Difficulty Adjustment Algorithm

Intermediate
March 29, 2023
Read time:
7m

Difficulty Adjustment Algorithm (DAA) is responsible for adjusting the difficulty of mining a cryptocurrency. This is an essential element of the protocol, as the difficulty of mining directly impacts the speed at which new blocks are mined, and subsequently, network stability and efficiency.

How does it work?

The DAA operates by modifying a target value that defines the difficulty of discovering the correct block hash. According to the number of miners in a given network, the algorithm changes the difficulty level to keep the average block mining time stable.


Monitoring the algorithm's performance is crucial to ensure network stability and avoid hash rate volatility. Excessive time required to mine a block can lead to network fragility or even the cryptocurrency network's division.


The algorithm's assumptions also influence the profitability of mining. Changing the difficulty level can affect the reward for mining a block and the profits miners receive. Without periodic difficulty adjustment, the value of the block reward would collapse. Experienced miners often pay attention to DAA and decide whether or not to undertake mining on these grounds.


These factors make the DAA extremely significant to a cryptocurrency's success. Attentive supervision and ongoing optimizations need to occur to maintain network sustainability and efficiency while sustaining mining profitability for miners.

DAA in Bitcoin

Bitcoin uses a Difficulty Adjustment Algorithm (DAA) based on the 'Median Time Past' concept. This approach considers the time blocks mined in the past, with the difficulty level adjusted every 11 blocks.


As its name suggests, the Median Time Past (MTP) uses the median time when the last 11 blocks were mined to determine whether the current difficulty level should be adjusted or left unchanged.

If the average time to mine a block is longer than 10 minutes, the MTP increases the target value, making it more difficult to mine a new block. However, if it's less than 10 minutes, the algorithm reduces the value, making it easier to mine.

DAA in Ethereum

Before The Merge, Ethereum used a version of the DAA called “Difficulty Bomb”. The Difficulty Bomb progressively raised the difficulty level of ETH mining to push towards Proof-of-Stake, which is more efficient and low-energy than PoW. Changing the difficulty level affected the amount of ETH mined at a given time, with the DAA strongly influencing the economics and stability of ETH.

The increase wasn't significant in the initial stages, but the rate strongly increased in the subsequent stages. The Difficulty Bomb then created a situation where miners had to work exceptionally hard to mine new blocks until it reached a point where this was only possible with PoW.

Summary

The Difficulty Adjustment Algorithm (DAA) is a vital component of cryptocurrency protocols that adjust the difficulty level of mining to maintain a constant average time required to mine a block. Careful monitoring and optimization of the DAA are crucial to ensure the stability and efficiency of the network.

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