When mining, users guess at the solution to a puzzle that the protocol sets out. The puzzle is designed so that it takes a fixed amount of time for miners to solve it (10-20 seconds in Ethereum). It stands to reason, however, that the more users guessing, the faster they’ll find the solution. To remedy this, the protocol increases the difficulty of the puzzle when hashing power is increased.
Ethereum uses this style of consensus algorithm, but it also includes a difficulty bomb, which increases the overall difficulty at specified block heights. In turn, such an increase decreases the profitability of mining – this is the intended effect. As time goes on, it becomes exponentially harder to generate blocks, and rational miners will abandon the practice. Ultimately, the difficulty bomb leads to the so-called ‘Ice Age,’ where it becomes so difficult to mine that the chain is effectively frozen.
This mechanism is designed to eliminate Proof of Work, in line with Ethereum’s current roadmap. The network is expected to transition to staking in the future – the difficulty bomb seeks to dissuade anyone from continuing to generate blocks on the old chain. Amongst other things, this could prevent the chain from being split into two contentious forks.
It has a secondary effect of preventing the stagnation of development on the Ethereum chain, as developers must frequently upgrade it to prevent it from becoming unusable.