How will “mergers” transform Ethereum mining?

Foreword: V God re- raised the merger of Ethereum , causing speculation about the mining industry

On May 20, Hong Kong time, the day of the ETH Shanghai Cloud Summit, Vitalik Buterin, the founder of Ethereum, claimed on his personal Twitter that he was no longer a “billionaire”. Buterin also said at the summit on the same day that “Ethereum 2.0 is undergoing final network testing… The merger may take place as early as August”, and he was correcting his past “negative value of contributions to the world”.

Whether V’s rich status is not guaranteed is more of an interesting talk about ordinary users’ investment operations. What can really cause industry shocks is the “Ethereum 2.0” and “merger test” he mentioned at the same time. The miners who are most concerned about this trend may be the miners because it is highly related to their vital interests.

Subversive changes in core technologies and mechanisms will surely be transmitted to the most upstream of the crypto industry chain, that is, the mining industry that miners depend on. This report aims to use a moderate length, roughly comprehensive clues, clear and easy-to-understand logic, and closely linked derivation to disassemble the changes that will occur in the Ethereum mining industry in the context of the merger.

At the beginning of this report, this report will also detail the reasons for the recent huge drop in computing power, and the role played by the merger of Ethereum in Ethereum 2.0, and explore what the drop in computing power means for the merger of Ethereum, helping readers to better understand A good understanding of the Ethereum ecosystem. This report is for informational purposes only and does not constitute any investment advice.

1. Huge drop in computing power

Before and after Buterin made the above remarks, the price of Ethereum plummeted. In the third week of May, the lowest price of Ethereum reached $1,791.85, a drop of more than 63.2% from the all-time high price. At the same time, Bitcoin fell by 61%. It seems to be expected that the price of Ethereum is sluggish under the big market. In addition to the rise and fall of currency prices, the data that can most directly reflect the growth and decline of the mining industry is actually the computing power of Ethereum.

According to OKLink data, the current computing power of Ethereum is about 1P. Compared with the 8P scale at the end of 2021, its computing power has shrunk by nearly 8 times, which may make many miners feel that winter is coming. What is the reason for this phenomenon?

How will "mergers" transform Ethereum mining?

The bearishness of the overall market is an important driver of this round of the sharp drop in computing power, but it also constitutes the background of this round of Ethereum merger. It is worth noting that this round of computing power collapse and the merger of Ethereum are inextricably linked. After dismantling these two phenomena in succession, we will interpret the relationship between the two.

2. Reasons for the decrease in the scale of computing power

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 – operating cost of mining machine

The main factors affecting the profit 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.

2.1 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 the 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 demand for ETH in the Ethereum project.

2.1.1 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.

How will "mergers" transform Ethereum mining?

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 with the previous destruction data, which indirectly reflects the reduction in the number of transactions processed on the Ethereum chain.

2.1.2 Competitors cannibalize market share

Many public chains are committed to solving the expansion and performance problems currently 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 and so on.

How will "mergers" transform Ethereum mining?

(Public chain TVL picture, the picture comes from defillama)

According to the comparison data of public chain TVL, although the pie chart on the left shows that the Ethereum public chain still ranks first with a proportion of 55.4%, the area chart on the right can clearly reflect that the proportion of TVL on Ethereum is different due to other factors. Continued decline due to the cannibalization of competing products.

2.2 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. Established improvement plans such as EIP-1159 and Ethereum 2.0, while committed to improving the performance of Ethereum, have also changed the income structure of Ethereum miners. up to 0.

2.2.1 EIP-1559 reduces the income of miners

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 handling 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.

How will "mergers" transform Ethereum mining?

(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.

How will "mergers" transform Ethereum mining?

(ETH supply, the picture comes from OKLink)

According to OKLink data, since the implementation of EIP-1559, the estimated supply of Ethereum is 120,919,588, and the actual supply is 118,558,187. At present, the Ethereum blockchain has destroyed 2,361,400 ETHs, which are all part of the decrease in the income of the original miners.

2.2.2 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 four development stages. 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 run 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. 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 lock (stake) 32 ETH in the software to become validators and participate in validating transactions, thus ensuring the decentralization and security of the network. In return, stakers will be eligible to receive ETH rewards. This part also leads to a decrease in POW mining rewards.

How will "mergers" transform Ethereum mining?

How will "mergers" transform Ethereum mining?

(Beacon chain block data, the picture comes from

As of May 27, the beacon chain is running smoothly. The data on the chain shows that the beacon chain already has 391,500 nodes, with a cumulative total pledge of about 12,527,700 Eth, of which the effective voting participation rate is 99.77%. Since October 15, 2021, the number of nodes and the total amount of staking have grown steadily, and the daily validator income has also been slowly increasing. At present, the daily reward amount of the beacon chain exceeds 1500 ETH.

2.2.3 “Merge” approaching transfer to POS mining

According to Buterin, the “merger” planned by Ethereum in the third quarter of 2022 will merge the consensus layer (PoS beacon chain) with the execution layer (PoW original chain), and stop the PoW part of the original chain, This upgrade represents Ethereum’s official switch to PoS consensus. 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 be withdrawn from the stage of history soon, and it will also bring some pressure to the miners who are engaged in PoW mining.

2.3 Summary

To sum up, 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 also 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 to the “merger”, the POW mining share gradually decreased. 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.

3. “Merger” and its impact

According to the previous analysis, the completion of the Ethereum merger will have a huge impact on the Ethereum mining industry. It is mainly manifested in the following four aspects: hardware equipment, total computing power, interest pattern, and development direction. Let’s talk about them one by one:

3.1 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 transition 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 crypto 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.

