After the "crisis" of Bitcoin mining, Ethereum miners also face elimination

This article is sourced from decrypt, originally written by Jeff Benson, and compiled by Moni from Odaily 星球日报.

The upcoming proof-of-stake network will eliminate Ethereum miners, but that doesn't mean they will leave.

Like Bitcoin, Ethereum currently requires a significant amount of energy for "mining" to secure the network while creating and distributing new digital currency. Globally, there are many Ethereum miners who also need to purchase expensive mining machines to solve computational problems and earn the native cryptocurrency of the Ethereum network, ETH. However, if all goes well, Ethereum will undergo a major upgrade in 2022, fundamentally changing the way the network operates and how ETH tokens are created— in other words, Ethereum mining will become a thing of the past.

So, what will happen to the miners currently mining on the Ethereum blockchain?

"Proof"

The Bitcoin white paper was officially released in 2008, showcasing a new way to secure decentralized network remittances using cryptographic concepts, which we now know as: Proof of Work.

The Ethereum blockchain was officially launched in 2015, and like Bitcoin, it uses the same Proof of Work consensus protocol. In short, Proof of Work is a method to ensure that computers reach consensus on the transaction and database state at any given time. Under this consensus mechanism, the network is protected from potential double-spending or multiple-spending attacks.

Although Proof of Work is a cryptographic algorithm, the Ethereum Foundation explains that "mining itself is 'work,' which is the act of adding valid blocks to the blockchain." Of course, the Proof of Work algorithm, which uses a large amount of computational power, consumes a significant amount of electricity, which has become the main reason for environmental organizations to criticize cryptocurrencies.

Frankly, Ethereum core developers have been working to transition the network consensus protocol from Proof of Work (PoW) to Proof of Stake (PoS), a new consensus mechanism that requires very little electricity to maintain network operations while continuing to support larger-scale transactions. The upgraded Ethereum network is referred to as Ethereum 2.0 (ETH 2.0), and network security will be maintained through staking ETH tokens, ensuring that attacks can be effectively prevented, as any malicious actors will have their staked tokens confiscated.

According to Ethereum core developer Tim Beiko, when Ethereum 2.0 officially launches, the currently allowed Proof of Work Ethereum blockchain will "merge" into the new Proof of Stake blockchain, a process that may occur before the end of 2021—meaning that all mining activities on the Ethereum network should be shut down by the end of this year. Tim Beiko stated:

"Miners should prepare in advance before the Ethereum network upgrades to 2.0 to ensure they do not incur losses."

But the question is, what will happen to the current miners after the Ethereum 2.0 upgrade?

"Merge"

Michael Carter is a cryptocurrency miner and the host of the YouTube crypto channel BitsBeTrippin. He predicts that there will not be a significant decline in the Ethereum mining market before the "merge" of the Ethereum Proof of Work network and the Proof of Stake mining.

However, to be safe, Michael Carter has put considerable effort into estimating profit margins, analyzing at least 10 different scenarios to calculate the profitability of Ethereum mining in the coming months, such as high prices and high trading volumes, high prices and low trading volumes, and so on.

Although Michael Carter is a supporter of native Ethereum, he states that he is prepared to respond to the Ethereum 2.0 upgrade—"If another chain becomes more profitable, I will switch my mining resources to the new chain."

Of course, Michael Carter is not in a hurry to switch networks. For those Ethereum miners with considerable cash flow, they can actually play a "long game," continuing to hold ETH and waiting for prices to rise.

Once Ethereum 1.0 and Ethereum 2.0 complete their merge, Michael Carter believes that current Ethereum miners will likely switch to other blockchains. There are now two simple options: one is Ethereum Classic, and the other is Ravencoin:

Ethereum Classic is another chain that emerged from the Ethereum network hard fork in 2016. As of June 22, Ethereum Classic's market capitalization is approximately $4.7 billion. Ravencoin is the native asset of a network used for transferring digital and tangible assets, and as of June 22, Ravencoin's market capitalization is approximately $436 million, with a token price of around $0.05.

Whether it is Ravencoin or Ethereum Classic, neither is as well-known as the Ethereum blockchain and is not widely used in the crypto community. But that’s okay, because the most important thing is that both of these digital currency blockchain networks can be mined using computational devices with graphics processing units (GPUs), just like Ethereum 1.0.

