Altcoins face increasingly more challenges as the bar is raised. One challenge of the scrypt derivatives are multipools. Fortunately, there is an obvious solution. Of course, new coins coming out without this gravity well should be ignored completely.

What is the problem exactly? Multipools are pools, which can switch between coins after each round. The can mine some TIPS and switch to WDC a few minutes later. In theory, this enables them to always mine the most profitable coin. In practice it is a little more complex, but I do not want to talk about mining now. The problem for new altcoins is that the network hash power is relatively low. A single multipool joining can spontanously and significantly increase the network hash power. Usually the mining difficulty should increase accordingly, but that only happens after a lot of blocks. This means high profits for the multipool, since blocks are found much faster than intended for a while. As soon as the difficulty adapts, the multipool will switch to another coin and the network hash power plummets. This means blocks will now be found much slower than intended. This creates a vicious circle: The difficulty is so high that it will take a long time until the difficulty decreases again. As it is quite unprofitable to mine in this time, more miners will leave and hashing power plummets even more. For example, out of desperation the Fedoracoin community asked the Dogecoin community, if the would donate some hash power.

The solution is called Kimoto Gravity Well invented for Megacoin. This algorithm can adapt the difficulty much faster. It adapts the difficulty after each block, which means a multipool would have to switch constantly. The challenge of such rapid change is to prevent too much fluctuation of difficulty. As many coins adopt this solution, Kimotos Gravity Well seems to work fine in practice. Exempt from this problem are networks with a big enough hash power that multipools are no danger. This means Litecoin and Dogecoin are safe.

Remember this: A new coin which states something like “Difficulty Retarget 60 Blocks (~1 Hour)” is outdated. It means their developers are unable to provide state of the art quality, so who knows what else they will mess up. Scrypt altcoins without Gravity Well are already obsolete on launch.

Edit 2014-03-12: There are other even better solutions now. For example, check out DigiShield or Temporal Retargeting.