Original author: Shirley Xiuxiu, researcher Ou Yi
Original source: Ouyi Research Institute
Foreword: Mining Ecological Changes Caused by the Approach of “Merger”
In mid-July, Ethereum core developer Tim Beiko expected the news that Ethereum’s consensus algorithm would migrate to PoS and the implementation date of the merged upgrade would be September 19, causing shocks in the entire Crypto industry. The merger is to merge the beacon chain run by PoS with the original chain run by PoW, and gradually stop the PoW part of the original chain. This upgrade represents that Ethereum will switch to PoS consensus in the near future. This is a key step in Ethereum’s journey to 2.0, and it has attracted much attention because it involves the transformation of the consensus of the public chain. Among them, the miners are most concerned about this trend, because it is highly related to their vital interests.
The data that can directly reflect the growth and decline of the mining industry is the computing power of Ethereum. According to OKLink data, the current computing power of Ethereum is about 0.88P. Compared with the 1.05P scale in early May, its computing power has shrunk by 16%. This shows that many miners are gradually withdrawing from Ethereum mining. On the other hand, some miners are united and are waiting for the opportunity to cause the fork of Ethereum.
(The average computing power of the entire Ethereum network, the picture comes from OKLink)
So, what are the reasons for the decline of Ethereum’s computing power? What does “merge” have to do with the fork of Ethereum? This report aims to use roughly comprehensive clues and closely linked derivations to disassemble the changes that will occur in the Ethereum mining industry under the background of “merger”. At the beginning, this report will also disassemble in detail the reasons for the recent huge drop in computing power, and the role played by Ethereum’s “merger” in Ethereum 2.0, and discuss the impact of Ethereum’s transition from POS consensus to POW on Ethereum. What is the impact. This report is for informational purposes only and does not constitute any investment advice.
1. Reasons for the decline in the scale of computing power
Ethereum’s hashrate has shrunk by 16% in two months. The reason is that, on the one hand, the subsidence of the industry bubble and the encroachment of competing products have led to a decrease in the project’s demand for ETH, which has further led to a decline in the price of ETH. On the other hand, the established improvement plans such as EIP-1159 and Ethereum 2.0 have changed the income structure of Ethereum miners. From EIP-1159 to the launch of the beacon chain, the POW mining share directly decreased, and then after the “merger” It is expected to gradually change from POW to POS mining. All of them will lead to less profitability of the current Ethereum mining machine, which will jointly contribute to the shrinking of the computing power of Ethereum.
The most direct factor affecting the mining behavior of miners is profitability. According to the mining machine profitability formula:
Profit = mining machine ETH income — mining machine operating cost Profit = current price of ETH * amount of ETH obtained by mining machine — mining machine operating cost
The main factors affecting the profitability of miners are the amount of ETH obtained by the miner, the current price of ETH, and the operating cost of the miner. Since the operating cost of a single mining machine will not change significantly in a period of time, this article will conduct further dismantling analysis from the perspectives of the current price of ETH and the amount of ETH obtained by the mining machine.
1.1 Price drop due to reduced ETH usage
The relationship between supply and demand is the bottom law of economics, and prices are determined by supply and demand. If demand decreases and supply stays the same, prices will fall. Ethereum is positioned as a world computer. When a program needs to run on the Ethereum network, Ethereum needs to allocate enough network resources (computing, storage, bandwidth, etc.) to it, and ETH acts as the fee for the use of Ethereum network resources. From the perspective of supply and demand, the prosperity of the Ethereum network ecology determines the demand for ETH, and the current industry bubble subsides and the market share of competing products has led to the reduction of the Ethereum project’s demand for ETH.
1.1.1 Industry Foam Extrusion
After the DeFi boom in 2020 and the NFT wind in 2021, the industry bubble gradually subsided, applications on the chain tend to shrink, and the frequency of users paying with ETH is greatly reduced.
In other words, the industry tightening due to cyclical reasons has compressed the circulation and application scenarios of ETH. According to the OKLink chart, since March, the single-day destruction of ETH has continued to decline, which has shrunk significantly compared to the previous destruction data, which indirectly reflects the reduction in the number of transactions processed on the Ethereum chain.
(The amount of ETH destroyed, the picture comes from OKLink)
1.1.2 Competitors cannibalize market share
Many public chains are committed to solving the current expansion and performance problems faced by Ethereum. Most of them are compatible with Ethereum code at the smart contract layer, so as to quickly accept Ethereum developers and divert a large number of ETH usage needs. Typical representatives are Solana, Avalanche, and Tron, among others.
