A Death Spiral refers to a potential scenario where a blockchain's functionality grinds to a halt due to a sudden and significant decrease in hash power. This can occur when miners, who are responsible for validating transactions and adding new blocks to the blockchain, leave the network en masse.
For instance, if a more profitable cryptocurrency emerges, miners might switch their resources to mining the new cryptocurrency. This could lead to a sudden drop in hash power for the original blockchain, potentially triggering a death spiral.
The consequence of a death spiral is that the time to mine a new block increases significantly due to the reduced hash power. This can make mining unprofitable, causing even more miners to leave the network. The cycle continues until the blockchain slows to a halt and effectively dies, as no new blocks are being added.
If the time to mine a new block increases from 10 minutes to 1 hour, the number of transactions that can be processed per hour would decrease significantly. This could lead to a backlog of unconfirmed transactions and a significant increase in transaction fees, further discouraging use of the blockchain.
To prevent a death spiral, many blockchains have rules in their difficulty adjustment algorithms. These rules adjust the difficulty of mining new blocks based on the total hash power of the network. If many miners leave and the hash power decreases, the difficulty of mining new blocks is reduced to ensure that the blockchain continues to function.
Bitcoin, for example, adjusts its mining difficulty approximately every two weeks. If the total hash power of the Bitcoin network decreases during this period, the difficulty of mining new blocks will be reduced to ensure that new blocks continue to be added approximately every 10 minutes.
4. risk factors
Certain factors can increase the risk of a death spiral. These include a high initial mining difficulty, a slow difficulty adjustment algorithm, and competition from more profitable cryptocurrencies. Blockchains that rely heavily on a small number of miners are also more vulnerable to death spirals.
A blockchain that relies on a small number of miners is at risk of a death spiral if these miners decide to leave. This is because the loss of these miners could result in a significant decrease in hash power, potentially triggering a death spiral.
* All terms and definitions may update as the Cryptionary improves.