Vertcoin, Litecoin, Megacoin: Everything You Want to Know about Kimoto's Gravity Well (KGW)

After my initial post on Vertcoin last week, the difficulty started to do some interesting things. Mostly, it was reacting to miners jumping on and then off VTC, which resulted in the difficulty spiking up, then dropping down, then up again.... I didn't think we'd see that much variance thanks to the relative difficulty of getting the new VTC cgminer version running, but I was clearly wrong. Thankfully, the developers were already looking at improving the core design of VTC, and as such we have two major changes that are coming at block 26754, which should arrive some time in the next 12-16 hours.

First, the rollout schedule for changing N-Factors has been modified so that the first jump to N=12 (it's currently at N=11 while standard scrypt is N=10) will happen around early 2016. This will allow slightly older GPU hardware (think Radeon 5000 and 6000 series cards) to continue to mine VTC for two more years before it becomes potentially too demanding in terms of memory requirements.

The second change is perhaps more important: instead of the current difficulty adjustments that take place every 2016 blocks (which is what happens with BTC and LTC), VTC will be implementing Kimoto's Gravity Well (KGW). KGW is names after its creator, Dr. Kimoto Chan of Megacoin fame. The problem with difficulty adjustments is that they generally don't happen frequently enough in our modern day of cryptocurrency pool hopping and multi-coin pools. KGW fixes this by adjusting difficulty more or less after every block, avoiding huge spikes in difficulty followed by huge drops in hash rate as miners (and multi-coin pools) jump ship.

Consider the following all-too-real scenario. Coin XYZ has a network hash rate of 1GHash, with a difficulty of 1, and let's say that this coin is highly profitable right now -- maybe returns are 10X higher than mining LTC. People see this coin rise to the top of Coinwarz (or just paying attention to the cryptocurrency network), and suddenly instead of 1GHash XYZ has 50GHash. Now if the creators of the coin were perhaps short-sighted, difficulty might adjust every 2016 blocks, with a target block time of 2.5 minutes (every 3.5 days). Sound familiar?

For a sequence of up to 2016 blocks, instead of 2.5 minutes per block suddenly it's only taking 15 seconds! That won't do at all, and so at the next adjustment point the difficulty jumps from 1 to 50. Okay, normally the maximum adjustment is 4X or 8X, so after 2016 blocks at difficulty 1, there's another 2016 blocks at difficulty 4, then 2016 at difficulty 16, and now we're at difficulty 50. But for the sake of a worst-case scenario, let's just say we jump from difficulty 1 to 50.

Now suddenly the profitability of XYZ has tanked, because where it was 10 times as profitable as LTC at difficulty 1, it's now only 1/5 as profitable at difficulty 50. Everyone jumps off the bandwagon and the network hash rate drops back to 1GHash -- the core miners of XYZ. But now, with only 1GHash remaining on the network, instead of finding a block every 2.5 minutes it starts taking 125 minutes! And the next difficulty adjustment is 2016 blocks away, which instead of being 3.5 days it now requires 175 days. If this actually happened, coin XYZ is now dead, and the only options are to hard fork (an update to the client that changes the difficulty) or to just let the coin go away.

Megacoin and others have had this sort of problem, but instead of just hard coding a new difficulty, the adjustment algorithm was scrapped and KGW was created. Now the difficulty follows the hash rate in a very organic way, so if a bunch of people start mining MEC the difficulty jumps in response, and if they all leave the difficulty drops again. It doesn't happen immediately of course, but it happens within minutes or hours instead of days or weeks (or even months). VTC experience this sort of phenomenon as well, though it was "only" a jump of about 50% difficulty for three rounds straight. That took the coin from potentially earning 0.03 BTC/MH to 0.02 BTC/MH to 0.013 (more or less), and then miners went looking for greener pastures.

So now, starting with a block in the very near future, Vertcoin will be using KGW to avoid future complications. Long-term, I think VTC has a lot of potential thanks to using a different hashing function (Adjustable N-Factor Scrypt). With the addition of KGW to deal with large swings in the number of people mining VTC, it should be even better.

As an interesting aside, check out the recent LTC difficulty/hash rates. LTC went from a high of around 4000 difficulty and everyone suddenly decided to jump ship and go to more profitable coins like DOGE. The result was a huge drop in network hashing speed, so it took much longer than the usual 3.5 days for the next difficulty, which dropped all the way to 3200 or so. That still wasn't enough, apparently, so it took another 4+ days before it dropped to 2400. Suddenly, at 2400 LTC starts looking really tasty again and a bunch of miners hop back on the train, so the next sequence of blocks only takes 2.5 days and the difficulty jumps back to 3300! This is something I think we'll see a lot more going forward, and all other alt-coins better learn fast that long periods of time between difficulty changes are going to be really detrimental.

Why I mention that is that Litecoin is the original scrypt coin, and it did really well for a while, but not it's starting to look a bit rusty. There are still a lot of people mining LTC, and it's profitable, but as an example the total network hash rate on LTC is around 84GHash and DOGE is currently at 91GHash. Other alt-coins are gaining on LTC as well, though some will invariably end up as pump-and-dumps. If the currently second largest cryptocurrency in terms of market capitalization can't really deal with large mining swings, what chance do the newer/smaller coins have?

Getting back to VTC, at present you can trade it on two exchanges, and both are lesser exchanges in my book. First up and slightly better (though terribly sluggish) is CoindedUp, a "tier 3" exchange where the price is currently around 0.0004 BTC per VTC. The other option is Poloniex, a newer and hence "tier 4" exchange, where price is even lower (around 0.0003 BTC per VTC right now). The main Vertcoin page has the difficulty for VTC mining (9.9), and it's around 340 MHash. Keep in mind that most people get 40-50% of their usual scrypt hash rates with VTC, so that's the equivalent of roughly 680-850 MHash.

In terms of profitability, let's say you have a 3x280x rig that does 2.1MHash on scrypt; on VTC you should expect more like 900 KHash. That should produce about 90 VTC per day at current difficulty levels (VTC and LTC have a cool feature that let's you divide your KHash rate by the difficulty to get a decent estimate of your number of coins -- at least until the block reward drops to 25 in a few years), which works out to 0.036 BTC per day using CoinedUp. Compared to scrypt mining, that would mean you're getting around 0.017 BTC per MHash, which is pretty good.

The change to KGW incidentally is scheduled for block 26754, at which point VTC will become much more responsive to mining adjustments. That should be good for the long-term outlook, and potentially I could see VTC catch up to LTC in value. Of course, when the scrypt ASICs arrive, LTC will likely be a big target, and due to its status as the original scrypt coin it has become a medium for exchange, so I don't think VTC can catch LTC value for at least six months to a year, and perhaps never. Even so, a valuation of 0.003 (10% of LTC) is pretty reasonable, and it could become higher. We'll see. For now, I'm holding all the VTC I've mined (though I admit to jumping ship to other options, like Leasing).

BTC: 1GGJUb1gFpydygpeKzd6oFoShLRUSyThV7
LTC: LfCLyykrNFftzpdWejR73hf478ZtBzQ9jE
VTC: VaYNYUUi3amUTKQAQSs9EM4xJyNRyqnoUG