Bitcoin recently gained a new competitor: Bitcoin Cash. Bitcoin Cash is a fork of Bitcoin which boasts a configurable maximum block size, currently set to 8MB. This is an increase from Bitcoin’s maximum block size, which is only 1MB. With this fork, a few terms have been being thrown around, including the “Bitcoin Death Spiral”.
A few other basic terms
Before I go further, here’s some explanations for a few terms you’ll see throughout this article.
Bitcoin Cash has what’s called the “Emergency Difficulty Adjustment, or “EDA”: difficulty adjusts downwards if it takes longer than 12 hours to mine 6 consecutive blocks.
Bitcoin and Bitcoin Cash both have the “2016DA”: Every 2016 blocks, if it took longer than 14 days to mine those blocks, difficulty adjusts downward so the next 2016 blocks will take only 14 days. The reverse is also true, adjusting upwards if it took less than 14 days.
Difficulty adjustments and mining profitability
On Sunday, August 20th at around 12am EST, Bitcoin Cash had it’s 2016DA and difficulty adjusted downward significantly. The drop in difficulty was likely the cause of the price spike that happened over the days before. A lot of miners have been switching over because of it, which is causing Bitcoin Cash to cruise straight through the next 2016 blocks very quickly. Instead of reaching it in 14 days as we’re supposed to, we’re going to reach it in about 2. We’re going to see a massive spike in mining difficulty.
When this difficulty spike happens, obviously some miners are going to switch back to Bitcoin for profitability, although some powerful miners have already demonstrated a loyalty to Bitcoin Cash by mining at loss of opportunity cost. However, we can already see that mining Bitcoin Cash causes Bitcoin’s mempool to fill up (currently 57,000 transactions, 76MB, which would take 76 blocks to fill, excluding the transactions that would take place while those 76 blocks are mined.) Miners switching back will clear up the mempool temporarily. However, without those miners we’ll more than likely see Bitcoin Cash’s EDAs to activate, dropping mining difficulty again. These EDAs will again make it more easier to mine but they won’t be as severe as last time.
The miners that stay will push us to the next 2016DA. It will take less time to get to that 2016DA than the last time, so the difficulty will still drop though not as significantly. Since the difficulty drop won’t be as significant, we won’t cruise through the next 2016 blocks so quickly, which will leave more time for the BTC mempool to fill up before the difficulty raises again.
Okay, so what is the Bitcoin Death Spiral?
This will “spiral” back and forth, each time the BCH 2016DA taking longer and longer to reach until Bitcoin Cash is consistently at the 10 minute block interval. Each time, Bitcoin’s mempool will fill up more and more. This creates a lack of faith in BTC and it’s value. This is the Bitcoin Death Spiral.
What do you think? Is the Bitcoin Death Spiral something to worry about?