According to the comparison data of the public chain TVL, although the pie chart on the left shows that the Ethereum public chain still ranks first with a proportion of 65.42%, the area chart on the right can clearly reflect that the TVL ratio on Ethereum, due to other It has declined due to the cannibalization of competing products.
(Public chain TVL picture, the picture comes from defillama)
1.2 The reduction in the amount of ETH obtained by miners due to the reduction in the share of POW mining rewards
According to the mechanism settings, previously the income of Ethereum miners came from block reward (fixed at 2 ETH) + handling fee, and usually the income brought by block reward is higher than handling fee. Since August 2020, affected by the DeFi and NFT boom, the activity on the Ethereum chain has increased sharply, the gas fee has risen sharply, and the proportion of the fee in the total income of miners has gradually increased.
Due to the frequent congestion events in Ethereum, the high gas fees and waiting for packaged transactions make the user experience very poor, which limits the development of Ethereum to a large extent. The established improvement plans such as EIP-1159 and Ethereum 2.0, while committed to improving the performance of Ethereum, also changed the income structure of Ethereum miners. From EIP-1159 to the “merged” POW mining share is gradually decreasing, up to 0.
1.2.1 EIP-1559 reduces miners’ income
EIP-1559 is an improvement proposal proposed by the Ethereum community to solve the congestion problem in Ethereum. Previously, miners’ revenue came from block rewards and fees. Among them, the block reward is fixed at 2 ETH, and the handling fee is dynamically changed, and all are owned by the miners. After the implementation of EIP-1559, the fee will be destroyed, and the miner’s income will only come from fixed block rewards and tips, which are completely paid by users. Therefore, under the setting of EIP-1559, a part of the miner’s income source will be destroyed, and the profit will be reduced.
(The change of miners’ income before and after EIP-1559, the picture comes from the Internet)
According to previous Coindesk related research reports, after the implementation of EIP-1559, it is roughly estimated that miners’ income will drop by 20% to 35% in the case of zero tip income. According to OKLink data, since the implementation of EIP-1559, the estimated supply of Ethereum is 121,693,647.47 and the actual supply is 119,136,265.16. At present, the Ethereum blockchain has destroyed 2,557,382 ETHs, which are all the reduced income of the original miners.
(ETH supply, the picture comes from OKLink)
1.2.2 Beacon Chain Online
Ethereum 2.0 is an established plan to solve the current network performance bottleneck of Ethereum, and is committed to greatly improving the scalability and performance of the Ethereum network without reducing decentralization. In order to achieve this goal, it has set 4 stages of development. The first three stages adopt the PoW model. The fourth stage will complete the conversion from PoW to PoS, as well as important upgrades such as sharding and replacing EVM by eWASM. It is the final form of Ethereum. The Ethereum 2.0 network improves the scalability and processing capacity of the network by introducing sharding, and the beacon chain is the “command and control center” of the entire Ethereum 2.0 network.
Its latest roadmap shows the beacon chain, the main node of the fourth phase of Ethereum’s upgrade, going live, “merging”, and sharding. At present, the beacon chain has been launched in December 2020. Since then, the beacon chain will operate in the form of PoS. The process of generating blocks in the execution layer is still carried out in the form of PoW by the original chain, and Ethereum has entered a stage of PoW+PoS mixed mining. , paving the way for the entire network to transition to PoS.
The Beacon Chain is launched, the Staking function is enabled, and users can deposit their Ethereum into the Ethereum 2.0 network. People can ensure the decentralization and security of the network by locking (staking) 32 ETH in the software to become validators and participate in validating transactions. In return, stakers will be eligible to receive ETH rewards. This part also leads to less POW mining rewards.
As of July 29, the beacon chain is running smoothly. The data on the chain shows that the beacon chain has about 411,000 nodes, and the cumulative total pledged is about 13.132 million ETH, of which the effective voting participation rate is 99.83%. In addition, since October 15, 2021, the number of nodes and the total amount of pledges have steadily increased, and the daily income of validators has also been growing slowly. At present, the daily reward amount of the beacon chain is about 110,000 ETH.
