"Zhikuang University Q&A" Why does Ethereum's mining output fluctuate so much?

Answer from @JackyLHH, editor of Zhikuang University:

Compared with Bitcoin mining, the volatility of Ethereum mining revenue is greater. This is mainly due to two reasons: one is the volatility of handling fee income, and the other is the volatility of currency prices.

Ethereum mining revenue mainly consists of two parts: transaction fee income and block rewards. Let’s first look at the transaction fee. As shown in the figure below, the DeFi liquidity mining boom in July and August this year has led to a rapid increase in Ethereum’s transaction fee income. On September 17, the airdrop of the decentralized exchange Uniswap made the transaction fee income on that day reach 42,763 ether.

Figure: Ethereum’s daily fee income

As the representative of blockchain 2.0, Ethereum, the underlying public chain, has attracted a large number of developers and users. New ways of playing and innovative things appear every once in a while, from CryptoKitties, FOMO 3D to the current liquidity mining. Every time a new way of playing appears, the Ethereum network will be congested and the transaction fees of the entire network will soar rapidly. The ones who benefit from the congestion are always the Ethereum miners who make a fortune in silence.

In contrast, Ethereum's block reward has stabilized. The block reward was initially 5ETH, and the Byzantium upgrade in October 2017 reduced the block reward from 5ETH to 3ETH. The Constantinople upgrade in March 2019 reduced the block reward from 3ETH to the current 2ETH.

In addition to the fixed reward of 2ETH per block, if the block references an uncle block, the miner who generates the block and the miner who creates the uncle block can also receive additional rewards.

The average block time of Ethereum is about 13 seconds. After miners mine a block, they need to broadcast it to the entire network. The broadcast process takes time. Miners of other nodes may have mined new blocks at the same block height before receiving the broadcasted new block, causing a temporary fork in Ethereum. Due to the short block time, the probability of a temporary fork in Ethereum is very high. In order not to affect the enthusiasm of miners to mine, the Ethereum system stipulates that blocks that are not on the longest chain but are referenced by the latest 6 or less blocks on the longest chain are called uncle blocks and can also receive rewards.

A block can reference up to 2 uncle blocks. According to statistics from the blockchair website, the current uncle block rate of Ethereum is about 5%.

Figure: Ethereum’s uncle block rate

Another reason for the volatility of Ethereum mining income is the volatility of the coin price. Some miners like to sell the coins they mine on the same day, and the mining income is greatly affected by the coin price of the day; other miners like to store the coins they mine after deducting the electricity fee and wait until the bull market to sell them. The two different strategies have a great impact on the mining return rate. The following example uses a Bitcoin mining machine to illustrate:

In the last Bitcoin mining cycle (i.e., from the second halving to the third halving: July 2016 to May 2020), if one Antminer S9 was used for mining, with a computing power of 13.5T and a power consumption of 1320W, the mining machine was priced at 13,500 yuan. Based on the annual unit price of 0.38 yuan/kWh of electricity, the total annual electricity bill was 17,576 yuan. During the mining cycle, the total output of the S9 mining machine was 5.09 BTC.

If you choose to mine and sell coins on the same day, the total income will be 76,397 yuan, and the mining return rate will be 465.866%; if you choose to hoard coins and sell them when the price is 8,800 USDT, the total income will be 302,681 yuan, and the mining return rate will be 2011.88%.

Therefore, if you are optimistic about Ethereum in the long term, it would be a good strategy to hoard the coins mined now and sell them when the bull market comes. But if you are looking for a stable cash flow every day, it is understandable to sell them on the same day they are mined.

Risk warning: The content of this article is only the author’s personal opinion, does not represent the views or position of Zhikuang University, and does not constitute any investment opinion or recommendation.