Hot weather? Ethereum miners are shivering in cold weather

Over the past few months, the price of Ethereum has continued to fall, and market panic has continued to spread. Under the shadow of the bear market, it is not only investors who are in urgent need of recharging their faith, but also Ethereum miners.

Data source: Coinmarketcap

Since the beginning of 2018, the cost of Ethereum mining has continued to rise. At present, a mining machine with six graphics cards running continuously for 24 hours can only mine about 0.33 ethers per month. The price of Ethereum has shrunk by nearly 70% compared to its peak in 2017. After deducting the electricity cost, the monthly mining income of a single mining machine is only a few hundred yuan. If the equipment fails during operation, or its performance deteriorates due to long-term operation, this month's mining will be almost in vain.

After the halos of low threshold and high profits of Ethereum mining faded, some miners left the market with full load and chose to retire early; some miners boldly pursued it, hoping to continue to benefit; there were also some new miners who found the road ahead worrying after entering the market and struggled with whether to cut their losses and leave as soon as possible.

However, whether they are experienced seniors or newcomers under pressure to make a profit, the miners who are still sticking to the Ethereum blockchain all hope that the glory of the past can appear again.

1. Crazy prices, crazy computing power, crazy miners...

According to historical price data, the price of Ethereum was less than $5 before 2016. Then, as the ICO market became popular, the price of ETH began to soar in March 2017; in just four months, it doubled every month, soaring from $15 to $300.

Data source: Coinmarketcap

The crazy price increase during this period attracted a large number of gold diggers to enter the market. The total network computing power increased by nearly 1.5 times in the second quarter of 2017, a month-on-month increase of 71 percentage points. Although the influx of computing power has increased the difficulty of Ethereum mining and reduced the output of ETH per unit time, under the influence of this hot market, the net income of Ethereum miners is still rich, three times the average in the first quarter of 2017.

According to mining machine manufacturer PandaMiner, the minimum static payback period for miners who purchased their mining machines during this period is only two months.

Note: The calculation results are based on the electricity fee of 0.7 yuan/kWh, the power consumption level of 150MH/s computing power, the monthly average of the computing power and price of the entire network.

Not only these new miners who quickly recovered their investment, but also the early participants who started mining before 2017 also made considerable profits. When they entered the market, the price of Ethereum was not high, and the mining profit was not lucrative; but at that time, the total computing power of the entire network was low, and the ETH mining output per unit time was extremely large (compared to now).

When the Ethereum test version Frontier was released on July 30, 2015, there were not many mining participants because there was only an execution page and there were unresolved issues; at that time, a graphics card mining machine with a computing power of about 150 MH/s could mine about 100 to 200 ETH per month.

After the release of Homestead, the official version of Ethereum, on March 14, 2016, the number of external participants increased, and the total network computing power gradually increased, but it was still less than 2% of the current level; using the same graphics card mining machine with a computing power of about 150 MH/s, it can also mine 20 to 30 ethers per month. If it were put on hold until now, it might not be possible to mine this amount in 15 years.

Without the motivation of high profits, most early participants entered the market with a try-it-out mentality. Among these people, there were miners’ exchange group owners who accidentally saw the mining equipment promotion, and Canadian miners who accidentally saw Vitalik’s report. These miners who mined Ethereum at low cost, if they hoarded the coins until the Ethereum price skyrocketed in 2017 and then sold them, they could not only recover their investment, but also make a good profit.

A miner who started mining in June 2016 told Hashpie, “The price of the coin was not high at the beginning, and I just mined it for fun without considering the issue of making a profit. But what is certain is that I made a full profit in March 2017, and it was very profitable.”

Note: The power consumption level of 150MH/s computing power is calculated based on the computing power of the entire network.

Another reason that prompted miners to accelerate their entry is the skyrocketing price. From December 2017 to January 2018, the price of Ethereum increased exponentially and hit a record high of $1,432. During this period, miners' enthusiasm for entry increased rapidly, and the total computing power of the entire network quickly increased by nearly one-fold.

