Towards the end of 2018, the whole cryptocurrency market was consumed with thought of Bitcoin entering a death spiral. This first set its base in the space when a professor from Santa Clara University, Atulya Sarin posted an article about how Bitcoin is entering a death spiral and declared that the coin is going to zero. This conclusion by the Professor was entirely based on the price of Bitcoin plunging below the mining cost.
As per the Bitcoin fundamentals, the mining difficulty will be readjusted once every 2016 blocks are mined, approximately two weeks. If the Bitcoin hash power and miners participating see a massive drop, then the time taken for the issuance of a block would also be prolonged from the current 10 minutes, which would, in turn, prolong the time taken to adjust the mining difficulty. This will eventually result in mining becoming less profitable and several miners exiting the space, with this having a direct effect on the hash rate and the cycle repeating and thereby creating a death spiral.
In the latest episode of Magical Crypto Friends, Samson Mow, CSO of Blockstream, Riccardo Spagni, lead developer of Monero, Charlie Lee, the creator of Litecoin, and Whale Panda, discussed the death spiral phenomenon.
Whale Panda started by stating that the “whole point” of the difficulty adjustment is to avoid a death spiral phenomenon from taking place. This was followed by Mow stating that it is Bitcoin’s difficulty adjustment in particular as it is much slower in comparison to Bitcoin Cash’s Emergency Difficulty Adjustment [EDA], adding that this “super fast” difficulty adjustment could trigger a death spiral. Succeeding this, Whale Panda stated that even if mining does slow down in the end, the fees will eventually take the uptrend and will become “more profitable again to mine”.
Riccardo Spagni aka fluffy pony said:
“It’s self-corrective. but the other thing is there’s a limit to the amount of adjustment that can happen in each adjustment cycle. so it, very relatively speaking, adapts slowly, which means it can compensate to price volatility a lot better than some of the quick adapting algorithms that try and track difficulty a lot more closer”
Mow added that it is “harder to game a slow-moving thing”. Spagni further stated:
“The other thing that people forget is that if a miner exits […] [they’re going to] sell that equipment to try and recoup some money and that equipment might not be sold to a single player, might be distributed amongst 100 or 200 miners […] so it’s it’s not always like – exit the system and then the difficulty necessarily goes down indefinitely it could go it down and when that equipment comes back off back into service within a week or two it’s back up”
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