Leading bitcoin mining companies and industry-oriented equipment manufacturers are increasing their investments in ether mining, despite the imminent shift of the network’s consensus mechanism to the proof-of-stake.
Bitcoin mining companies Hut 8 and Hive are increasing their capabilities to mine the world’s second largest cryptocurrency by market value. Meanwhile, equipment manufacturers such as Bitmain and Innosilicon are already set to launch new mining machines on the Ethereum network by the end of the year.
Such an investment may seem odd, as the Ethereum network’s consensus mechanism will migrate from proof-of-work (PoW) for the proof-of-stake (PoS) in five months, and the mining process after this change will not require machines as advanced as these. The growing demand can be attributed to expectations that the migration will be delayed, according to industry professionals.
“We were told that mining would end four years ago and we’re still here,” said Mark D’Aria, CEO of Bitpro, a US consulting firm focused on brokering and managing mining hardware on the Ethereum network. “It’s always been a ‘wait and see’ approach – things tend to take longer than everyone thinks.”
While the “London” update brings the network closer to Ethereum 2.0, significant advances across the blockchain’s six years also have a history of several delays.
For example, the “Constantinople” update – which was an important step on the way to Ethereum 2.0 – was originally scheduled to be released in early 2018. However, a bug in the code delayed implementation until February 2019, creating more layers for migration.
Freezing Mining with the “Ice Age”
The proposed Ethereum Network Improvement (EIP) 3554 introduced the Difficulty Bomb that adds artificial miners to increase the mining difficulty, making operations less profitable. This point was called the “Ice Age”. Network developers initially introduced the EIP in 2015, but ended up postponing it to December 2021.
As the price of ether rises, it could become more difficult to transition the network to proof of participation, said Ethan Vera, COO of Luxor in Seattle.
“We see ether rising into the $3000 range, the decentralized finance system (DeFi) is built on top of the grid and (NFTs) have taken off,” said Ethan Vera. “Even those who are optimistic about the transition from the Ethereum network to POS still want to take it slow to make sure things get done right and that there are no doubts, pitfalls or blind spots that developers might be missing.
In addition to technical challenges and asset security issues on the Ethereum network, potential resistance from the mining community could be another factor that would slow down the network’s migration to POS.
“One thing that hasn’t really been understood is how much resistance there will be to this migration,” said D’Aria. “To think they’re just going to flip a switch and turn off billions of miners’ dollars is crazy, it’s not going to happen.”
Mining on the Ethereum network has more individuals and fewer large-scale miners than on the Bitcoin network.
Relatively low energy consumption compared to that spent by bitcoin miners combined with small amounts of heat and noise coming from Ethereum’s mining equipment make it possible to mine ETH in graphics processing units (GPUs) at home, said Ethan Vera.
More than 90% of ether mining machines are based on GPUs, which is also common hardware for gamers, said D’Aria.
However, cryptocurrency mining heavyweights are moving to enter the industry and make bigger profits than they would from bitcoin mining.
Cryptocurrency mining company Hive Blockchain claims to have become Ethereum’s largest public miner in the world with 3,383 GH/s, which is 1.3% of the total hash rate for the network at the time, according to with a financial report from Hive in October 2020.
The Vancouver-based company is looking to raise the mining hash rate on the Ethereum network to 5,500 GH/s by the end of the year, an increase of 62.5%. In February, Hive acquired a 50-megawatt data center in New Brunswick, Canada, which belonged to GPU One.
Another cryptocurrency mining joint-stock company, Hut 8, purchased $30 million worth of machines specializing in ether mining from manufacturer Nvidia in May. The company said all mining machines will be delivered and installed by the end of August and plans to have a hash rate of 1,600 GH/s with 4MW power usability.
“This transaction serves to strengthen Hut 8’s objective of increasing income diversification and generating short- and long-term revenue growth in 2021,” the company said.
Unlike bitcoin-only companies like Marathon and Riot, companies like Hut 8 have a mandate to tap into underutilized or stagnant energy and make it computing power and premiums, according to Ethan.
“I think companies that are getting into Ethereum mining now in the 45 seconds of time are looking for a bigger picture where they can capitalize on their computing power,” said Ethan. “Cryptocurrencies are one vertical of many they would pursue.”
