Bitcoin Cash mining

How miners manipulate the difficulty of Bitcoin Cash mining

Over the past 2 weeks, mining Bitcoin Cash has several times become more profitable than mining Bitcoin. At the same time, miners migrate between the two blockchains, which does not benefit the users of either of these coins. Bitcoin Magazine sorted out the technology of the process and possible.

Mining profitability is determined by the size of the block reward (new coins + commissions) and the difficulty. The higher the reward and the lower the difficulty, the more the miner earns.

The difficulty of mining Bitcoin and Bitcoin Cash automatically changes every 2016 blocks. If the release of these 2016 blocks takes more than two weeks, then the difficulty drops, along with which it becomes easier to mine new blocks. If 2016 blocks appear within 2 weeks, then the difficulty increases; hence, it becomes harder to mine new blocks.

Obviously, the difficulty of mining Bitcoin Cash must be significantly lower than the difficulty of mining Bitcoin for miners to be interested in forming the Bitcoin Cash blockchain. If the Bitcoin Cash block reward is 15% of the bitcoin block reward, then the Bitcoin Cash mining difficulty must be 15% of the bitcoin mining difficulty or less. Otherwise, the profitability of Bitcoin mining will be higher, and there will be no reason for miners to allocate their computing power to Bitcoin Cash..

The problem is that sooner or later, the difficulty of mining Bitcoin Cash will increase, while the rewards will remain the same. It is clear that at this point the miners will abandon the Bitcoin Cash blockchain and go to mine bitcoins. To address this issue, the emergency difficulty adjustment (EDA) function has been integrated into Bitcoin Cash. If less than 6 blocks are released in 12 hours, then the difficulty of mining the next 6 blocks will be 20% lower. If miners work together, they can reduce mining difficulty by 75% in one day..

The Bitcoin Cash developers chose the lesser of two evils and allowed the miners to manipulate the complexity, but they are guaranteed not to leave the blockchain in motion. This does not in any way reduce the scale of the problem that needs to be addressed somehow..

Once the difficulty drops to a certain level, miners switch to the Bitcoin Cash blockchain and produce a huge number of blocks before the difficulty rises again in a day or two. After which they again return to Bitcoin mining, waiting for the EDA algorithm to work, and then return to the Bitcoin Cash blockchain, thus working in a certain cycle. The formation of this cycle entails a lot of problems.

First, it negatively affects Bitcoin users. Every time miners jump to the Bitcoin Cash blockchain, the hash rate on the Bitcoin network drops, which means that blocks are released more slowly. As a result, transaction confirmation times and fees increase. The fact that miners are deliberately participating in this cycle means that the problem will not be solved overnight. This situation can persist for weeks or months until Bitcoin Cash developers do something..

In addition, the confirmation time of Bitcoin Cash transactions is constantly jumping. On certain days, transactions are confirmed very quickly, and blocks are found every minute. On other days, new blocks hardly appear, at least for 12 hours, respectively, transactions are not processed.

At the same time, the volume of Bitcoin Cash is growing very quickly: 4 times faster than under normal conditions. Because of this, Bitcoin Cash has a high inflation rate. Bitcoin’s inflation rate is 4% and Bitcoin Cash is 16%. This means that miners earn from BCH holders..

In addition, the decline in the Bitcoin Cash block reward will occur in mid-2018, rather than mid-2020, as expected. And if nothing changes, then the reward will be reduced again in early 2019. Thus, in a little more than a year from now, the Bitcoin Cash block reward will be 3.125 BCH.

This is where the real problems begin. Bitcoin Cash strives to provide the lowest transaction fees or get rid of them altogether, representing this as one of the main advantages of cryptocurrency over Bitcoin. It is not yet clear how the drop in the block reward will affect commissions. It is unlikely that the commissions will be able to compensate for the drop in awards anytime soon. Thus, if the BCH rate relative to BTC does not grow quickly and significantly, miners may lose interest in mining Bitcoin Cash..

Additionally, miners can try to squeeze the best out of Bitcoin Cash in no time. They can start producing 2016 blocks not in two days, as now, but in one. Or faster. At the same time, the block reward will decrease even earlier, after which miners will have to halve the difficulty in order for Bitcoin Cash mining to remain competitive with Bitcoin mining..

As we can see, the urgent EDA difficulty adjustment is a downward spiral that makes Bitcoin Cash extremely vulnerable to a 51% attack. In addition, there are other ways miners can negatively impact the Bitcoin Cash blockchain. For example, they can block an urgent change in difficulty..

One day, the day may come when Bitcoin Cash mining ceases to be profitable, and then miners will stop switching between the two cryptocurrencies, leaving the Bitcoin Cash blockchain forever. The developers are already looking for a solution to this problem, since they cannot count on the rapid growth of BCH relative to BTC.

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