The crypto community is celebrating the coming of Ethereum 2.0, but there are also concerns for miners. Since Ethereum has switched to a proof-of-stake model, mining Ether will no longer be necessary. Due to this, mining machinery will become obsolete, leaving miners with fewer options.
Ethereum developers have scheduled the merge for block number 58750000000000000000000, which should fall on September 15 or 16. When this happens, Ethereum will migrate to a completely different consensus mechanism that secures the blockchain using capital locked up in validating nodes instead of the computers currently used for proof-of-work.
This will leave Ethereum miners holding a $4 billion bag of hardware.
They will want to deploy this hardware elsewhere, no doubt, but the question remains: where can they go to reap the same returns?
There are two options on the table:
1 Mine other GPU-compatible coins like Ethereum Classic (ETC)
2 Mine a proposed Ethereum fork that will maintain proof-of-work
Unfortunately for ETH miners, neither will furnish them with the cash flows they have garnered on Ethereum.
Broader Context: With the Merge, Ethereum Shrugs Off an $18B Industry
Proof-of-stake has been in the Ethereum roadmap since its inception, though it’s been delayed repeatedly for years. In December 2020, things began to accelerate with the launch of the Beacon Chain, the central nervous system for Ethereum 2.0, and the first concrete technical step from Ethereum’s development team to make the merge a reality. Fast forward to today, and developers have tested the Ethereum 2.0 merge and its architecture on multiple testnets. These tests were successful enough that Ethereum’s team felt confident enough to pick an activation time firmly.
Ethereum miners poured money into graphics cards (GPUs) and other mining equipment despite the pending merge. (Unlike Bitcoin, Ethereum is mostly mined with GPUs, and only 10% or so of Ethereum’s compute power comes from ASICs, the same specialized chips BTC miners use).
Onlookers might wonder why Ethereum miners invested so much in hardware even though they knew that Ethereum’s end game has always been proof-of-stake. One peek at Ethereum’s performance in the 2021 bull market and its thriving ecosystem of Defi applications has their answer: Ethereum mining has been extremely lucrative, even more so than Bitcoin mining.
Yes, you read that correctly. In 2021, Ethereum mining revenue trumped Bitcoin mining revenue, and so has Ethereum mining’s year-over-year revenue from August 17, 2021, to August 17, 2022.
The primary driver of this revenue is Ethereum’s suite of so-called decentralized finance (Defi) applications. Platforms like Uniswap, Compound Finance, Aave, and others allow users to borrow and lend Ethereum-based assets using smart contracts and on-chain accounting. The use of such platforms (in addition to the NFT craze last year) drove demand for Ethereum’s block space, sending average transaction fees into the triple (and sometimes even quadruple) digits). Fee revenue made up a large chunk of Ethereum mining revenue during 2021’s bull run – at times, over 50%. An Ethereum code change, EIP-1559, was altered this last August; now, the network sends all transaction fees to an inaccessible address. Users can opt to send “tips” to miners in addition to transaction fees, but as evidenced by the chart below, these tips make up a fraction of the fee revenue miners reaped with transaction fees.
Ethereum Classic Could Be a Savior
Currently, only a few blockchains run on the proof-of-work consensus and are graphics processing unit (GPU) compatible, which can offer Ethereum miners the luxury of a GPU-compatible blockchain. The chief of them that comes close is Ethereum Classic (ETC), which was created in 2016 after the attack on the Ethereum network. Ethereum Classic’s price has risen in recent weeks due to its mining demand.
There are, however, some downsides. If Ethereum miners turn to ETC or GPU-compatible altcoins, it will lead to a drop in profitability of the current miners. For better context, an influx of miners to a network will cause a spike in its hash rate, which determines the computational power of a network. It will lead to an increase in mining difficulty, which indicates the difficulty of creating a block and reduced earnings for miners.
Proposed Ethereum Hard Fork Could Be an Option
In July 2022, Chinese Ethereum miner Chandler Guo started a campaign opposing the merger, saying it would cause job losses for Ethereum miners. Guo and other developers proposed a hard fork to retain the proof-of-work mining model. A hard fork is a radical upgrade to a blockchain that permanently changes its functionality.
Guo and the group named the cryptocurrency EthereumPoW (ETHW). He tweeted in July 2022: “how will coming soon.” It seems like the hard fork is set to happen after the Ethereum Merge.23 Some big Ethereum mining pools are expected to support EthereumPoW (ETHW), and some miners may opt for the proposed Ethereum fork.4 Meanwhile, Coinbase has confirmed that it would consider listing forked Ethereum.5
Decision Points: Best to Wait and See
The trading strategies discussed above will only be available to those with advanced technical proficiency. Since it’s unlikely that any frontends for popular Defi applications will emerge before the ETHPoW fork, traders will have to use their Ethereum nodes to communicate directly with the protocol on the backend. So if you’re not a code whisperer, there’s little you can do to play the merge.
That said, a handful of exchanges have already announced support for ETHPoW. The two most notable are Poloniex and BitMEX, while Binance and Huobi said they might support the fork if certain criteria are met. For Poloniex and BitMEX, the current markets are essentially futures trading in perpetual swaps. If the fork is successful, these markets will likely open up to spot trading, allowing Ethereum and ETHPoW users to dump the forked coins.
And dump, they likely will. While there is a good chance that ETHPoW pumps in the first hours or so after the fork, there’s no reason to think that the coin will hold any medium-to-long term value. As with Ethereum Classic, it could have very few real users, nor does it currently have any developer support to sustain the Defi applications that have made Ethereum so popular.
Miners and traders seeking to profit from the fork will dump coins as soon as they can to cash in on their holdings; likewise, Ethereum 2.0 users will likely liquidate their coins as well in an attempt to capture as much value as possible (they may also be ideologically incentivized to put selling pressure on a fork they view as adversarial to Ethereum 2.0). All you need to do is look at the trading history of Ethereum Classic or Bitcoin Cash to see that this fork probably has very little runway if any at all.
Further, there are still too many open-ended questions surrounding this fork – whether or not wallets and exchanges will support the fork to give users access to ETHPoW. The average user will need such support to access the forked coins. Otherwise, it will only be those with enough technical prowess to run their nodes and understand the Ethereum code well enough to access them by speaking directly to the Ethereum protocol.
All that to say, the only way for most folks to safely trade this fork right now is to play the exchange listings. The same goes for Ethereum Classic. For most Ethereum holders and users, there’s not much to do except long or short these assets, grab some popcorn, and watch the fireworks when the ETHPoW fork and the merge come to pass.