diminishing productivity of machines and slumped hashprice, it’s important to expand time frame to gain perspective.
This chart shows how miner revenue has historically climbed following supply halving.
When in doubt, zoom out.
The Difficulty of Mining
With the profitability of mining machines swayed by software updates like the halving, it may raise some questions about the total Bitcoin supply cap of 21,000,000 coins (current supply is ~ 19,690,000 coins).
Such as:
If more people mine bitcoin, why don’t remaining coins get mined at a faster rate?
If mining machines get more efficient, do coins get mined faster?
These questions can be answered through the contextual lens of what is known as the “Difficulty Adjustment Algorithm”.
This is not as complicated as it sounds. It is the adjustment of how hard it is for miners to mine bitcoin based off the last 2,016 blocks of transactions.
Picture this:
Miners compete to produce bitcoin blocks by throwing darts at a giant dartboard with as many landing spots as there are atoms in the universe (technically 2²⁵⁶ landing spots).
But if more miners come online to throw darts or get really fast at throwing darts, then Bitcoin would be produced too fast i.e. 21M cap would be realized next week.
In order to counteract this, the size of the bullseye is adjusted automatically by every Bitcoin participant (nodes and miners running Bitcoin software), recalculating the size of the new bullseye given the last two weeks of mining data.
If blocks were coming faster than 10 minutes on average(it took a shorter period of time for 2,016 blocks to be added), the bullseye shrinks to make it harder to hit.
If slower (it took longer for 2,016 blocks to be added), it expands to make it easier.
This keeps Bitcoin production on schedule regardless of the miners joining or leaving the network, or an increase in machine efficiency.
Per Satoshi in the Bitcoin Whitepaper, “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 generated too fast, the difficulty increases.”
How does the algorithm know how long it took for miners to produce 2,106 blocks?
Let’s look at the most recent block:
Each block header has a timestamp (Bitcoin “blockchain” is also called a “timestamp server”).
When the algorithm processes the timestamp data from the last 2,016 blocks, it can figure if it took longer or shorter than 10 minutes per block.
As is stands right now, the next diffculty adjustment is projected to be negative as hashrate has come offline post halving and blocks are taking longer than 10 minutes on average.
As you can see, the chart looks like a staircase because the level of difficulty is fixed for 2 weeks before it is adjusted again.
What does this mean for miners?
As competition to add a block increases, the difficulty also increases, making it harder for all miners to find the acceptable hash.
Some machines can bear this increased difficulty better than others, as shown in the revenue calculator.
The variable difficulty of mining based upon competition brings up a couple key concepts to grasp.
— Bitcoin is a one-of-a-kind asset because no matter how much work is done to produce more units, the programmed issuable units remains the same.
Increased competition cannot add to the global supply.
If more people mine a precious metal or rock, more mines are built, more efficient extraction technologies are developed, and more deposits are discovered, increasing the total supply.
But if more people mine Bitcoin, despite the increased number of mining facilities and the capability and efficiency of new gen miners, that same amount of bitcoin is extracted.
— The more Bitcoin one miner produces, the less another will.
Increased competition reduces the output of existing miners.
Whenever a mining operation expands, they are effectively looking to capture productivity from all other operations. There can only be 1 winner per block.
Bitcoin mining is the pinnacle of free-market competition, and losing is not sustainable.
In short, new gen machines are shadowing older machines, although at a diminishing rate. The difficulty adjustment is what keeps the supply on schedule, further motivating miners to maximize productivity to remain profitable.
If you are currently mining with us at Simple Mining and interested in selling your older generation ASICs or upgrading to more efficient miners, please reach out to sales@simplemining.io for more information.