However, in Michael Carter's view, the future for miners using application-specific integrated circuit (ASIC) mining machines may be more challenging, because although ASIC miners have more powerful computing capabilities, Ethereum has already used algorithms to take away most of the mining advantages of such machines. Moreover, once Ethereum 2.0 completes its upgrade, they will not be able to switch to other networks to continue mining like GPU miners.

As one Reddit user commented:

"ASIC miners will become useless in the future."

"Warning"

Unlike Michael Carter and other miners who are ready to "jump ship" after the Ethereum 2.0 upgrade, not all Ethereum miners are satisfied with the current upgrade arrangements.

In July of this year, the Ethereum network will undergo a significant update, which is expected to bring major changes to how miners are paid (and the amount paid). This update will incorporate Ethereum Improvement Proposal EIP-1559 in the so-called "London" hard fork—after this proposal is deployed, the Ethereum blockchain will automatically calculate the amount of gas users pay (the network fee for Ethereum), and then… destroy it.

In other words, in the future, ETH transaction fees will no longer be paid to miners but will be sent to an inaccessible address, ultimately being destroyed to ashes… This means that after the completion of the "London" hard fork, Ethereum miners will only receive newly minted ETH as rewards. While supporters of EIP-1559 believe that this upgrade will ultimately benefit everyone on the network (as reduced supply will increase demand, thereby potentially raising ETH prices), not all miners share this view—undoubtedly, where there are supporters, there are also detractors.

EIP-1559 sets an unofficial "game clock" for the integration of the Ethereum network, as it also represents the point in time when miners may begin to abandon the Ethereum network (in any case, the Ethereum network may abandon mining in a few months). However, if miners leave Ethereum now, they may miss the last opportunity to "make a fortune."

Ethereum core developer Tim Beiko explains:

"If miners leave the network before EIP-1559 is deployed to the Ethereum blockchain, the overall network hash rate will decrease, and other miners will earn more profits. In other words, the fewer miners there are, the easier it will be for those who remain to earn ETH."

Given that Ethereum must conduct distributed "mining" to ensure network security, a mass exodus of miners could pose certain risks to the blockchain.

Tim Beiko continued:

"Before EIP-1559 is deployed to the Ethereum blockchain, we actually need some miners, but if they gradually leave the network before the upgrade, it could pose security risks to the current network. However, in reality, most miners have already invested a significant amount of cost in infrastructure such as mining machines, and considering that miners have incurred considerable fixed costs, they should be motivated to mine until the last block."

Although as the deployment of EIP-1559 to the Ethereum blockchain approaches, some miners with outdated mining equipment may "jump ship," there will still be miners who persist on the Ethereum network. Regarding this phenomenon, Compass Mining's Will Foxley stated:

"Many people believe that the deployment of EIP-1559 to the Ethereum network will lead to miners leaving, but at least before the deployment, the Ethereum blockchain still attracts a large number of miners to mine, as they want to earn as much ETH as possible before the merge, knowing that once EIP-1559 is fully deployed, ETH prices will rise."

Are you ready?

Michael Carter emphasizes:

"Everyone knows that Ethereum will transition to a proof-of-stake consensus algorithm, but only those who are prepared will be able to cope with this change. Some mining pools started preparing for the changes in the Ethereum network years ago, such as F2Pool, the second-largest mining pool for Ethereum, which has already set up an ETH 2.0 validator pool."

Perhaps coincidentally, some mining pools announced their support for EIP-1559 as early as the beginning of this year, indicating that there are already market participants who clearly understand that once this Ethereum improvement proposal is fully deployed, the price of ETH will rise over time.

From past experiences, any blockchain network needs to stand alongside its core users and contributors; otherwise, it will pay a hefty price, as seen in the previous TheDAO hard fork. The good news is that key developers and core contributors have been actively building Ethereum, helping it thrive and develop to its current state.

However, there are dissenting voices in the Ethereum community regarding the EIP-1559 proposal, with SparkPool being one of them. Currently, SparkPool controls nearly a quarter of Ethereum's hash rate, and they believe that the EIP-1559 proposal is "wealth distribution and the tyranny of the majority." However, Compass Mining's Will Foxley believes that SparkPool's opposition to the deployment of EIP-1559 may not succeed:

"I think they are powerless, and I believe they have realized this."

However, theoretically, for ETH miners dissatisfied with the EIP-1559 proposal, they also have countermeasures, such as creating another Ethereum fork, like "Ethereum Classic 2.0," insisting on not transitioning to a proof-of-stake consensus algorithm.

The Ethereum protocol will eventually change, and miners on the PoW network will face elimination. What the final outcome will be may only be answered by time.