Ethereum’s Difficulty Bomb Kicks In, Supply Falls, Block Times Rise

The ethereum network is suddenly producing less eth than just a few weeks ago, with block rewards to miners down from circa 13,500 eth a day to ◊12,500.

Looked in more detail, according to etherscan data this drop is not because of more uncles (orphans), but because the block reward itself has fallen from circa 13,000 eth to ◊11,800.

As can be seen ethereum’s block rewards were far higher in 2016 at ◊30,000. That was reduced in late 2017 to ◊20,000 through a network upgrade, and again earlier this year to ◊14,000.

There has been no recent network upgrade, however, to affect issuance, and yet block rewards have fallen with block times up too while the hashrate is increasing.

Block times are not up that much (circa one second), but this chart probably makes it obvious what’s going on. The difficulty bomb has now kicked in.

The difficulty bomb, as you might know, is a protocol level algorithm that increases the amount of computational power required to find a block after a set date or block number.

The big spike there in 2017 saw the difficulty bomb kick-in around March-April of that year, with it rising from 14 seconds a block to about 30 seconds in October, that being six months.

For the second time it kicked in around December 2018, it reached 20 seconds in February, or just two months of the difficulty bomb running.

That’s when it was delayed for another year, and now a year later it’s starting again, this time rising from about 13 seconds and at one point even as low as 12 seconds .

At the beginning, the difficulty bomb starts very slowly, but eventually it becomes exponential to the point it is pretty much impossible to find a block.

From above, we can expect it to take around six months to reach 30 seconds, that being around May, and then maybe not quite six months but by autumn next year it may near 1 minute per block.

At 30 seconds, the block reward slightly more than halves. At 1 minute it halves again, so there would be just 4,000 eth a day.

Coincidentally, that’s the 2/3rd reduction Vitalik Buterin, ethereum’s co-founder, has suggested for the end of next year.

So it may be the case the difficulty bomb this time is not delayed at all. That would give miners quite an incentive to not only stay out of any interference with development – like ProgPoW suggestions – but to proactively support ethereum 2.0 perhaps even with funding so that they can get out ETH2 in time and thus not see their issuance fall more than necessary.

That’s especially the case as although the ethereum network is to have a technical upgrade in a few weeks, there will be no delay of the difficulty bomb this time with no suggested proposal to delay it.

Meaning it is likely there won’t be a delay for at least six months as a new upgrade necessarily takes time. By then, hopefully we’d be near the launch of decentralized checkpoints from the Proof of Stake (PoS) Beacon Chain. So presumably there wouldn’t be much point to delaying the difficulty bomb prior to that being implemented or something like it.

Very interestingly, ethereum’s ratio against bitcoin began rising for the first time in two years around roughly just when about block times started rising a little bit, and block rewards started falling.

The difficulty bomb algorithm is of course public knowledge, although not quite something at the forefront of everyone’s mind, so there may have been a bit of front-running in September, but generally it coincides.

The reason for it is obvious, there’s less supply and presuming demand remains constant, then ethereum’s value is higher all else being equal.

Here, not only is there less supply, but there’s the expectation there will be less supply from now on pending any proposal to change the protocol.

Thus if you’re sophisticated, presumably you’d try and price it in, hence perhaps this maintained increase in the ratio recently.

From miners’ point of view, initially you’d think this fall in block rewards is not any good, but that’s only if they care about the amount of eth they get, instead of the amount of dollars.

If it’s about eth, then that conflicts with holders who’d rather not see dilution and maybe more importantly, who’d rather not see miners’ concentration in staking too.

If instead it’s about dollars, then there wouldn’t necessarily be any divergence because a fall in supply should lead to a rise in its value against the dollar, or if demand falls, then to a lesser fall of its value against the dollar.

So rational thinking from miners should lead to them not minding this difficulty bomb, but the other effect of it is less capacity because the amount of data in a block is limited, and such blocks will be rarer.

However, the amount of data in a block is limited to the current level precisely because blocks are more frequent. If they become rarer, then the limit can be increased proportionally to keep the amount of data at the same rate regardless of block times.

Meaning if the difficulty bomb is allowed to run and if miners at least maintain the current amount of data accordingly – or preferably at least double it as bitcoin has – then the only difference here would be how long it takes for a transaction to be included in a block.

In bitcoin, where the market cap is 8x that of eth, they wait ten minutes for a block confirmation. One minute in ethereum would probably be very much manageable, especially as it’s temporary.

Ethereum obviously has dapps and the like, but they can try BLS rollups , zk-rollups, or the long list of potential tools given by Buterin:

Meaning there’s an argument to be made to just let the difficulty bomb run as ethereum nears the Proof of Stake transition, at least for some months.

Maybe card gamers would have to wait a bit more in that case, but arguably gamer devs or in dexes or other dapps would in that case try and be more efficient and improve the user interface as realistically there’s hardly much of a difference between 15 seconds and 60 seconds, so they should be doing that anyway.

Maybe miners don’t play rational and just keep the network clogged – as arguably they have to the point in data eth’s capacity is lower than even bitcoin – but in that case at least we’d know what sort of miners we have and a few months of a bit of inconvenience in a network realistically hardly used for the prize of greater certainty regarding PoS timely rollout, is perhaps worth it.

Meaning there would have to be some strong arguments to delay the difficulty bomb now as it is difficult to see why the network should consent to it, and if that’s the case, then ethereum may well have a halvening before bitcoin.

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