ETH2.0 is coming, how can miners achieve "reemployment"?

It has been 4 years since the Ethereum consensus mechanism officially planned to switch from proof of work (POW) to proof of stake (POS). As the first step of the ETH2.0 roadmap, the Ethereum Beacon Chain is committed to introducing a more secure and environmentally friendly proof of stake mechanism for the consensus layer of the Ethereum network. It is planned to completely replace the energy-consuming and increasingly centralized proof of work after integration with ETH1.0.

In the PoW stage of Ethereum, miners compete for the right to record and sort transactions through hash collisions. After adopting proof of stake, people will stake Ethereum on a new chain (beacon chain) and randomly become validators to sort transactions in the network, thus forming a new consensus form.

In addition, according to statistics, after Ethereum is officially integrated, the overall energy consumption of the network will be reduced by 99%.

However, in addition to some positive iterations, this transformation also means that traditional mining behavior will be difficult to sustain, which will undoubtedly have a huge impact on a large number of miners. Faced with this situation, miners have two choices:

One is to sell mining equipment and buy ETH to adapt to the PoS staking mechanism;

The second is to switch the miner to other networks that support GPU miners.

Nick Foster, a representative of Kaboomracks, a U.S. mining equipment distributor, said that most ETH miners are likely to choose the latter.

Back to Ethereum 2.0. Although the Ethereum merger has been planned for many years, the continuous technical challenges have repeatedly delayed its completion. Based on the ETH core developers' impatience and the successful merger of the Ropsten test network, if there are no accidents, the main network merger is expected to be on track in August or September (which seems a bit difficult now).

There are two types of Ethereum mining machines: ASIC and GPU.

ASIC (Application Specific Integrated Circuit) is computer hardware designed for a specific purpose. Ethereum ASIC miners have hashing algorithms written in them that are suitable for Ethereum. GPU miners can solve complex PoW calculations, but can also be used for more general applications. For example, GPUs are often found in workstations and gaming computers, used to render images, encode videos, or perform any other application that requires repetitive calculations.

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' mining activities are based on GPU miners, while the other 10% are based on ASIC miners. Michael Carte, the host of Bitsbetripping and a crypto mining consulting business, has also publicly stated that he estimates that 20-30% of miners on the network are mining based on ASIC miners.

The biggest problem with Ethereum ASIC miners is that they can only be used for ETH mining and are almost incompatible with other applications. Ethereum Classic is the only other PoW cryptocurrency that can be mined with Ethereum ASIC miners because its hashing algorithm is compatible with ETH's algorithm. But this also means that if mining Ethereum Classic is unprofitable, then ASIC miners will most likely not have a resale market and may even be shelved completely after the Ethereum merger.

Therefore, after the Ethereum merger, GPU miners become the only Ethereum mining hardware that can be repurposed for other applications. So what should miners do after the Ethereum merger?

After analyzing a large number of GPU mining machine reuse solutions, the well-known research institution Messari has come up with the following relatively feasible solutions:

1. Mining other PoW tokens

For some long-term miners, they may have become accustomed to passively earning cryptocurrencies from mining equipment or gaming computers.

As Ethereum abandons the PoW mechanism, miners will undoubtedly want to know what other PoW coins they can mine. Relying on the mining profit calculation website WhatToMine, miners can determine the mining profit of cryptocurrencies based on the specified mining machine type and electricity cost.

Some large miners seem to be on a similar path. Sue Ennis, vice president of Hut 8, said that Hut 8 is considering mining other PoW tokens, such as Ethereum Classic, after the Ethereum merger. In addition, Hut 8 also plans to switch its GPU hash power to Luxor Mining Pool to mine tokens including BTC, DASH, ZEC and SC, and all profits are paid in Bitcoin.

But this solution also has a problem that cannot be ignored - the market size of these PoW tokens is far less than that of Ethereum.

As of June 9, the total market value of GPU-mineable tokens other than Ethereum was $4.1 billion, accounting for about 2% of Ethereum's market value. Among the top seven GPU-mineable tokens by miner revenue, Ethereum alone accounts for 97% of GPU miners' total revenue. Ethereum Classic accounts for 1.9% of GPU miners' total revenue, ranking second. From these data, we can imagine how much the market size of GPU-mineable tokens will shrink without Ethereum.

