Bloomberg Businessweek: Ethereum mining is going away and miners are unhappy

The shift from proof-of-work to proof-of-stake would drastically reduce electricity consumption and allow some expensive technologies to find new uses.

Mikel-Angelo Chalfoun, an Ethereum miner, stores his graphics cards at a warehouse in Dubai.

The Ethereum mining community is a diverse group, both geographically and demographically. There’s a 28-year-old translator in Ukraine who runs some computing hardware on his balcony to earn cryptocurrency so he can buy clothes and other necessities. In Argentina, a retiree uses her gaming PC to double her monthly pension. And a college student in Canada has mined enough to buy a BMW motorcycle and a modified 2006 Dodge Charger SRT — and pay for gas every month.

Even many outside the blockchain world know that the collapse of the cryptocurrency market has made the past few months quite painful for anyone whose finances are tied to the currency. As of June 15, the price of Ethereum was down about 70% this year. At the same time, a little-known factor (a tectonic shift known as Ethereum's "merge") will end Ethereum mining entirely, cutting off income for as many as 1 million people. "It will be a huge economic blow, almost completely depriving the original miners of a good source of income," said the Ukrainian translator. (He asked to remain anonymous for fear of being robbed.)

Bitcoin and Ethereum, the two largest cryptocurrency networks by market capitalization, both use a process called proof-of-work to record transactions, with so-called miners dedicating computer resources to solving difficult math problems to add blocks of transactions to a public ledger. Miners receive payments in cryptocurrency as rewards. Bitcoin mining, which typically involves specialized equipment, has become industrialized; as mining has moved to data centers, participation by ordinary people has been largely eliminated. But Ethereum mining relies on the kind of graphics cards inside a typical gaming PC, and many ordinary people can still do it.

Proof of work is simply a race to make computers work harder, which means it uses a lot of energy. The environmental toll it takes is a major criticism of cryptocurrencies by environmentalists. Since Ethereum’s inception, its developers have been preparing to move to an alternative model known as proof of stake. Under this system, people would reserve or “stake” a certain amount of ether, the cryptocurrency of the Ethereum blockchain, to win rewards for running software that batches transactions correctly into new blocks and checks the work of other validators. Proof of stake could reduce the Ethereum network’s electricity consumption by about 99%. It would also put miners out of work, a major blow given the capital investment to set up the business. Ethereum miners have already spent about $15 billion on graphics processing units (GPUs), according to Bitpro Consulting, not including ancillary costs such as wiring and transformers.

Prices of some used graphics processing units on eBay

Average of the previous week??

The Ethereum merger is expected to take place in August, although no official date has been given. It has been pushed back multiple times, and many miners hope it will happen again. "I don't think they'll get it done anytime soon," said Aydin Kilic, COO of Hive, an industrial Ethereum miner. But others involved with Ethereum believe the merger is inevitable. "The odds of it not happening this year are very low (from 1% to 10%)," said Tim Beko, a computer scientist who coordinates Ethereum developers. "What I want to avoid is someone buying a mining GPU today, but the merger happens this summer, which will make it almost worthless."

Despite this, miners are actually expanding their operations. The price of GPUs has fallen by more than half since the beginning of the year, leading to a surge in purchases. Ethereum’s hashrate, a measure of the mining power supporting the network, has nearly doubled in the last year, according to data from tracker Etherscan. Even with the current low cryptocurrency prices, mining Ethereum is more profitable than backing any other major coin, including Bitcoin. “I guess people are trying to get as much as they can before it’s over,” said Slava Karpenko, chief technology officer of 2Miners, a group that helps small miners pool their resources to support Ethereum. The number of active users has climbed 70% to about 120,000 since November, he said.

Still, recouping costs has become more difficult because of the drop in ether's price. Mike Lam, a 38-year-old engineer from Ontario, has been mining for a year and has earned only about $5,000 worth of cryptocurrency on his initial $30,000 investment in hardware; he also pays a monthly electricity bill of about $650. Aaron Petzold, 24, a recent college graduate who mines ethereum at his parents' house in Wisconsin, said he has four months to recoup his more than $28,000 investment. "I want to keep mining until the end," he said. "It's a lot of uncertainty. No one really knows what's going to happen. There are a lot of people who think I'm obsessed."

The Ethereum merger may be finalized after August.

Miners won’t gain nothing. After the merger, their mining rigs will still be powerful computing devices that can be used elsewhere, and some are planning to mine other coins or find other uses for the devices. After the merger, Petzold is considering using his rig for a piece of hardware in digital video production, mainly rendering, which requires a lot of computing resources. “There are other uses for these graphics cards,” he said. “You can turn it into a render farm, you can do different machine learning options. They’re just not going to be as profitable as mining.”

Canadian mining pool operator Flexpool is looking to add more tokens for its members to mine and plans to deploy its developers to program other cryptocurrency projects. “It’s like a typewriter company,” said an executive who requested anonymity for fear of being robbed. “No one buys typewriters anymore, so you have to use the capital you made on typewriters to move into other businesses.”

Others, like Ivan Zhang, 35, and Karol Przybytkowski, 36, plan to sell their stable of graphics cards and use their facilities in upstate New York to host other miners’ rigs and collect fees. But with many ethereum miners likely to rush to sell immediately after the merger, GPU prices are expected to fall further. Bitpro plans to stop buying graphics cards within a few weeks, and its CEO Mark D’Aria said: “My view is that whatever we pay today is going to be a lot less after this event. We’re just going to sit there and watch this happen and pick up the pieces.”

Some miners hope to do better by moving to mining other coins that require GPUs, such as Ethereum Classic or Ravencoin. The more miners flock to any coin, the harder it is to make a profit. But crypto breeds optimism, and miners are building on the fact that their business will be a reason to survive. Mikel-Angelo Chalfoun, 30, pays $9,000 a year for a warehouse in Dubai to house and power his 76 graphics cards. He says he will be able to compete with miners at a higher cost. "No matter how cheap crypto gets, no matter how harsh the crypto winter is, I'm fine, I will never mine at a loss," he said.

Other miners just feel betrayed. “Until the merger, they need miners! This is a bit weird. Ethereum needs us miners until they kill us,” said Lin, a Canadian engineer who runs 50 graphics cards in his basement.