3.2 The market 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 use of their existing ETH mining machines is worthy of attention. Ethereum POW computing power plays a pivotal role in the entire encrypted mining track and accounts for a large proportion. Once converted 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.

3.2.1 The original chain fork

Faced with the redistribution of mining interests, miners may, from the perspective of interests, not follow the Ethereum community to complete the PoS consensus mechanism conversion when the Ethereum 2.0 merges and upgrades. As a result, Ethereum may fork into two chains with POW and POS mechanisms at the merge node.

3.2.2 Turn to ETC mining

The hard fork of the DAO event caused the Ethereum community to split into Ethereum and Ethereum Classic, and the tokens were 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. 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, which is likely to attract a large number of ETH ASIC miners to switch to ETC mining.

3.2.3 Other Miners Compatible Coins

In theory, the graphics card can directly mine Grin, BEAM, RVN, XMR, BTG, AION and other currencies.

3.3 The overall output of the mining industry – the total computing power has temporarily dropped sharply

Undoubtedly, according to the previous article, after Ethereum is converted to POS, it mainly adopts the method of staking tokens instead of mining machine computing power for mining, which is also a call for “carbon neutrality”. Therefore, a considerable number of miners are temporarily shut down and forced to suspend, waiting for a new usage scenario to be found before restarting. Therefore, it is foreseeable that in the short term, the overall output of the mining industry, the total computing power of Ethereum, will drop sharply, and the total computing power of the entire network will also temporarily decline to a certain extent.

As mentioned above, after switching to the POS mechanism, the original miners and computing power of these Ethereum will flow into other public chains and currencies that adopt the POW consensus mechanism, making their computing power more abundant. Then, this part of the computing power will exert more uncertainty on the currency price trend. Because the relationship between supply and demand between the two has undergone certain changes. Previously, the market demand for its currency increased, causing the price to rise, which in turn resulted in a large supply of computing power. Today, these public chains and tokens have undertaken a certain scale of computing power without expectations, spawning more tokens, and superimposed on the weakening market liquidity under the Fed’s interest rate hike, the currency price will increase in the later period. turbulent.

3.4 The development direction of mining – the rise of staking and pledged mining

After the “merger”, Ethereum will be converted from P0W to POS mining, and the threshold for users to participate in mining will be lowered. They only need to pledge 32 Ethereum to apply to become a verification node to participate in mining. Therefore, the form of Ethereum mining will fundamentally change, that is, from offline equipment mining to online pledge mining. With the increasing pressure of “carbon neutrality” on the encryption circle, it is not ruled out that some public chains will learn from the leading Ethereum in the later stage and also choose POS, then this will further compress the living space of physical equipment mining, but this is more Just a trend.

Returning to the current reality, after switching to POS, projects based on Ethereum pledge services will become mainstream, and the proportion of Ethereum pledges will increase significantly before and after the merger. Staking services also have scale effects. Under the circumstance of limited cakes, projects with higher market share are more likely to increase the proportion of Staking shares through the advantages of scale, thereby further increasing their market share. The leading projects in this track deserve attention .

Conclusion: The merger of Ethereum is an important node in the encryption circle and has a fundamental impact on the mining industry

Based on the above analysis, the following conclusions can be drawn:

The industry bubble squeeze and the market share of competing products have jointly led to a decrease in the use of ETH in the Ethereum project. The established improvement plans such as EIP-1159 and Ethereum 2.0 have also changed while they are committed to improving the performance of Ethereum. The income structure of Ethereum miners has led to a reduction in the mining share of miners, and these factors have combined to reduce the income of miners, which in turn leads to a reduction in the scale of Ethereum’s computing power. But it also has an invisible but important connection to this round of Ethereum mergers.

The transformation of Ethereum from POW to POS is a technical upgrade on the one hand, and a redistribution of interests on the other hand. In the POW era, miners have contributed to maintaining the high-quality operation of the system and have also won huge ecological rewards. After switching to POS, the original POW miners will no longer be able to participate in mining, and there is a possibility of forking a new chain, “mining” ETC or other miner-compatible coins. The nodes and pledge services based on Ethereum Staking in the ecosystem will become mainstream.

Ethereum has gone through two rounds of industry cycles since its birth, and it is still the benchmark for the public chain ecosystem and the source of blockchain innovation. Currently, it has made many breakthroughs in various underlying technologies, including Layer 2 and Ethereum 2.0. try. The previous POW mining has contributed to the security and stability of the system. After the “merger” to POS, the competition of the public chain ecology will enter the 2.0 stage, and the all-round competition of the public chain in the bottom layer, application, capital and other aspects is worth looking forward to.

Based on the current situation, for assets such as ETH with unlimited total amount, there is no “story” of constant total amount of BTC, and the price is mainly maintained by the “supply and demand relationship”: that is, the dynamic balance between the new increment and the burning amount. The amount of burning is closely related to ecological applications. It represents the demand for maintaining “trust” in the decentralized digital world. Only when the ecology is more and more abundant and the demand for “trust” is increasing, the prosperity of the ETH ecology can continue. Therefore, what determines the development prospects of the blockchain is the prosperity of the developer ecology on it, and the “out-of-the-circle” application is the existence that leads the future of the blockchain.

It can be seen that the impact of the merger on the Ethereum mining industry is particularly far-reaching, comprehensive, and even fundamental. In addition, the merger itself, including the future Ethereum 2.0, will also have a follow-up research and real-time attention to the impact on the Ethereum ecosystem and even the entire encryption circle. Including a series of potential impacts on the development trend of the subsequent pledge track, whether it will reverse siphon the ecology of other public chains, and where the Layer 2 track project will go.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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