Thread by @dilutionproof

1/7 Just published an article at @BitcoinMagazine that uses on-chain data visualizations to explain how #Bitcoin's difficulty adjustment mechanism works & how it relates to hash rate, block intervals, fees & the mempool

This 🧵 summarizes the article 👇

bitcoinmagazine.com/technical/bitc…

2/7 #Bitcoin reaches its 21 million hard cap by starting with a 50 BTC block subsidy and halving that each 210k blocks, until the block subsidy falls away after 33 halvings

#Bitcoin needs block intervals of ~10 min to ensure these halvings are spread out over ~4 years. But why?

3/7 If #Bitcoin had a fixed difficulty, it would have had an adoption threshold if it started high, or quickly run through its supply issuance schedule if it started low

Relatively stable block interval times are needed to spread out miner incentives & ensure stable throughput

4/7 This is achieved via a difficulty adjustment mechanism

When hash rate is high & block intervals short, #Bitcoin increases mining difficulty to slow down production

If hash rate is low & block intervals long, difficulty decreases, incentivizing miners to (re)join the network

5/7 When hash rate grows & blocks are coming in faster than planned, it is relatively easy to get a transaction included a block, easing transaction fee pressure

The opposite is true during a steep hash rate dip - until miners get bailed out by a downward difficulty adjustment

6/7 In #Bitcoin, it is also possible to see what transactions are in the waiting line to get included in a block (the mempool), and what fee they bid to jump the line

During hash rate dips, the waiting line gets more crowded & jumping the line gets more expensive

7/7 When the block subsidy runs out, transaction fees will become the primary source of miner revenue.

Developing a healthy block space market is essential for #Bitcoin's long-term existence. If you'd like to read more on that, check out this article:

https://twitter.com/dilutionproof/status/1387503892821336065