(Beacon chain block data, the picture comes from https://beaconscan.com/)
1.2.3 “Merger” is approaching, and will gradually be converted to POS mining
According to Buterin, Ethereum’s planned “merger” in the third quarter of 2022 will merge the consensus layer (PoS beacon chain) with the execution layer (PoW original chain), and gradually stop the PoW part of the original chain , this upgrade represents the official switch of Ethereum to PoS consensus in bu jbu ji. Under the PoS mechanism, the Ethereum revenue that miners can obtain will be related to the proportion of their pledged ETH to the ETH pledged in the entire network, and it is no longer necessary to purchase hardware such as mining machines. This means that Ethereum PoW mining will withdraw from the stage of history soon, and it also brings a certain pressure to the miners who are engaged in PoW mining.
The conversion of Ethereum POW to POS mining is a gradual process. The merge difficulty bomb in September is the beginning of the merger. The specific process can be briefly summarized as follows:
Difficulty bomb starts -> block production time is prolonged -> miners gradually leave -> network computing power drops -> TTD is set -> it is difficult to reach the final goal
Degree -> switch from PoW to PoS (to achieve mainnet merger)
After that, under the PoS mechanism, the Ethereum revenue that miners can obtain will be related to the ratio of their pledged ETH to the entire network’s ETH pledge, and it is no longer necessary to purchase hardware such as mining machines. This means that Ethereum PoW mining will withdraw from the stage of history soon, and it also brings a certain pressure to the miners who are engaged in PoW mining.
2. The impact of PoW to PoS mining
According to the previous analysis, this Ethereum merger represents that Ethereum will switch to PoS consensus in the near future, which will have a huge impact on the Ethereum mining industry. The main impact of PoW to PoS mining on Ethereum mining is reflected in the following four aspects: hardware equipment, total computing power, interest pattern, and development direction. Let’s talk about them one by one:
2.1 Mining hardware equipment — hardware providers such as graphics cards shrink shipments
The most upstream hardware providers in the industry have benefited a lot from the POW mining of Ethereum. Last year, Nvidia CEO Jensen Huang revealed that Nvidia achieved a profit of $155 million within three months after launching the Ethereum mining processor; last year’s Q2 Nvidia graphics card mining revenue reached $266 million, a record high. Nvidia has previously publicly acknowledged that Ethereum’s shift from POW to POS is a potential threat to demand for graphics card (GPU) products. On May 20, a week before the release of the Q1 financial report, chip giant Nvidia announced that it would slow down its recruitment, which aroused special attention and key interpretations of practitioners in the encryption circle. Machine demand plummeted.
As a leading player in the global high-end electronic hardware equipment suppliers, and the most upstream component manufacturer of mining equipment in the crypto circle, NVIDIA will still reduce its shipment forecast due to the fall in the market and the conversion of Ethereum to POS, let alone There are other large and small players in the upper, middle and lower reaches of the industrial chain. Of course, the conversion of Ethereum to POS will have a greater impact on them, because after all, compared with NVIDIA, computing power mining is their “pillar industry”, or even a bottom line. Therefore, it can be seen that with the intensification of the market downturn and the implementation of POS mining, the global shipments of physical mining equipment and its components will decline in the short term.
2.2 The main body of the mining industry — POW miners move elsewhere
All market entities are born for profit, which is particularly evident in the encryption circle, especially the mining circle. After Ethereum is converted from P0W to POS mining, the original POW miners will no longer be able to participate in Ethereum mining, and the usage of their existing ETH mining machines is worthy of attention. Ethereum POW computing power plays a pivotal role in the entire crypto mining track and accounts for a large proportion. Once transferred to POS, the original POW computing power may flood into other mining markets like a smashing market, which may have a huge impact on the existing mining track, and reconstruct the hardware mining of the entire encryption circle to a certain extent. The interest pattern of the mine track.
2.2.1 The original chain fork
In the face of the redistribution of mining benefits, miners may not follow the Ethereum community to complete the PoS consensus mechanism conversion when the Ethereum 2.0 merges and upgrades from the perspective of interest. As a result, Ethereum may fork into two chains with POW and POS mechanisms at the merge node.
2.2.2 Turn to ETC mining
The hard fork of the DAO event caused the Ethereum community to split into Ethereum and Ethereum Classic, and the Token was also divided into two — ETH and ETC. At present, the two algorithms are not the same, and ETH ASIC miners may require firmware updates to be compatible with the ETC mining algorithm ETCHash. However, there is no technical barrier between the two. The existing ETH ASIC miners can mine ETC only by upgrading the firmware of the mining machine. The graphics card does not need to be upgraded, and can mine ETC directly. The switching cost is very low.（https://twitter.com/uniswap12 ）
