Where will miners go in the era of Ethereum 2.0?

The upcoming Ethereum PoS merger raises an expensive question: where will Ethereum miners go?

This issue involves equipment and mining revenue, worth tens of billions of dollars. The PoS merger is currently scheduled for the 15th and 16th of next month, and miners are waiting for this day to come, when ETH computing power will be worthless in front of the PoS beacon chain.

Figure 1: Comparison of the total value of Ethereum and Bitcoin mining machines

At present, the Ethereum miners after the PoS merger can be divided into two camps:

The first type: miners who want to maintain the PoW mechanism through Ethereum fork (mostly Chinese miners)

The second type: miners who switch to the ETC chain

The first one is obviously controversial, and even regarded as heresy by PoS supporters among the miners. In addition, the danger signals released by it may discourage Ethereum miners, such as transaction fee ¹ being sent to a multi-signature wallet address for management.

But looking at the second type, the value brought by tokens like ETC is not enough to support all Ethereum miners. After all, this is the largest mining group besides Bitcoin.

Due to the lack of a highly secure fallback, many Ethereum mining pools are still in a wait-and-see state. Most of them have not yet announced their development plans for the ETH2.0 era unless the PoS merger is clearly confirmed, as they are already accustomed to its repeated delays.

Luxor Technologies has formed a consulting team ² to try to convince the Ethereum Foundation to retain the PoW mechanism. Others like f2pool (stakefish ³ ) and Ethermine ⁴ will turn their attention to providing services for ETH2.0.

The current situation regarding ETH2.0 is complex and subtle, and it is a game of cowards involving tens of billions of dollars. Although we very much hope that Ethereum can retain its repeatedly tested PoW mechanism, it is still valuable to explore the future mining direction of miners in the ETH2.0 era, including feasibility and the consequences that may be caused after the direction is selected.

With all that said, let’s now take a deeper look.

Seeking Common Ground While Reserving Differences: PoW Fork (ETHW/ETHPoW)

We’ll start with the PoW fork, ETHW or ETHPoW, because it is the most complex, controversial, and significant proposal currently in existence.

Oddly enough, the story starts with ETC. Or more precisely, it starts with Guo Hongcai, the main engineer of the ETC fork chain.

As a frontline worker in the previous ETC fork operation, Guo Hongcai tweeted on July 27: I forked Ethereum once, and I will fork it a second time.

The plan for the fork has already spread to Ethereum miners’ WeChat groups, Telegram group chats, and now has an official Twitter account5. On August ¹⁰ , the ETHPoW organizers announced the principles of the fork in the Twitter chat room (already in their project ^manifesto6 ):

1. This fork is a fair launch with no additional rewards or guarantees.

2. The PoW mechanism will be the only mechanism on the forked chain.

3. Abolish EIP-1559 on the existing ETH and abolish the gas fee burning mechanism.

4. Continue to uphold the concept of decentralization

5. Dissolve the team behind this fork within three years

Only time will tell whether the above principles will be upheld.

This project has its own Linktree ⁷ and website ^8. In addition, there is code data copied from Go-Ehereum on GitHub ⁹ .

According to the code in the ^project10 , the fork will come around September 18. In a recent media ^platform11 , the ETHPoW team said that the underlying code is ready and the test network is about to be completed. At the same time, it was stated that the Ethereum difficulty ^bomb12 has been removed, anti-reentry protection has been added, and the ETHPoW beacon chain address has been updated.

The ETHPoW project team recently released the initial version ¹³ of the hard fork. As the most noteworthy and controversial point, the team pointed out that unlike the previous burning mechanism (which was burned in EIP-1559), the basic fees on the new fork chain will be transferred to a multi-signature wallet managed by miners and the community. In addition, the starting mining difficulty of ETHPoW will also be lowered on the day of release.

Multi-sig vaults are, to put it mildly, brazen and a deal breaker for miners. At best, they raise trust issues; at worst, forked chains under multi-sig wallets are like outright scams.

Cryptocurrency exchanges embrace ETHPoW

I believe everyone is familiar with the following famous saying, that is, don’t waste every crisis. But for cryptocurrency exchanges, “don’t waste every fork” is even more appropriate.

