A potential scenario where a blockchain's functionality grinds to a halt due to a sudden decrease in hash power.
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. The term originates from aviation but aptly describes the self-reinforcing negative feedback loop that can occur in proof-of-work blockchain networks.
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. This was a concern during the 2017 Bitcoin/Bitcoin Cash fork, when mining profitability between the chains fluctuated dramatically.
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. Additionally, transaction confirmation times lengthen dramatically, fees may increase as users compete for limited block space, and the cryptocurrency's market value often plummets as user confidence erodes.
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. Users might abandon the network entirely, causing further price decline and miner exodus.
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. Some networks implement more responsive difficulty adjustment algorithms to better handle hash rate volatility.
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. Bitcoin Cash improved upon this with its Emergency Difficulty Adjustment (EDA) and later the Difficulty Adjustment Algorithm (DAA), which adjusts difficulty more frequently to maintain stable block times even during rapid hash power fluctuations.
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. Additionally, chains with identical mining algorithms face particular risk, as miners can easily switch between them without changing hardware.
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. This risk is particularly relevant for smaller chains that share the SHA-256 algorithm with Bitcoin and Bitcoin Cash, as miners can instantly redirect their hash power to whichever chain is most profitable at any moment.
While complete death spirals are rare in established cryptocurrencies, there have been several close calls and instances of extreme mining instability. These events provide valuable lessons about blockchain resilience and the importance of well-designed difficulty adjustment algorithms.
Following the Bitcoin Cash fork from Bitcoin in 2017, there were periods of mining instability as miners switched between chains based on profitability. Bitcoin Cash eventually implemented an improved difficulty adjustment algorithm to stabilize block times and prevent potential death spiral scenarios. This has become an industry standard approach, with many newer cryptocurrencies implementing similar responsive difficulty adjustments.
All terms and definitions may update as the Cryptionary improves.