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Bitcoin has slid even further down this weekend, as the cryptography market has lost $ 17 billion in market capitalization. But problems could only be the beginning, as further declines are likely to cause a domino effect in incentives that keep mining networks running.
The danger was initially suggested in a tweet by Colin LeMahieu, the main developer of Nano:
For PoW systems, there is an unfortunate price drop feedback loop. Low price -> low mining earnings -> disable some miners at lower costs -> lower hash rate -> confirmation of longer transactions -> lower price.
– Colin LeMahieu (@ColinLeMahieu) November 20, 2018
"It's not a fatal flaw, even if it's a bad user experience" LeMahieu told Crypto Briefing in an e-mail. "The problem comes when there are big swings in the price". When prices fall suddenly, he explained, transactions slow down.
The most serious consequences of these downward pressures have yet to be felt, given that the mining sector is still profitable in countries with cheaper energy. However, this could change if prices continue to fall and miners start to worry about their electricity bills.
The mining spiral
Here's how falling prices could affect the fundamentals of the Bitcoin network.
Although the mining block is often considered a cryptographic "puzzle", it could best be regarded as a game of darts, with each miner throwing blindly until someone hits a bullseye and claims the prize. Every two weeks, the Bitcoin network makes the goal bigger or smaller, so as to ensure that someone scores about every ten minutes.
These consensus changes work quite smoothly over the long haul, but encounter problems when sudden changes in the number of players occur or the value of the prize. A sudden drop in the value of block premiums could cause some Norwegian or Chinese launchers to drop, leaving only a handful of players aiming for the same tiny target until the next adjustment difficulty.
But a fall in miners can further aggravate problems, as it now takes fourteen or fifteen minutes to extract a ten-minute block. Because the interval between the difficulty settings is measured in blocking times, that two-week period could become three weeks or even longer.
Then prices fall even more, as Bitcoin users and merchants renounce a currency that has inconsistent and unpredictable transaction times, causing further price drops, and more miners to close, thus making transaction times even longer.
These problems are not just theoretical. The initial fork of Bitcoin Cash has been marked by several blocks of hundreds of minutes while the new network has suffered under previous high levels of difficulty.
$ 3,000: The Bitcoin Event Horizon
Despite the most recent sale, mining is still (barely) profitable in some wholesale energy markets. But even these profits are starting to shrink, with reports from some mining plants that sell their ASIC equipment "Per kilo".
The sell-offs will probably continue if Bitcoin prices will pass over $ 3,000 USD – the average bitcoin production price in China, where 74% of all mining occurs.
The hashrates have plummeted since October and the blocking times have consistently exceeded ten minutes in the last month, even after a reduction of difficulty on 17 November.
What's going to happen?
It is not clear enough to what extent the descending cascade could bring the price of Bitcoin. In the long run, of course, hashing power and difficulty levels will both sink into balance, with rewards high enough to support the remaining miners.
But in the short term it could probably deepen and continue the ongoing crypt recession, as problems in the transaction network highlight the uncertainties of cryptocurrency transactions. For those paid in cryptocurrency, or relying on cross-border remittances, it might become more attractive to go with Western Union after all.
This would not be the end of cryptography, or even Bitcoin. But it would cause a lot of remorse for hodler and would justify a little bit. of skepticism towards the ability of cryptocurrency to survive as an economic system.
It would also throw a key on the fundamentals of the network, which only started to assert its viability as a payment system. Depending on how big the wrench is, the engine may take a long time to be resolved.
The author is invested in Bitcoin, Bitcoin Cash and Nano, which are mentioned in this article.
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