More powerful mining machines are coming to market, which shortens the payback period on such operations and increases profits.
Specialized machines on the Ethereum network, also known as application-specific integrated circuits (ASIC), are designed by manufacturers like Bitmain specifically for mining, where most GPUs are made from reusing graphics cards used for gaming.
Nvidia announced its first mining machine on the Ethereum network in early 2021, while Bitmain and Innosilicon are set to deliver their new models to mine on Ethereum by the end of the year.
Manufacturer iPollo has raised more than $200 million from the pre-sales of its latest ASIC model from Ethereum, which will ship in the fourth quarter of 2021, said Paul Yao, vice president of global business development at iPollo. The company plans to increase production when it has capacity, and may produce mining machines throughout 2022, according to Yao.
The Singapore-based company will set up a US office in 2022 and shift its focus from the Chinese market to the US. “We see increasing demand in North America and some of the Asian markets,” Yao said.
“With a return on investment in ASIC/GPUs within five or six months, and the fact that ETH 2.0 will likely take longer than that, I can understand why most take the risk, especially with prices being so strong,” said Azam Roslan of Wattum, a cryptocurrency mining machine brokerage and management company in New York.
Ethan Vera predicts that the payback period for mining on the Ethereum network could be as short as four months if miners use the latest generation of ASICs. “For bitcoin mining, depending on the price they’re paying for the operations, corporations wait a year for a payoff,” Ethan said.
By comparison, some of the pre-existing GPU boards for mining on the Ethereum network, such as the 3070 GPU produced by Nvidia, still need approximately 18 months for miners to be able to cover all costs, said Arseni Grusha, CEO of Wattum.
“You want the payback period to be under 12 months, meaning either the value of ether goes up, or the GPU prices have to go down,” Grusha said. “We don’t expect GPU prices to go down, and even if ether goes up to $4,000, cryptocurrency would have to stay in that price range for the ROI to be attractive.”
Strong market prices and relatively low operating costs are among the main reasons why mining on Ethereum has generated more profits since last year than mining bitcoin.
While the “London” update allowed the Ethereum network to burn a portion of the fees that would be paid to miners, mining appears to be even more profitable from the hard fork thanks to the price of ether.
The daily income – in US dollars – of miners increased 7.1% and reached the highest increase within two months, according to data from Coin Metrics. Since the upgrade, the network has burned approximately 33% of the supply expansion, which corresponds to 22,708 ether units or $76.1 million.
In addition to priority fees (supply rate minus base burn rate), block subsidies (similar to Bitcoin block premiums) and maximum value and extraction (MEV) are the other two sources of income for miners. The MEV is the amount of money an Ethereum network miner can make by helping operators insert, omit or rearrange transactions for a block.
“After EIP 1559, we still got the MEV, two ether units from block subsidies and a little refueling fee from some wallets,” said D’Aria. “So that’s not really such an important issue.”
Miners are already expecting supply rates to fall in the longer term as more scalable solutions are introduced into the grid, which would reduce transaction fees and congestion, D’Aria said.
Decentralized finance (DeFi) saw explosive growth last winter as a result of a new reward mechanism for investors using DeFi protocols, where they can earn new tokens in addition to deposit returns. The increased trading activity across multiple protocols on Ethereum has dramatically increased transaction fees, which are paid to miners for their work in validating transactions.
“You get two units of ether from block subsidies, and another five or seven from fees,” D’Aria said of the rise in fees from the boom in DeFi protocols. However, with lower transaction volumes in DeFi, supply rates have dropped for network miners. “This was an anomaly and the miners intend to take advantage of it while it lasts.”
Mining on the Ethereum network tends to have low operating costs compared to the Bitcoin network. While GPUs are expensive and require more work to run, low power consumption could offset those costs and make the overall cost even lower than the Bitcoin network, said Ethan Vera.
No one knows the exact date of the Ethereum network’s historic migration to POS, but a timely investment in mining the network can bring big profits, Vera said.
“The miners who bet against the participation test two years ago were quite right,” said Ethan. “If you can bet against it, the payoff can be very profitable.”
Text translated and republished with the permission of Coindesk