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The astounding growth of the bitcoin network provides increased security as well as an impressive metric for the rate of global bitcoin adoption. Incidentally, this is also leading to long-term economic implications that can only be undone with a sustained trend reversal or an update to the bitcoin protocol.
In particular, the network is currently 3% ahead of its targeted block discovery schedule, meaning bitcoins are being issued substantially faster than most would expect. As of the writing of this article, block 238,346 was discovered when we should be closer to 231,000 if the originally-outlined plan were more closely followed.
New blocks are found by miners when they find an acceptable hash. Finding the correct hash is merely a matter of probability – the more guesses a miner computes, the higher the chance they will find an acceptable one. The difficulty of finding an acceptable hash increases as more computing power is added, with the goal of averaging 10 minutes between blocks. If that plan were followed, issuance would track the commonly-referenced graph shown at right.
Though the difficulty is adjusted in an attempt to maintain the targeted 10 minute block discovery time, this only occurs every 2016 blocks by using the time required to mine the previous 2016 blocks as a reference. While nobly designed, the reality is that computational power is being added at such a significant rate that the network regularly underestimates its adjustments, leading to an average time between blocks so far in 2013 of approximately 8 minutes and 55 seconds – 11% faster than expected.
The average time between blocks has varied significantly since bitcoin’s inception. As the chart below shows, sustained growth in computational power has lead to an average block discovery time well below 10 minutes for the last three years.
Cumulatively, the effect of this has been significant. At the end of 2009, one year after bitcoin’s inception, there was actually a large deficit of total blocks discovered relative to the outlined plan due to the floor in the difficulty level. Since then, every year has seen a notable surplus as more computing power is added to the network. At the end of 2011 we were a cumulative 1.5% ahead of schedule. In 2012 another 0.6% was added to the cumulative differential, and in 2013 YTD another 1% has already been added. At this rate, bitcoin block discovery will be a cumulative 4% ahead of schedule by the end of the year.
If the network adjusts difficulty to average 10 minutes based on the speed of discovery of the past 2016 blocks, we’re almost guaranteed to continue seeing average discovery time below 10 minutes as long as computing power continues to grow. In addition to fundamental forward projections for technology like Moore’s Law, there are already known surges in network computing power in the pipeline. With Avalon ASICs now shipping, 10,000 USB miners from ASICMiner currently in production, and Butterfly Labs supposedly, maybe, eventually delivering thousands of backordered units, there’s strong reason to believe this trend will continue.
The last new BTC will be issued around block 7,000,000. If global adoption and the power of the network continue to increase at the current rate, block 7,000,000 will be discovered around 2085, or 55 years ahead of the commonly estimated 2140 time frame. The chart below shows what would happen if the bitcoin network pulled 1% further ahead of schedule every year (i.e. 10 years forward is 10% further ahead of schedule) – as has been the trend since 2010.
Another way to look at this would be to assume a constant number of blocks discovered per year. Given that an average of around 60K blocks have been discovered per year since 2010, we also looked at what that would look like projected forward. In this case, the final BTC issued is pushed back to 2125, much further but still well ahead of schedule.
Either way, since the number of new bitcoins issued per block reduces by half every 210,000 blocks, BTC issuance is naturally front-loaded. Pushing up the block schedule only amplifies that effect. As of today, there have been 11.2M BTC issued, nearly 2% more than scheduled. It looks like the Fed and ECB aren’t the only ones trigger-happy when it comes to currency printing.
The officially outlined schedule was always meant as an approximation – printing ahead of that schedule is not necessarily positive or negative for bitcoin, but it should be watched carefully, particularly when the effect is as dramatic as the last few years have proven. An accelerated money supply should register near- and medium-term inflationary pressure on bitcoin’s exchange rate, while also pushing forward the end of the issuance period and related long-term deflation.