The influx of computing power and the adjustment of block rewards after the Byzantium hard fork caused a significant decrease in the mining output per unit time of miners during this period, which was nearly 90% lower than the average in Q2 2017. However, the mining income in the two time periods was similar due to the nearly 4.5-fold increase in the price of Ethereum. In January, when the price of ETH reached its historical peak, its mining income was even higher than that of BTC during its historical peak.

With the mentality of chasing the rise of cryptocurrency speculation, a large number of new miners plunged into the Ethereum mining market. They did not hesitate to buy graphics cards that were hyped up to high prices or even futures, so as to quickly enter the market, hoping to make a fortune before the mining craze cools down.

However, what greeted these miners who rushed into the market was not the lucrative mining income or a quick payback period; instead, it was the worst quarter and mining disaster in Ethereum’s history.

2. What comes head-on is wave after wave of attacks

"When I saw Bitcoin breaking through 100,000 and Ethereum breaking through 4,000, I paid attention and joined the industry (mining Ethereum). But I encountered mining accidents right after entering the market. I invested 100,000 at the time, and now I still haven't recovered about 50% of my investment." - A helpless description of a miner who entered the market at the end of December 2017

From the end of 2017 to the beginning of 2018, the price of Ethereum and graphics cards soared, and the initial cost for miners to enter the market during this period was relatively high. What weighed on their shoulders was not only the high entry fee, but also the multiple pressures from the Ethereum network and external stakeholders.

Block rewards decrease, mining costs surge

Like all mineable currencies, the cost of cryptocurrency mining has gradually increased with the increase in participants and the total network computing power. As shown in the tangent line in the figure below, the growth rate of Ethereum mining costs has accelerated significantly since October 2017, and has accumulated a 126 percentage point increase since last month. However, in addition to the increase in the total network computing power, this wave of cost surges is also caused by the reduction of Ethereum network block rewards.

Note: The calculation results are based on the electricity fee of 0.7 yuan/kWh, the power consumption level of 150MH/s computing power, the monthly average of the computing power and price of the entire network.

In fact, in order to allow the Ethereum network to smoothly transition to the PoS (Proof of Stake) mechanism, after the execution of the first phase of the Byzantine hard fork of the Metroplis upgrade in October last year, the block reward of its network has been reduced from the original 5 ETH/block to 3 ETH/block.

Although the block time of Ethereum has dropped from about 30 seconds in October 2017 to the level before May of the same year (about 15 seconds) after the hard fork, the mining output of Ethereum miners has been greatly reduced due to the two factors of the decline in block rewards and the surge in computing power. According to current miners, "the current output is at least three times lower than before the hard fork."

Ethereum average block time history (data source: etherscan)

The reduction in mining output, coupled with the continued decline in Ethereum prices since the end of January 2018, has led to a downward trend in Ethereum’s monthly mining revenue.

Other interested parties enter the market and share the block rewards

The deteriorating mining income has forced some miners to leave the market out of frustration. SparkPool, which currently accounts for about 16% of the computing power of the Ethereum network, said that when the price of the currency drops, the number of small mining participants in the network drops significantly.

However, in the past month or so, the computing power of the entire Ethereum network has not shown a significant downward trend, and currently remains at around 260 TH/s (data source: etherscan.io). By querying the Ethereum mining addresses, it can be found that there is no shortage of new entrants in the network computing power rankings; for example, USITech (data shows that USI is a foreign exchange broker that can provide cryptocurrency transactions) and cloud mining pool Kuverpool, which joined in Q1 2018 and quickly ranked at the top of the rankings, as well as the mining address "0xcc16e3c00dbbe76603fa833ec20a48f786dfe610" that has mined more than 10,000 ETH since February this year but has never transferred them out.

The suspected coin hoarding behavior of these mining addresses may be related to the upcoming consensus mechanism switch.

Screenshot from: etherscan.io

According to the setting of Constantinople hard fork, the next stage of Ethereum development, the Ethereum blockchain network may switch to a PoW+PoS hybrid mechanism. This means that in addition to maintaining the network and mining block rewards by contributing computing power, participants can also obtain block betting income by staking funds under the PoS mechanism. According to the currently published draft, participants must hold at least 1,000 ETH.

