Everything Satoshi did in inventing Bitcoin was non-original – his genius was in seeing how combining a specific set of previously solved problems could, together, solve certain unsolved problems – except the Difficulty Adjustment.
The Difficulty Adjustment is Satoshi’s most underappreciated breakthrough - a truly genius application of game theory.
Suppose Bitcoin’s price rises, creating an incentive for more Bitcoin miners to mine because their rewards are greater. More hashpower will join the network and on average, blocks will be mined faster than 10 minutes, therefore Bitcoin will be minted more often.
In this case, the Bitcoin protocol will automatically raise the difficulty of mining, such that the creation of new Bitcoin, and the timing of transaction verification, does not accelerate beyond its preset schedule (about every 10 minutes).
Analogously, suppose Bitcoin’s price falls, and higher cost Bitcoin miners turn off their machines. The Bitcoin protocol will automatically reduce the difficulty of mining, such that the creation of new Bitcoin, and the timing of transaction verification, does not decelerate below its preset schedule.
The Difficulty Adjustment is what drives Bitcoin’s salability across time, also called perfectly-inelastic supply.
Unlike gold, even amidst periods of surging demand for Bitcoin, Bitcoin miners have no ability to mine Bitcoin faster, making unexpected inflation impossible. Forever.
Typical of Satoshi’s understated style, the Difficulty Adjustment was described in just two sentences in his original Bitcoin whitepaper:
“Mining difficulty is determined by a moving average targeting an average number of blocks per hour. If they are generated too fast, the difficulty increases.”
The Difficulty Adjustment has now been continuously tested for fourteen years, at total global network power levels ranging from a just a few laptops, all the way up to enough energy to power a country like Argentina, and with lots of total network power volatility along the way.
The total network power volatility is what requires the Bitcoin protocol to continually adjust the mining difficulty, akin to continually adjusting the number of digits of the product of the two primes. And, astonishingly, just as Satoshi designed, no matter the global mining capacity, or its variability - a new block is verified every 10 minutes.
Tick Tock, Next Block!
-- an excerpt from the Stone Ridge 2020 Shareholder Letter, its 2-minute version can be found here https://www.2minutebitcoin.org/blog/stone-ridge-2020-shareholder-letter
reply
Love this. Schiff can suck a phatty.
reply
🤣🤣🤣
reply
Not a coincidence
reply
its the little things
reply
Crypto nerds don't understand the multiple brilliant innovations in Satoshi's design. Difficulty adjustment being one of them. Bitcoin is a game theoretic masterpiece.
reply
Perfectly written and excellent excerpt. I am curious about something related to this topic: has anyone done a study on how increasing difficulty might have (or might in the future have) an effect on block regularity? Intuitively, it seems to me that as difficulty continues to increase, eventually the time between blocks will become more irregular due to the corresponding scarcity of hash solutions for higher difficulty levels. Hopefully that day would be in a galaxy far far away, but it would be nice if we have insight on that, and to know where we currently are on the scale of block regularity.
reply
But that's bad for the environment
/s
reply
It's like sports betting ledgers adjusting lines.
reply