What's the relationship between Bitcoin's hashrate and Bitcoin's issuance rate?
- Inflation rate is tied to hashrate fluctuations.
- Difficulty adjustment makes sure the block interval is at an average of ten minutes.
- When the hashrate drops dramatically, the block interval slows down causing reduced inflation.
Bitcoin doesn't just mine a static number of Bitcoin per hour, it is calculated in each block to mine a certain number of Bitcoin. But the blocks can come faster and slower depending on the fluctuation in hashrate.
Bitcoin is currently mining 6.25 bitcoin per block. If new blocks come every ten minutes (600 seconds) then this translates out to around 1.8% inflation currently. But that exact inflation percentage changes periodically based on short term fluctuations in hashrate.
The below chartshows some correlated drops in Bitcoin's inflation rate(1) and hashrate(3). It is safe to say that if there is a quick drop in the hashrate this translates to a short lived drop in inflation. But why is this happening?
Simply put, the difficulty adjustment keeps the number of blocks mined to an average rate of 10 minutes(600 sec). But this difficulty adjustment only adjusts every 2016 block. So as the hasrate drops dramatically in one difficulty period, you could see a significant rise in the block interval(3). The block interval is the number of seconds between each block.
When ASICs were first being deployed in 2013, there was a quick and consistent rise in hashrate. It was consistently more hashrate than the difficulty adjustment could handle so it lead to a lower in the average block interval, eventually slowing down enough for the block interval to adjust.
Over the long-run this doesn't affect bitcoin’s inflation too much outside the short term inflation rate and after the next halving, bitcoin’s inflation rate will be lower than 1%. There are still only 21M Bitcoin and as of December 2021, 90% of all bitcoins have been mined, only getting more scarce.