A common misconception in the mining space is that an increase in hashrate leads to an increase in coin prices, when in fact the opposite is true. If ETH GPU miners flock to a PoW coin overnight, this will significantly increase the difficulty of mining that coin, resulting in a decrease in mining rewards. The end result is that most miners cannot be profitable. Only those miners with access to the cheapest energy can remain profitable, which is likely to be institutions and large mining companies. Therefore, this means that only a small portion of ETH computing power will be able to migrate to other GPU mineable coins.

The only way for other public chains that can mine tokens through GPUs to absorb Ethereum's computing power is to increase the token price by several orders of magnitude. Given that the user activity on these public chains is much lower than that of Ethereum, the probability of a significant increase in the price of their tokens is very small. In addition, most PoW public chains lack healthy community building except for the miners themselves.

Take ETC for example, even though Ethereum Classic (ETC) ranks second in the GPU miner revenue list, the network actually only has $120,000 in total value locked and about 35,000 daily active addresses. In comparison, Ethereum has a total value locked of $50 billion and more than 493,000 daily active addresses.

This discrepancy suggests that the massive price increase of ETC over the past two years has little to do with network fundamentals and is driven primarily by speculation. As a result, this means that miners will have a hard time finding alternative coins with real value and network usage.

Overall, it is difficult to see a large-scale migration of miners to other PoW coins as a sustainable solution. Any increase in hash rate will increase mining difficulty and drive most miners out of profitability. Unless the price of mined coins increases by several orders of magnitude, the network can only accommodate a small fraction of Ethereum's hash rate, which is unlikely to be achieved based on the current fundamentals of these projects.

2. Data centers that provide high-performance computing

After several years of development, the scale of Ethereum miners has grown from individual miners with only small mining machines to large mining companies that operate thousands of mining machines and are publicly listed. Although small miners may easily transform after the Ethereum merger, it will be very difficult for large miners who have invested heavily in mining hardware, dedicated warehouses, and electricity-related infrastructure to make the next decision.

Hut 8 and HIVE Blockchain are two large publicly traded mining companies that have announced their post-Ethereum merger strategies. Both Hut 8 and HIVE Blockchain have said they will attempt to transition into the high-performance computing industry. Both companies have acquired data center businesses in order to reposition the company for transformation. These data centers are designed to provide an alternative to network services from 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 to provide high-performance cloud computing services. Hub 8 describes its GPUs as the "Ferrari of GPUs" and they are one of three important customers of NVIDIA. Hut 8 specializes in projects in the Web3 industry, providing cloud hosting services such as blockchain infrastructure, game rendering, and NFT storage.

As gaming, artificial intelligence, and movie animation flourish, the demand for high-performance computing will continue to grow. Once the Ethereum merger occurs, this growth is an opportunity for large miners to gain a large new source of income.

3. Providing computing power for Web3 protocols

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 built as a 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 computing power to a handful of Web3 protocols, including:

Render Network: A distributed GPU computing power market that allows users to contribute computing power for 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 that handles video streaming. The network relies on miners using GPUs to provide video transcoding services.

Akash Network: A decentralized cloud computing power market that provides a collaboration platform for providers with extra computing power and users seeking computing power. Akash aims to integrate the GPU market into its platform in 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 to find new homes. It is worth noting that some protocols (such as Akash) set additional hardware capital thresholds for miners to become computing power providers. This solution is open not only to small miners, but also to large miners. In the future, Ennis said Hut 8 will open its data center as a node operator/provider for Web3 protocols (such as Render Network).

4. Sell mining machines and pledge mined ETH to participate in PoS

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 to run a validator node. In return for validating transactions, validators receive rewards in the form of block rewards, tilt incentives, and MEV. Depending on the number of stakers and the level of network activity, the yield can be between 7% and 13%. For miners who do not have 32 ETH or do not want to take the risk of running a validator node, they can also participate in staking through ETH 2.0 staking service providers.

After Ethereum successfully merges with the mainnet, the GPU mining market for PoW tokens will most likely shrink rapidly. As miners realize that mining other PoW tokens will only keep a few miners with access to cheap energy profitable, most GPU mining machines will be resold on the secondary market.

Miners willing to invest time and money will be able to transition to high-performance data center operators or node providers for Web3 computing protocols, so both markets will have huge growth potential.

While the Ethereum merger appears to be the end of GPU mining, it may also usher in another era, and the "displaced" miners will not sit idly by and will look for new opportunities in Web3.