Some of the most influential exchanges have already committed to supporting ETHPoW (or will consider supporting it in the future). For those exchanges that commit 100% to supporting ETHPoW immediately, this means they can create a futures market for the token and then sell it as spot once the fork is successful.

Poloniex ¹⁴ was the first exchange to express support. Like a domino effect, the rest is left to game theory: after Poloniex issued a statement, BitMEX ¹⁵ , Gate.io ¹⁶ and MEXC ¹⁷ successively issued statements of support. In addition, Binance ¹⁸ , Huobi ¹⁹ and OKEc stated that if the ETHPoW token can pass the evaluation, they will include it in the trading list.

Figure 2: Screenshot of the ETHPoW trading interface on BitMEX

With the support (potential support) of the above exchanges (or there will be more), the PoW chain has finally stepped into the arena to compete with the PoS chain.

However, for ETHPoW to be competitive, it needs not only a "competition field", but also a lot of spectators.

The past is also the prologue: the experience of ETC and BCH

If a hard fork like ETHPoW wants its value to rise to a certain level, even if it is only a small part of the public chain, it still needs economic support.

In other words, it is valuable only if someone buys it.

This is very important because the millions of dollars miners earned on the previous Ethereum chain will be replaced by this fork. Therefore, if you want to get even a small part of the previous profits on ETHPoW, you can’t do without the economic support behind it.

This part of the economic support can (initially) come from traders who want to profit from the chaos caused by this sudden fork (more on this below). However, if you want to carry out long-term mining activities on the forked chain, you need long-term trading support. To have actual purchases, you also need market participants and developers to have 100% trust in the forked chain.

In this way, the BCH hard fork and the ETHC hard fork are both good examples. After Bitcoin forked into BCH in 2017, its price soared all the way. At the highest point, 1BCH was even equivalent to 0.28BTC. Similarly, the price of ETC also skyrocketed after the fork, and at the highest point, 1ETC was equivalent to 0.33ETH.

Compared with the public chain, the prices of both reached historical highs after the fork, but neither of them did anything except "lying flat" afterwards. So it is natural that they cannot catch up with the public chain in terms of computing power. For BCH, its computing power has been decreasing; on the other hand, ETC's computing power has been declining when ETH's mining income was so lucrative during the 2020/2021 bull market, but it increased by nearly 6 times in the preparation stage of the ETH2.0 merger.

Figure 3: BCH hashrate trend since its creation

Figure 4: ETC computing power trend

If ETHPoW miners want to avoid repeating the same mistakes, the support of the Ethereum community and developers will be indispensable.

Where are the developers?

Indeed, the reason why Ethereum mining profits have been so lucrative in recent years is precisely the booming development of DeFi applications on its chain.

Without these smart contracts in DeFi, miners would not be able to make such profits from transaction fees and MEV ^20. Once these applications are developed, customers will follow.

But the problem is that so far there is no sign that the project owners and developers support this fork.

On the contrary, as Ethereum’s most popular oracle and an indispensable piece of the DeFi puzzle, Chainlink ²¹ has explicitly expressed its support for the PoS mechanism.

Similarly, USDC ²² C and USDT ²³ , the largest stablecoins in the market, have also voiced their support for PoS chains. Stablecoins are now in a more disadvantageous position than other tokens. LINK coins from Chinalink or UNI coins, the governance tokens of Uniswap, can be replicated on the chain, and the corresponding contracts are still valid on different chains.

But this is not feasible for stablecoins, because stablecoin merchants have to ensure a 1:1 conversion rate between USDC and USDT. So they chose PoS.

Stablecoins are crucial to DeFi and are essential to the success of ETHPoW. It is reported that Justin Sun (Poloniex owner) is developing a ^stablecoin on ETHPoW24.

Assuming stablecoins are developed successfully, ETHPoW can also develop, but in order to achieve its economic feasibility, DeFi smart contracts and users will need sufficient transaction liquidity. Anyone with relevant technology can technically maintain the ETHPoW fork chain, just like Uniswap and Compound Finance, although no investment in this regard has been seen yet. Even if maintenance is in place, for smart contracts to be successfully executed on ETHPoW, users and transaction liquidity are still needed to maintain the operation of the liquidity pool on the contract.

