• Ethereum miners place a multimillion-dollar bet on a delay in upgrading

  • Despite the second network’s impending switch to proof-of-stake, major bitcoin mining firms and miner manufacturers are increasing their investments in ethereum mining.

    Hut 8 and Hive, two publicly traded bitcoin mining companies, are expanding their capacity to mine the second-largest cryptocurrency by market capitalization. Meanwhile, miner manufacturers such as Bitmain and Innosilicon plan to release new ethereum mining machines later this year.

    This investment may appear odd given that the Ethereum system is expected to transition from proof-of-work (POW) to proof-of-stake (POS) mining in five months, and POS mining does not require such advanced machines. According to industry experts, rising demand could be attributed to expectations that the migration will be delayed.

    “We were told four years ago that mining would end, and it is still going,” said Mark D’Aria, CEO of Bitpro, a New York-based consulting firm specializing in the brokerage and management of Ethereum mining hardware. “It has always been a wait-and-see approach – things take longer than everyone anticipates.”

    While last week’s London fork brings the network one step closer to Ethereum 2.0, significant upgrades have a track record of multiple delays throughout Ethereum’s six-year history.

    For example, the Constantinople upgrade – a key step toward Ethereum 2.0 – was originally scheduled to launch in July 2018, but a bug in its code delayed its deployment until February 2019, further delaying the migration.

    The Ice Age caused mining to freeze.

    The difficulty bomb was introduced in Ethereum Improvement Proposal (EIP) 3554, which adds artificial miners to increase mining difficulty, making mining operations less profitable. This time period is known as the “Ice Age.” This EIP was first presented by Ethereum developers in 2015, but it has since been postponed until December 2021.

    According to Ethan Vera, chief operating officer of Seattle-based mining company Luxor, as the price of ether rises, it may become more difficult to transition the network to proof-of-stake.

    “We’ve seen ether reach $3,000, decentralized finance (DeFi) is being built on top of the network, and [non-fungible tokens] have taken off,” Vera said. “Even those who are bullish on Ethereum’s transition to POS want to proceed slowly to ensure that everything is done correctly and that there are no potential doubts, pitfalls, or blindspots that the developers are missing.”

    Aside from technical challenges and security concerns for Ethereum assets, potential resistance from the Ethereum mining community could be another factor slowing the network’s transition to POS.

    “One thing that hasn’t been fully realized is how much resistance there will be to that proof-of-stake migration,” D’Aria said. “To think they’re just going to flip a switch and turn off billions of dollars worth of miners is insane; it’s not going to happen.”

    Institutional participants

    Ethereum mining employs a greater number of individuals and fewer large-scale miners than bitcoin mining.

    According to Vera, mining ETH on graphic processing units (GPU) at home is possible due to the relatively low energy consumption compared to bitcoin miners, as well as the small amounts of heat and noise produced by ethereum mining rigs.

    According to D’Aria, more than 90% of ethereum mining machines are based on GPUs, which are also commonly used by gamers.

    Crypto mining heavyweights, on the other hand, are making moves to break into the industry and make profits that are greater than those made from bitcoin mining.

    According to Hive Blockchain’s financial report on Oct. 15, 2020, it has become the world’s largest public ethereum miner with 3,383 gigahashes per second (GH/s), which was 1.3 percent of the total hashrate for the Ethereum network at the time.

    By the end of this year, the Vancouver-based company hopes to increase its ethereum mining hashrate to 5,500 GH/s, a 62.5 percent increase over the previous level. In February, Hive purchased a 50-megawatt (MW) data center in New Brunswick, Canada, from data center colocation services provider GPU One.

    In May, Hut 8, another publicly-traded cryptocurrency mining company, paid $30 million for specialized Ethereum miners from GPU maker Nvidia. All miners are expected to be delivered and installed at the company’s Alberta facilities by the end of August, according to the company. It intends to have a hashrate of 1,600 GH/s and power consumption of 4MW.

    “This transaction reinforces Hut 8’s goal of increasing revenue diversification and driving immediate short- and long-term revenue growth objectives forward in FY 2021,” the company said.

    Unlike pure-play bitcoin mining firms like Marathon and Riot, companies like Hut 8 have a mandate to convert stranded or underutilized energy into computing power and reward, according to Vera.