In order to participate in the PoS competition for currency reserves, as the Constantinople hard fork approaches, the phenomenon of Ethereum network hoarding coins may become more and more serious. Small Ethereum miners who are under the shadow of these large mining companies and large institutions will see their mining income greatly reduced.

New mining machines launched, mining competitiveness threatened

Since the Ethash algorithm used by the Ethereum blockchain is an algorithm that heavily relies on RAM bandwidth, many people believe that it is not cost-effective to turn it into an ASIC. Therefore, in the three to four years since the birth of Ethereum, no ASIC chips designed specifically for it have appeared.

It was not until April this year that the first mining machine developed specifically for Ethereum mining, AntMiner E3, was launched. AntMiner E3 was developed by Bitmain and is expected to be shipped in mid-July this year. According to the data provided by Bitmain's official website, compared with the graphics card mining machine (eight graphics cards), the current use of a single AntMiner E3 for Ethereum mining will increase monthly mining income by about 11%.

Data source: Cryptocompare (time: June 3, 2018)

Although the 11% efficiency improvement is not much, the mining competitiveness of AntMiner E3 per unit time is higher than that of GPU mining machines. Of course, this is only a theoretical calculation. Whether AntMiner E3 can reach the standard of its reference parameters will have to wait until the mining machine is shipped in July to know.

Under the pressure of increased initial costs, reduced block rewards, the entry of other interested parties and the emergence of new mining machines, unless miners can look forward to a new round of price surges, the payback period for these miners who enter the market to chase the price increase will be greatly prolonged.

In 2018, the “public chain war” is about to begin. With the successive launch of the mainnets of public chain projects such as EOS, which claims to surpass Ethereum, and Aeternity (AE), the European version of Ethereum, Ethereum, Ethereum’s position as the “public chain hegemon” will be challenged. In addition, in recent months, the United States, Canada and other countries have increased their intervention in the ICO market; it is unlikely that the price of Ethereum will find a new breakthrough in the short term.

3. Boiling frogs in warm water forced miners to find other ways out

For early mining participants, it is not a problem to get back their investment. The temporary rise and fall of the coin price will not have much impact on them. As long as the current mining electricity price is not a loss, it will still be profitable in the long run.

However, the Byzantium hard fork executed in October last year was only a prelude to the Ethereum consensus mechanism switching plan. Participants in the blockchain network will also face unknown arrangements during the transition from the PoW mechanism to the PoS mechanism.

Ethereum development timeline and characteristics of each stage

According to the design of Ethereum's development route, after the Metroplis Phase II Constantinople hard fork, the Casper project will be launched and will push the Ethereum network to slowly switch to the PoS mechanism. However, the specific details of the project, execution time, etc. are still under discussion.

At this stage, it is known that the Casper project is divided into two protocols: Casper FFG and Casper CBC. Casper FFG, proposed by Vitalik, aims to gradually switch to the PoS mechanism through the PoW+PoS hybrid consensus mechanism; and Casper CBC, which focuses on building security proofs but is still vaguely described. Of the two, Casper FFG is being developed faster, with the first version of the code released in early May, and the speed of experiments is expected to be put on the agenda.

According to the preliminary settings in the EIP 1011 Hybrid Casper FFG draft, after switching to the PoW+PoS hybrid mechanism: with a cycle of 50 blocks, the validator will vote on the last block in the cycle, that is, the PoS mechanism will be used to generate blocks; and the rewards for the remaining blocks generated under the PoW mechanism will decrease by 0.6 ETH/block every 3 months, and will gradually decrease from the current 3 ETH/block mining reward to 0.6 ETH/block within one year.

Screenshot from: EIP 1011 on Github

If the EIP 1011 draft becomes a reality, and the Ethereum network computing power, block speed and price remain at the current level (268 Th/s, 15 seconds, $619), small Ethereum miners will face the embarrassing situation that the mining cost is more expensive than buying coins directly six months after the activation of the Casper project. Large mining farms will become unable to make ends meet when the Ethereum block reward is reduced to 0.6 ETH/block.

