- The Merge will force the $19 billion POW mining industry to find another way.
- Most existing Ethereum miners cannot find POW coins with equivalent economics in the market. The total market cap of GPU-minable tokens excluding ETH is $4.1 billion, or about 2% of ETH’s market cap. ETH mining revenue accounts for 97% of the daily income of GPU miners.
- Many large miners plan to turn to data center-oriented businesses with a focus on providing high-performance computing services.
- Miners can contribute GPU computing power to Web3 protocols such as Render Network, Livepeer, and Akash .
The long-awaited merger will transform Ethereum from a proof-of-work ( PoW ) to a proof-of-stake ( PoS ) based network. Thanks to its early reliance on the PoW mechanism backed by GPU computing power, Ethereum has created a globally distributed mining industry that will generate nearly $19 billion in revenue in 2021. The scale of industry players has grown from individual miners with small rigs to operating large miners with thousands of rigs and public listings.
Instead of using computing power to determine which miner should create a new block, the PoS mechanism relies on collateral staked by nodes to determine the creator of a new block. Therefore, if Ethereum’s transition to PoS is successful, Ethereum miners will be eliminated. So, what will be the impact on miners and mining hardware after the merger?
While the ethereum merger has been promised for years, ongoing technical challenges keep pushing back its timeline. Based on the eagerness of ETH core developers and the successful merger of the Ropsten testnet, the mainnet merger is expected to be on track in August-September, assuming no surprises.
In May 2022, Ethereum’s hash rate peaked. Since then, its hash rate has been trending lower, suggesting that miners expect the merger to happen soon. The drop in hash rate is likely due to miners shutting down GPU miners and moving to the exchange market to sell after the testnet merger.
This is further illustrated by looking at trends in GPU resale prices. The resale value of popular mining GPUs including the RTX 3090, 3080, 3070, 3060, 2080 and 2070 has dropped rapidly over the past six months. GPU prices have dropped an average of 47% since December 2021. The recent drop in cryptocurrency prices has negatively impacted mining profitability and has also increased the supply of GPU miners on secondary markets such as eBay. Finally, as the merger nears, fewer miners are willing to invest in new mining rigs.
ASIC and GPU Miners
There are two types of Ethereum miners: ASIC and GPU. ASICs (Application-Specific Integrated Circuits) are computer hardware designed for a specific purpose, and hashing algorithms for Ethereum are written in Ethereum ASIC miners. GPU miners can solve complex PoW calculations and can also be used for more general-purpose applications. GPUs, for example, are often found in workstations and gaming computers to render images, encode video, or perform any other application that requires repetitive computations.
Due to the distributed nature of the Ethereum mining industry, it is difficult to determine the exact ratio of ASIC and GPU miners on the network. BitPro CEO Michael D’Aria estimates that 90% of miners are GPU-based, while another 10% are ASIC-based. Bitsbetipping host Michael Carter, who specializes in crypto mining consulting, told Messari that he estimates that 20-30% of the miners on the network are ASIC-based.
The problem with Ethereum ASIC miners is that they can only be used for ETH mining and cannot be reused for other applications. Ethereum Classic is the only other PoW cryptocurrency that can be mined with Ethereum ASICs because its hashing algorithm is compatible with ETH’s. If mining Ethereum Classic is unprofitable, then there is likely no resale market for ASIC miners, and they will be discarded after the Ethereum merger.
Therefore, after the Ethereum merger, GPU miners became the only Ethereum mining hardware that could be reused for other applications. After analyzing the reuse schemes of a large number of GPU mining machines, we have come up with the following feasible schemes:
- Mining other PoW tokens
- Data centers that provide high-performance computing
- Provides computation for the Web3 protocol
- Sell miners and pledge mined ETH to participate in PoS
Mining other PoW tokens
For some crypto enthusiasts, mining has become a hobby. They tend to earn cryptocurrency passively from mining rigs or gaming computers. For others, mining is an investment business with the aim of earning a return on investment.
As Ethereum abandons the PoW mechanism, both types of miners wonder what other PoW tokens can be mined. In a related thread on Reddit, some miners said the strategy after the Ethereum merger was to switch to mining any lucrative cryptocurrency. Relying on WhatToMine, a website that calculates mining revenue, miners can determine the cryptocurrency mining profit based on the specified mining machine type and electricity cost.
