The FUD (fear, uncertainty and doubt) has spread in the crypto-currency market since China announced several bans.
The most recent was the news that the Chinese were supposedly banning bitcoin mining in the country, having already banned the exchanges and ICOs from tokens. As China accounts for about 65% of the network's hashpower, it is understandable that the news generates panic among currency investors.
But is bitcoin really threatened if this new ban comes to fruition?
Mining: giving confidence to the network
Mining has a double function in bitcoin. The first is to allow the processing of the transaction blocks of the network, validating each one of them. The second - and most important - is to ensure the security of transactions, preventing processes such as double spending and fraud. It's mining that makes bitcoin work and be reliable.
Until the beginnings of bitcoin, it was possible to mine using a simple home computer. Satoshi Nakamoto himself mined the first blocks in his machine. However, the increased difficulty in the process has led to improvements in machines, so it is now impossible to mince bitcoins profitably without having a dedicated chip (known as ASIC).
It was in this way that the mining farms were formed, that today they realize in large scale a work that began with a few computers.
The difficulty settings
This increased difficulty is determined by an adjustment of the network itself. Every 2016 blocks - or about two weeks - the network verifies what was the average time it took for the blocks to be approved. As the average time is 10 minutes, the adjustment can be done in two ways:
1) if the blocks took more than 10 minutes to be mined, then the difficulty is decreased to facilitate the process;
2) If the process takes less than 10 minutes, then the difficulty is increased.
In either scenario, the average time will always be adjusted to stay as close to 10 minutes.
Consequences of a ban
Before starting, it should be noted that it is very unlikely that the Chinese government will expand the ban on miners. Weighted community names such as John McAfee and Jihan Wu (owner of AntPool) have already stated that there is no chance of this happening. But let's say the government changes its mind and decides to shut down the miners.
First, let's go to the bad news: the price of bitcoin would fall apart. The news of the loss of almost 70% of network hashrate overnight could not be ignored. Without this, transactions would tend to slow down (fewer miners to validate blocks), network security could be compromised (because there would be fewer "auditors" for transactions) and these would be network structure problems, which would undoubtedly influence in the price of the coin.
However, such effects would only occur as the network adjusted. With China's downfall, the adjustment of difficulty would be adjusted downwards, providing incentive for new people to enter the mining industry due to the low costs.
Remembering that we have several locations where it is possible and feasible to mine bitcoin: Paraguay (cheaper energy from South America), Iceland (low temperatures, which reduces costs with refrigeration) and even Venezuela, with all its repression to the miners, has the advantage of having extremely cheap energy. These countries could become safe havens for companies being evicted in a possible Chinese ban.
In addition, the reduction of the difficulty would open space for markets where the process is currently not financially viable. It is possible that even Brazil could experience good mining conditions, even for a short time.
So I do not think there's any cause for long-term panic over the network capacity. The adjustments made by Satoshi Nakamoto allow it to adjust appropriately to almost any adverse situation, even if late.
Conclusion
China will hardly go so far in its crusade against the crypto-coins. Mining companies have great economic power, and they will certainly fight for their interests.
The most recent was the news that the Chinese were supposedly banning bitcoin mining in the country, having already banned the exchanges and ICOs from tokens. As China accounts for about 65% of the network's hashpower, it is understandable that the news generates panic among currency investors.
But is bitcoin really threatened if this new ban comes to fruition?
Mining: giving confidence to the network
Mining has a double function in bitcoin. The first is to allow the processing of the transaction blocks of the network, validating each one of them. The second - and most important - is to ensure the security of transactions, preventing processes such as double spending and fraud. It's mining that makes bitcoin work and be reliable.
Until the beginnings of bitcoin, it was possible to mine using a simple home computer. Satoshi Nakamoto himself mined the first blocks in his machine. However, the increased difficulty in the process has led to improvements in machines, so it is now impossible to mince bitcoins profitably without having a dedicated chip (known as ASIC).
It was in this way that the mining farms were formed, that today they realize in large scale a work that began with a few computers.
The difficulty settings
This increased difficulty is determined by an adjustment of the network itself. Every 2016 blocks - or about two weeks - the network verifies what was the average time it took for the blocks to be approved. As the average time is 10 minutes, the adjustment can be done in two ways:
1) if the blocks took more than 10 minutes to be mined, then the difficulty is decreased to facilitate the process;
2) If the process takes less than 10 minutes, then the difficulty is increased.
In either scenario, the average time will always be adjusted to stay as close to 10 minutes.
Consequences of a ban
Before starting, it should be noted that it is very unlikely that the Chinese government will expand the ban on miners. Weighted community names such as John McAfee and Jihan Wu (owner of AntPool) have already stated that there is no chance of this happening. But let's say the government changes its mind and decides to shut down the miners.
First, let's go to the bad news: the price of bitcoin would fall apart. The news of the loss of almost 70% of network hashrate overnight could not be ignored. Without this, transactions would tend to slow down (fewer miners to validate blocks), network security could be compromised (because there would be fewer "auditors" for transactions) and these would be network structure problems, which would undoubtedly influence in the price of the coin.
However, such effects would only occur as the network adjusted. With China's downfall, the adjustment of difficulty would be adjusted downwards, providing incentive for new people to enter the mining industry due to the low costs.
Remembering that we have several locations where it is possible and feasible to mine bitcoin: Paraguay (cheaper energy from South America), Iceland (low temperatures, which reduces costs with refrigeration) and even Venezuela, with all its repression to the miners, has the advantage of having extremely cheap energy. These countries could become safe havens for companies being evicted in a possible Chinese ban.
In addition, the reduction of the difficulty would open space for markets where the process is currently not financially viable. It is possible that even Brazil could experience good mining conditions, even for a short time.
So I do not think there's any cause for long-term panic over the network capacity. The adjustments made by Satoshi Nakamoto allow it to adjust appropriately to almost any adverse situation, even if late.
Conclusion
China will hardly go so far in its crusade against the crypto-coins. Mining companies have great economic power, and they will certainly fight for their interests.