Block difficulty in Ethereum runs parallel to the calculation of block difficulty in the Bitcoin blockchain. The difficulty of the block increases if the time between two blocks decreases. This is required to maintain consistent block generation time. The difficulty adjustment algorithm in the Ethereum Homestead release is as follows:

block_diff = parent_diff + parent_diff // 2048 * max(1 - (block_timestamp - parent_timestamp) // 10, -99) + int(2**((block.number // 100000) - 2))

In this algorithm, the difficulty of the block is adjusted based on the block generation time. According to this algorithm, if the time difference between the generation of the parent block and the current block is less than 10 seconds, the difficulty increases. If the time difference is between 10 and 19 seconds, then the difficulty remains same. The difficulty decreases when the time difference between two block's generation is more than 20 seconds. The decrease in difficulty is directly proportional to the time difference.

Apart from the timestamp-based difficulty increment, as per the algorithm, the difficulty increases exponentially after every 100,000 blocks. This is known as the difficulty time bomb, introduced in the Ethereum network, since this will make it very hard to mine on the Ethereum blockchain network. This is the reason why PoS is the proposed consensus mechanism for Ethereum in the near future.