As we know, Bitcoin is a decentralized cryptocurrency without a regulating body overseeing the emission and value of the asset. So how does Bitcoin maintain technical stability? Let's delve into it.
To understand the importance of difficulty for the Bitcoin system, we need to know how the consensus algorithm underlying Bitcoin works. In a decentralized blockchain network, special protocols (most commonly PoW or PoS) are the only way to maintain stability. In the case of Bitcoin, the consensus algorithm is Proof-of-Work (PoW).
Work is a certain amount of computational energy that a miner directs towards mining one Bitcoin. It is here that the difficulty of mining arises, which we will discuss the importance of below.
The hash rate is responsible for this difficulty. Currently, it is significantly higher than in previous years and continues to rise, with news of historical difficulty records constantly appearing in summaries.
As mentioned earlier, Bitcoin is a decentralized currency without an external regulator. However, there is an "internal" regulator in the form of the algorithm that was embedded in the original code by the creator(s) of Bitcoin, Satoshi Nakamoto. This algorithm constantly adjusts the mining difficulty based on the number of miners working in the network to ensure stable block generation rates.
In essence, the mining difficulty can be interpreted as follows: the more participants, the higher the difficulty of mining Bitcoin, and vice versa. Thanks to the dependency on the hash rate and difficulty, Bitcoin ensures stable issuance and avoids uncontrolled block generation.
Mining equipment for cryptocurrency is constantly being updated, with manufacturers offering more powerful equipment and increasing the maximum hash rate of ASIC miners. If the difficulty did not change, the constantly growing hash rate could cause the issuance to skyrocket, greatly reducing the current value of BTC.
The difficulty helps maintain stability amid constantly changing hash rates, which in turn supports the blockchain network and the value of BTC on exchanges and other trading platforms. For crypto investors, this is a good sign as the asset's value may follow trends, but the strong volatility of cryptocurrency offers no guarantees of "correlated growth." Additionally, traditional markets and regulators can also impact the cryptocurrency market.