From a theoretical perspective, assuming that the difficulty of mining increases exponentially without considering the detonation of the difficulty bomb, unless the price of Ethereum can double to more than $1,043, or the computing power of the entire network can be reduced by at least 36%, even if the more efficient AntMiner E3 mining machine is used, small Ethereum miners will not be able to survive the transition period of the PoW+PoS hybrid mechanism.

In other words, after the Ethereum network switched to the PoW+PoS mechanism, individual miners were forced to leave the market one after another; if the total computing power of the entire network or the price of Ethereum can return to the level around the beginning of 2018, large mining farms will have the possibility of continuing to make profits at this stage.

Of course, this is just a possible scenario based on current data. How and when the PoW+PoS mechanism will come is still unknown. However, it is certain that in order for the Ethereum network to smoothly switch to the pure PoS mechanism, the miners under the PoW mechanism will have a harder and harder life in the future until they are squeezed out of the Ethereum blockchain.

Facing an uncertain future, many Ethereum miners seem to be ready to move. They told HashPie, "There are many other coins without ETH. Anyway, it is easy to switch graphics card mining machines. At worst, we can just mine a different coin."

Compared with highly specialized ASIC miners, GPU miners are indeed more flexible and can switch freely between multiple algorithms such as Ethash, Groestl, Equihash, etc. Top-ranked cryptocurrencies such as Ethereum Classic, Monero, Zcash, Bitcoin Gold, Decred, Verge, etc. can all use GPU mining.

At first glance, there seem to be quite a few currencies to choose from. However, except for Monero and Ethereum Classic, the current mining income of the relatively top-ranked currencies is generally lower than that of Ethereum. Of course, there are also currencies with higher income than Ethereum, such as SIB and PASL; but their market size is relatively small, mostly at the level of tens of millions of dollars or less. Whether they can grow in the future depends on their future development.

Some of the currencies that can be mined using GPUs (data from: hemabit, time June 3, 2018)

On the other hand, with the development of field technology, the increase in power consumption of mining under the PoW mechanism and its increasing impact on electricity consumption in some areas, the craze for digital currency mining is gradually fading. In recent years, the market share of digital currencies based on the PoW model has also shown a downward trend year by year.

With the number of new currencies using the PoW mechanism decreasing and ASIC mining machines for current currencies being launched one after another, there seems to be little room for Ethereum miners to transform in the future.

Note: According to Coinmarketcap data, the current share of digital currencies using the PoW mechanism in the market has fallen below 50%

As the access point for miners, mining pools are also seeking new ways out for themselves as the revenue from Ethereum mining gradually decreases.

Some mining pools such as Dwarfpool, Sparkpool, ethpool, and ethermine, which support fewer currencies and whose profits are mostly concentrated on Ethereum mining, have added support for other cryptocurrencies since last year. For example, ethpool, ethermine, and Dwarfpool recently started Zcash mining business.

In addition, some mining pools have also stated that they are considering switching to PoS mining pools in the future. If these large computing power users who entered the market earlier are calculated based on the handling fees they charge, they may have a large amount of ETH stored in their mining pools. In other words, whether it is the transition to the PoW+PoS hybrid mechanism in the future, or the complete switch to the pure PoS mechanism, these Ethereum mining pools are likely to profit from it.

Note: The transaction fee of each mining pool is 1% for Ethermine, Dwarfpool, BW.com, Nanopool, Ethpool, and Sparkpool; 0.9% for Miningpoolhub; 1.5% for Pandapool; and free for bitclubpool

"These wealthy and technically skilled mining pool owners are different. They can switch the mining pool mechanism and continue mining in a different mode. Unlike us small investors, we have to worry about machine failures, equipment overheating and other trivial matters every day. We also have to worry about what to do in the future - should we stick to our beliefs and continue mining, or should we sell our stocks and leave the market as soon as possible to avoid more troubles," a miner who has been in the market for a short time couldn't help but sigh, "Anyway, the difficulty is so high now that we can't mine any volume even if we are exhausted, so we might as well just turn off the machine and go to sleep."

Ethereum miners are going through the first hot and cold winter of 2018.