Once Ethereum merges with the Ethereum 2.0 Beacon Chain in September, mining on the network will become obsolete. So what will happen to all Ethereum mining pools and its miners as well as the millions of dollars worth of hardware in the ecosystem?
What is Ethereum Mining?
Since Ethereum’s launch in 2015, the blockchain has been using proof-of-work, the same consensus protocol as Bitcoin, to validate and record transactions. But unlike Bitcoin which solely uses application-specific integrated circuit (ASIC) miners, you can use graphics processing unit (GPU) of gaming computers to mine ETH. As a result, it is generally easier to mine ETH than Bitcoin since GPUs are more accessible and widely applicable than ASICs.
There are two main ways to mine ETH – pool mining or solo mining:
Pool Mining (working together)
- Work with others to mine and share rewards
- Get paid per share, on a hourly or daily basis
- Less random / dependent on luck
- Pools take some fees (0.5-8% depending on pool)
- You mine the entire block reward (differs based on mining difficulty changes) – no pool fees
- Random chance and probability – you can go days or months without rewards
- Not viable if hashrate is low – single GPU might take years to mine a block
Ethereum mining pools are the go-to options for most miners as solo mining takes a very long time to earn rewards. However, this work has drawn criticism for its impact on the environment and its excessive electricity consumption. It is a highly energy-intensive process as miners around the world pool together large amounts of resources and power to mine ETH. But all of that is about to change with the arrival of the Merge in September.
How does the Merge affect Ethereum Mining?
In 2022, Ethereum will switch its consensus protocol to proof-of-stake as part of an update known as the “Merge” that will link the Beacon Chain and the Ethereum Mainnet. The Beacon Chain is what allows users to stake ETH, which has been operational since the end of 2020. Many people have staked their ETH to support the transition as well as earn rewards on their stake. Here’s the kicker, after the Merge begins, mining difficulty will soar due to the “difficulty bomb”. It is a kind of self-destruct mechanism meant to make proof-of-work calculations almost impossible, incentivizing the move to an environmentally-friendly proof-of-stake model.
What will happen to Ethereum Mining Pools and Miners?
There is a divide in the Ethereum mining community between the organizations that have helped coordinate the resources of individual miners (mining pools) and the individual miners themselves.
For mining pools, the transition does not affect them at all. Since these organizations never did the actual work of generating computing power themselves, they are not affected by the sunk cost of the eventual obsolete mining rigs. Instead, these pooling companies have human capital and infrastructure necessary to organize the pooling of resources, source new clients, and overall manage and maintain the operation and its security. For this reason, leading Ethereum mining pools like Ethermine or f2pool can simply transition to staking pools. They do not rely on the actual mining itself. It is not a matter of product, only business model. These companies operate on a fee structure, charging individuals for participating in their pools, and it will be unaffected by the move from mining to staking. They only require business development, customer service, and communication with core developers, softwares, and client teams.
However, for the miners who make up these pools and other independent Ethereum miners, the transition could mean the end for them. People who have benefited from mining ETH, either by managing large mining farms or by contributing moderate amounts of GPU power to mining pools, may be left stranded. They have invested large amounts of money in expensive GPUs or specialized mining rigs that are useless in staking. Some will not even be able to recoup their initial investment as they hoped to profit from mining.
Although validating via proof-of-stake only requires a home PC with stable internet connection, it would require a minimum contribution of 32 ETH, which is a sum far greater than most people’s savings. Essentially, in order to fully cover the hole of lost mining revenues via staking, individual miners would have to establish and operate their own staking pools, which would be a considerably more difficult task than maintaining their own mining rigs.
There is really no good option for ETH miners. They can still salvage their GPUs by selling them in the market as gaming computers are still popular products, but it is safe to say that there is certainly no demand for ASICs in the market. They could use them to mine other cryptocurrencies that are compatible with their processors such as Ethereum Classic, Ravencoin or Ergo, but they are also much less in demand than Ethereum. The profit margins are substantially lower.
However, there are certain staking pools that encourage bringing current miners into the fold. According to Bitfly, EtherMine’s parent company, their goal is to “onboard current miners from proof-of-work to proof-of-stake.” They also noted that most deposits to EtherMine’s new staking platform have come from existing miners. But whatever the case is, there is still no easy answer as to how Ethereum Miners will ever again come close to generating the revenue produced by mining ETH. We will just have to wait and see until the Merge.