    “I think the companies that are getting into ethereum mining this late in the game are looking at a bigger picture of how they can capitalize on their computing power,” Vera explained. “Crypto is one of many verticals that they would pursue.”

    Faster payment

    More powerful ethereum miners are entering the market, shortening the payback period on such mining operations and increasing profits.

    The specialized ethereum miners, also known as application-specific integrated circuits (ASIC), are designed specifically for mining by miner makers such as Bitmain, whereas most GPU miners are made by repurposing graphic cards for gaming.

    Nvidia unveiled its first ethereum miner in early 2021, and Bitmain and Innosilicon plan to release their latest models to mine ethereum by the end of this year.

    According to Paul Yao, vice president of global business development at iPollo, the company has made more than $200 million in revenue from pre-orders of its latest model of ethereum ASICs, which will be delivered by the fourth quarter of 2021. According to Yao, the company intends to increase production when it reaches a higher capacity and is able to produce miners all year round in 2022.

    The Singapore-based company will open an office in the United States next year, shifting its focus away from the Chinese market and toward North America. “We are seeing increased demand in North America and some Asian markets,” Yao stated.

    “With an ASIC/GPU ROI (return on investment) of five to six months and ETH 2.0 very likely more than six months away, I can understand how most would accept the risk, especially with prices looking strong,” said Azam Roslan, a senior sales associate at Wattum, a crypto miner brokerage, and management company based in New York.

    Vera estimated that if miners use the latest generation of ASICs, the payback period for Ethereum mining could be as little as four months. “Depending on the price they pay for the operations, public companies are looking at a year for payback for bitcoin mining,” Vera said.

    In comparison, some existing GPU cards for ethereum mining, such as Nvidia’s 3070 GPU card, require about 18 months for miners to cover all of their costs, according to Arseni Grusha, Wattum’s CEO.

    “You want the payback period to be less than 12 months, which means that either ETH or GPU prices must fall,” Grusha explained. “GPU prices are not expected to fall, and even if ETH reaches $4,000, it must remain there for ETH mining ROI to be appealing.”

    Margin of profit

    Since last year, Ethereum mining has generated more profits than bitcoin mining due to a strong market price and relatively low operating costs.

    While the London fork has allowed the Ethereum network to burn a portion of the gas fee that would otherwise be paid to miners, Ethereum mining appears to be even more profitable since the fork due to the price of Ethereum.

    According to Coin Metrics data, daily miner revenue in US dollars has increased by 7.1 percent and reached a two-month high. Since the update, the network has burned approximately 33% of the new coin supply growth, totaling 22,708 ETH worth $76.1 million.

    Other sources of revenue for miners include priority fees (gas fee minus the base fee burned), block subsidies (similar to Bitcoin block awards), and maximal extractable value (MEV). MEV is the amount of money that an ethereum miner can earn by assisting traders in inserting, removing, or reordering transactions in a block.

    “After EIP 1559, we still get the MEV, 2 ETH from block subsidies, and quite a bit of gas from some of the wallets,” D’Aria explained. “So it’s not that big of a deal.”

    Miners are already expecting gas fees to fall in the long run as more scaling solutions for Ethereum become available, reducing congestion and transaction fees, according to D’Aria.

    DeFi experienced explosive growth last summer as a result of a new reward mechanism for investors who use DeFi protocols, in which they can earn new tokens in addition to the returns on deposits. More trading activity on Ethereum across various protocols has significantly increased transaction fees, which are paid to miners for their work in validating transactions.

    “You get two ETHs from the block subsidies and another five to seven from the fees,” D’Aria said of the high transaction fees during the DeFi boom. However, as transaction volumes on DeFi have decreased, gas fees for Ethereum miners have decreased. “That was an anomaly, and miners want to take advantage of it while it lasts.”

    When compared to bitcoin mining, Ethereum mining has lower operating costs. While GPU miners are expensive, and running the machines is more labor-intensive, Vera believes that low power consumption will offset those costs, lowering the overall cost even lower than bitcoin mining.

    The exact date of Ethereum’s historic migration to POS is unknown, but a well-timed investment in Ethereum mining could yield a large profit, according to Vera.

    “Two years ago, miners who bet against proof-of-stake made an absolute killing,” Vera said. “If you can bet against that, the payoff could be quite substantial.”

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