What Is Cryptocurrency Difficulty? Definition and Bitcoin Example

What Is Cryptocurrency Difficulty?

Cryptocurrency difficulty is a measure of how difficult it is to mine a block in a proof-of-work blockchain. A high cryptocurrency difficulty means it takes additional computing power to verify transactions entered on a blockchain—a process called mining.

Cryptocurrency difficulty is a parameter that Bitcoin and other competitive proof-of-work blockchains use to keep the average block production time steady as the network's hash power changes.

Understanding Cryptocurrency Difficulty

Bitcoin and other cryptocurrencies that use proof-of-work mechanisms are maintained through the process of mining. Miners verify the new transactions on a blockchain and perform the duties of auditors to prevent fraud and ensure legitimacy. In this system, miners—who run the cryptocurrency's software on their computers—compete to have their proposed block of data added to the chain.

This competitive process means that those who have faster systems stand a better chance of generating a hash that meets the difficulty target. Difficulty adjustments were introduced to try to keep mining fair and maintain a steady pace. Popular cryptocurrency mining is no longer fair because of technological advancements, and businesses have taken over the networks, but difficulty levels still maintain a steady block production rate.

The Bitcoin whitepaper explains how the proof-of-work difficulty level helps maintain a production rate:

"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."

To understand how difficulty is measured and adjusted, it's important to learn about "hashing" and "mining."

Hashing

Hashing is the term for sending transaction data through an algorithm, which turns it into a long string of numbers and letters. This is 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. Any adjustment made to the input data will change the hashing algorithm's output.

Mining

Miners must compete to produce a hash that's lower or equal to a numeric value called a target hash, which is set and maintained by the network's programming. Each miner on the network has a list of different transactions they add to a block and sends specific fields from that file through the algorithm. One of these fields is called the nonce—a number used once. This is one of the fields that is adjusted on each hash attempt. The nonce is increased by a value of one on every attempt, reaching a maximum value of about 4.5 billion due to the file's size limitations.

The other number that can be adjusted is contained in a field called the coinbase. It is called the extra nonce, but it is used as more of a counter for the nonce, which rolls over after the extra nonce changes value.

On each attempt, a new hash is created. 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 adjusting the nonce and extra nonce data until they meet the hash requirement. On the Bitcoin blockchain, the difficulty is automatically adjusted to maintain a rate of one block every 10 minutes.

Adjusting the Cryptocurrency Difficulty

The maximum difficulty the Bitcoin blockchain can set is 0x00000000F...(followed by 55 more Fs). When converted to decimal format, this equals 2²²⁴, a 68-digit number. The minimum value that can be set is 1. Every 2,016 blocks (10 minutes per block, 144 blocks per day, for 14 days), the network recalculates the next difficulty using the time it took to mine those blocks to find a ratio (T):

T = Time Previous / 2016 x 10 min

The blockchain should take 20,160 minutes to create 2,016 blocks. So, if it took 17,570 minutes, the formula to find the ratio would be:

• T = 17,570 / 20,160
• T = 0.8715

Next, the blockchain multiplies this ratio with the current difficulty. If the current difficulty was 81.00T (81,000,000,000,000):

0.8715 x 81,000,000,000,000 = 70,591,500,000,000 or 70.5915T

The difficulty is lower than it was previously, making the blockchain generate more hashes to keep the approximate 10-minute block time. Remember, the maximum target the blockchain can set is 2²²⁴ (68 digits), so a target of 70.591T is very low (but a very high difficulty).

The chart below plots Bitcoin's change in difficulty over the years. Notice that the difficulty level plummeted between May and July 2021—miners in China began moving operations to other countries after the government banned the practice. The network's hashrate dropped during this time, causing the difficulty level to drop correspondingly:

The Bottom Line

A cryptocurrency's difficulty is a goal that dictates how much work its blockchain network needs to do to add blocks. Difficulty levels are usually adjusted automatically by proof-of-work blockchains to compensate for changes in a network's hashrate (the participation level). Generally, the faster a network can generate hashes, the higher the difficulty will be.

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