Some large miners appear to be on a similar path. Hut 8 corporate vice president Sue Ennis told Messari that Hut 8 is considering mining other PoW tokens such as Ethereum Classic after the Ethereum merger. However, they continue to hold only BTC on the balance sheet . Hut 8 also plans to switch its GPU hashing power to the Luxor Mining Pool to mine tokens including BTC, DASH, ZEC , and SC, with all profits paid in Bitcoin.
The problem with miners switching from mining ETH to other PoW tokens is that the market for these tokens is nowhere near as big as Ethereum. As of June 9, the total market capitalization of GPU-minable tokens excluding Ethereum was $4.1 billion, or about 2% of Ethereum’s market capitalization.
Since hash rate cannot be used to compare the computing power of networks with different hashing algorithms, total miner revenue becomes the next best method. Among the top seven GPU-minable tokens by miner revenue, Ethereum accounts for 97% of total GPU miner revenue. Ethereum Classic came in second with 1.9% of total GPU miner revenue. This shows how small the market for GPU-minable tokens without Ethereum is.
A common misconception in the mining world is that an increase in hash rate leads to an increase in the price of a coin, when in fact the opposite is true. If ETH GPU miners flood into a certain PoW token overnight, this will drastically increase the difficulty of mining that token, resulting in lower mining rewards. The end result is that most miners are unprofitable. Only those miners with access to the cheapest energy can remain profitable, which is likely to be institutions and large miners. As a result, only a fraction of the ETH hashrate can be migrated to other GPU-minable tokens.
The only way for other public chains that can mine tokens through GPUs to receive Ethereum hashrate is to increase the token price by orders of magnitude. Given that the user activity on these public chains is much lower than that of Ethereum, the probability of a sharp rise in the price of their tokens is very small. Furthermore, most PoW public chains lack community other than the miners themselves.
For example, even though Ethereum Classic ( ETC ) ranks second in GPU miner revenue, the network only has $120,000 in total value locked and around 35,000 daily active addresses. By comparison, the total value locked in Ethereum is $50 billion, with more than 493,000 daily active addresses. This discrepancy suggests that ETC’s price surge over the past two years has nothing to do with network fundamentals and is largely driven by speculation. Therefore, even if the value of ETC is largely speculative, it will be difficult for miners to find alternative coins with real value and network usage.
Overall, a mass migration of miners to other PoW tokens is unlikely to be a sustainable solution. Any increase in hash rate will lead to an increase in mining difficulty and drive most miners out of the profitable zone. Unless the coin price rises by orders of magnitude, the network will only be able to accommodate a fraction of Ethereum’s hash rate, which is unlikely based on the current fundamentals of these projects. But it is still possible that there will be a PoW network where miners can reach consensus and be adopted.
Data Center Oriented Business
Ethereum miners have grown in size from individual miners with small rigs to large miners running publicly listed companies with thousands of rigs. While small miners may easily transition after the Ethereum merger, decisions on what to do next will be very difficult for larger miners who have invested heavily in mining hardware, dedicated warehouses, and power-related infrastructure.
Hut 8 and HIVE Blockchain are two large publicly traded miners that have unveiled their post-merger strategies on Ethereum. Both Hut 8 and HIVE Blockchain have said they will transition into the high-performance computing industry. Both companies acquired data center businesses in order to reposition the enterprise for transformation. These data centers are designed to provide an alternative to web services for cloud computing giants such as Amazon.
Hut 8 and HIVE Blockchain have invested heavily in high-performance GPU graphics cards for mining Ethereum, which enables them to repurpose GPU graphics cards for high-performance cloud computing services. Hub 8 describes its GPUs as the “Ferrari of GPUs” and they are one of three key NVIDIA customers. Hut 8 specializes in projects in the Web3 industry, providing them with cloud hosting services such as blockchain infrastructure, game rendering, and NFT storage.
The demand for high-performance computing will continue to grow as gaming, artificial intelligence, and film animation flourish. Once the Ethereum merger happens, this growth is an opportunity for large miners to gain a massive new revenue stream.