Or to go a step further, popular wallets like MetaMask will not support this fork (no benefit to be gained). In other words, it will be extremely easy to copy these wallets. In addition, any ETH locked in the beacon chain will be inaccessible (excluding other technical support), and the so-called "liquidity staking tokens" will become worthless.

Perfect Chaos Theory

Even if ETHPoW fails to reach the popularity of ETH, it will still be profitable in the short term.

There is no doubt that the market chaos caused by ETHPoW will bring huge profits to miners and traders who choose it.

This fork will completely copy ETH, which means that all smart contracts and assets currently on ETH will also appear on ETHPoW. This means that the liquidity pools of decentralized exchanges and automated market makers such as Uniswap and Compound Finance will also be completely copied and applied to this forked chain.

Traders and miners will most likely seize the liquidity pool immediately after the fork. The reason is that ETHPoW users have a large number of non-replicable assets such as stablecoins and WBTC, which lose their value on the forked chain due to the inability to exchange. So users will sell them in exchange for ETHPoW, and eventually miners will gain considerable MEV income for themselves through users' transactions.

(It is important to point out here that only users who are technically proficient enough to run their own nodes can perform these transactions. For DeFi contracts, there is no front-end processor on ETHPoW unless it is built manually, so these transactions may all occur on the back-end)

As traders try to get as much ETHPoW as possible after the fork, huge selling pressure will follow. Ethereum PoS supporters will try to sell as quickly as possible while the price of ETHPoW is still considerable in order to obtain cash gains. Any PoS supporter will intentionally exert selling pressure on the chain they consider hostile.

Having said so much, let’s turn to the existing blockchains that can replace ETHPoW .

Rather than switching to a new forked chain, some miners would rather stay with the old one, namely ETC.

The reason is simple. The original Ethereum chain (forked after the DAO was attacked in 2016) may be the first place miners can think of after the ETH2.0 era. It runs a slightly modified Ethash algorithm, so it is quite easy for miners to transfer computing power to it after the PoS merger.

Antpool (Bitmain Mining Pool) has also set an example. The team promised to invest $ ¹⁰ million in the ETC ecosystem25 for the development of DeFi applications to replicate the financial tools that have been popular on Ethereum in recent years, and also replicate the revenue generated by this application.

Just like ETHPoW, miners need these smart contracts, investors and users, so that it is possible to fill the gap in mining revenue under ETH and ETC.

The gap is: Ethereum miners earned $18.4 billion last year, while Ethereum Classic miners earned $318.7 million, a gap of nearly 60 times.

Figure 5: Comparison of ETH and ETC computing power prices

The computing power gap is even greater. As of the time of writing, ETH's computing power is 900TH/s; while ETC's computing power is only 30TH/s, a difference of 30 times.

After seeing the difference between ETH and ETC in terms of revenue and computing power, it is obvious that ETC cannot fully absorb ETH’s computing power. And the revenue is not enough to share.

In fact, to support Ethereum’s existing miners’ computing power, the price of ETC needs to increase 50 times.

Figure 6: Comparison of ETH and other PoW chains’ revenue in the past year

In summary, we expect miners to switch to other blockchains to obtain mining benefits (DOGE, RVN, LTC, etc.). However, as can be seen from the above figure, facing this second largest crypto mining group, the blockchains where these tokens are located are also unable to cope with it. Therefore, the best solution is to evenly distribute the computing power to the blockchains where these tokens are located (ideal state).

No Way Out

Unfortunately, once Ethereum’s computing power loses its value, it will become a candle in the wind and homeless.

The ETHPoW fork itself has too many variables, not to mention the issues of centralization and transparency. It may be profitable in the short term, but in the long run, it is unlikely to become a stable source of income. As far as the existing PoW blockchains are concerned, they are not enough to meet the income demands of the entire Ethereum miner group.

The best solution for miners is to evenly distribute computing power to different tokens. Based on the principle of seeking the best mining benefits, this situation will eventually come. But even if the computing power is evenly distributed, the miners' benefits will be greatly reduced compared to before.

The arrival of Ethereum 2.0 will truly be the end of an era. It will sound the death knell for most of the mining industries under the tokens and rewrite the history of token mining.