A quick history of mining difficulty

Bitcoin uses a fairly simple and easy-to-compute hashing algorithm called Double-Sha256. This is part of Bitcoin’s Proof of Work scheme used to maintain the integrity of the cryptocurrency’s Blockchain—the “public ledger” of transactions.

In the beginning, the community had a “gentlemen’s agreement” to hold back on porting the mining algorithm to GPUs because the move beyond CPU mining would trigger the beginning of a rapidly advancing arms race.

Surely enough, it did.

Bitcoin mining difficulty over time, via http://bitcoin.sipa.be/

By mid-2011, GPU mining was well underway as mining difficulty jumped a hundred-fold but it was just the beginning. By 2013, and much pre-order-related drama later, manufacturers started delivering Application-Specific Integrated Circuit devices (ASICs) which were optimized for mining Bitcoin.

Altcoins and delaying the inevitable

The rise of ASICs prompted the birth of several alternative cryptocurrencies (altcoins) based on a hashing algorithm called Scrypt, which some falsely believed to be impossible for ASICs to compute due to its high memory requirements. Litecoin pioneered this change as a fork of Bitcoin that changed the hashing algorithm and reduced the time between blocks in hopes to reduce confirmation time.

This worked for a while, but the inevitable has caught up with the community as ASIC manufacturers started taking pre-orders for Scrypt-optimized mining appliances a few of months ago.

Today, there was a proposal to migrate Litecoin to a new hashing algorithm to delay the mining arms race further.

ASICs work by replacing generic hardware circuitry which can execute arbitrary software instructions with very specific hardware circuitry which can only execute a very specific set of instructions very efficiently.

The idea of the X11 hashing algorithm proposal is to use so many different hashing algorithms that it’s too expensive and difficult to create such a complex hardware circuitry in the short-term. Maybe a year or two?

Incentives of ASIC manufacturers are really driven by economic factors. The more successful Bitcoin and other altcoins become, the more incentive there is to create expensive specialized hardware to mine them.

Some altcoins are trying new approaches, like Peercoin’s Proof of Stake mining—a technique which is not dependent on having a lot of processing power but rather works by paying interest on long-term account balances. The new technique is used in cohort with traditional Proof of Work mining but the developers hope to eventually migrate to Proof of Stake completely.

Dangers of the ASIC industry

Today’s cryptocurrencies rely on a peer-based democratic agreement. If 51% of participating miners agree on a change to the currency’s protocol, then that change becomes the de-facto standard.

This creates a huge vulnerability for new altcoins that enter into an ecosystem where there is a ton of mining power that can be redirected towards them. It’s like a tiny sword-wielding country announcing its sovereignty amidst a huge militarily-aggressive nation with nuclear weapons.

As Bitcoin, Litecoin, and others continue to grow in value and computing power, starting new forks becomes nearly impossible as 51% mining attacks become easy to execute right off the bat. Only existing relatively-mature cryptocurrencies have a diverse enough ecosystem of miners that it’s possible to defend from a singular aggressive mining attacker.

If we don’t start seeing more interesting solutions to the Byzantine Generals Problem which prevents Double Spending within the cryptocurrency’s Blockchain, this advancement in extremely efficient mining may signal the end of new viable altcoins. At least until these appliances dramatically drop in price.