Provide computing power for Web3 protocol
The purpose of Web3 is to rebuild the Internet on an open, decentralized and permissionless protocol. To achieve this, a distributed infrastructure needs to be established as the base layer. This includes building infrastructure for video streaming applications, rendering of 2D and 3D objects, and cloud servers. What these services have in common is that they rely on a distributed network of participants to provide GPU computing services.
Miners can redirect their GPU power to a handful of Web3 protocols, including:
- Render Network: A distributed GPU computing power market that allows users to contribute computing power to rendering. The network allows GPU miners to sell their rendering power to anyone in need, such as artists, designers, and researchers.
- Livepeer Network: A decentralized network for video streaming, which relies on miners to provide video transcoding services using GPUs.
- Akash Network: A decentralized cloud computing power marketplace that provides a collaboration platform for providers with additional computing power and users seeking computing power. Akash aims to integrate the GPU market into its platform by the second quarter of 2022, enabling the network to handle data-intensive workloads such as machine learning, artificial intelligence and cloud gaming.
These Web3 protocols will welcome GPU miners looking for a new home. It’s worth noting that some protocols (such as Akash) impose additional hardware capital thresholds in order for miners to become computing power providers. This solution is not only open to small miners but also large miners. In the future, Ennis told Messari that Hut 8 will open up its data centers as node operators/providers for Web3 protocols such as Render Network.
Transition to PoS staking
Miners who have accumulated ETH from mining can choose to sell their GPU miners and become Ethereum PoS validator nodes. The network requires validators to stake at least 32 ETH in order to run a validator node. In return for validating transactions, validators are rewarded in the form of block rewards, tilt incentives, and MEVs. Depending on the number of stakers and the level of network activity, yields can range from 7% to 13%. For miners who do not have 32 ETH or do not want to take the risk of running a verification node, they can also participate in staking through ETH 2.0 staking service providers.
Future Use Cases for GPUs: Zero-Knowledge Proofs (ZKPs)
Zero-knowledge proofs (ZKPs) allow users to cryptographically prove that they know a secret without revealing the secret to the other party. ZKPs are an essential solution for blockchain scaling and improving privacy. As ETH 2.0 focuses on a Rollup-centric roadmap, zk-rollups are gaining popularity as a Layer 2 scaling solution, with projects like Starknet and zkSync leading the way. Other projects besides Rollup that use ZKP include Mina, Filecoin , and Zcash.
Paradigm recently wrote an article on hardware acceleration of ZKP. The article discusses that as the popularity and complexity of ZKPs grow, the technology reaching the expected scale will require specialized hardware support, which will create a market similar to Bitcoin mining:
“As users seek more expressive, high-performance, and private computations, the complexity of using ZKPs will increase. This will result in slower proof generation, requiring specialized hardware to generate proofs in a timely manner.
Similar to Bitcoin miners, hardware operators need to be rewarded for their work. There will be a whole ZK mining and proof industry on the market, first with enthusiasts generating proofs in their CPUs, then GPUs, then FPGAs. Compared to Bitcoin, we expect ASICs may take a long time to be adopted. “
When Bitcoin was first launched, anyone with a standard CPU/GPU could mine Bitcoin. Eventually, professional miners developed more efficient hardware (ASICs), which made CPU/GPU mining no longer profitable. ZK mining is likely to follow a similar path, starting with standard GPU miners and then developing more efficient miners (ASIC or FPGA). ZKP is still in its infancy, but Paradigm predicts that the ZK miner/prover market may grow to the size of the PoW mining market in the future.
After Ethereum successfully merges its mainnet, the GPU mining market for PoW tokens may shrink rapidly. As miners realize that mining other PoW tokens will only keep the few miners with access to cheap energy profitable, most of the GPU miners will be resold on the secondary market. Miners willing to invest their time and money will be able to transition to high-performance data center operators or node providers for the Web3 hashrate protocol—both rapidly growing markets.
Elena Burger , a16z trading partner, reminds us that most new technological advancements require hardware support. “All major industries in tech—from cloud computing to computer graphics, artificial intelligence, and machine learning—have run into bottlenecks that require faster computing and more efficient hardware.” While the ethereum merger appears to be The end of GPU mining, but it could also usher in another era as displaced miners look for new opportunities in Web3.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/messari-where-will-miners-go-after-the-ethereum-merger/
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