Ouyi Research Institute: After the Ethereum POS, the choice of miners

Original author: Shirley Xiuxiu, Ouyi researcher 

Original source: Ouyi Research Institute

Foreword: Changes in the mining industry ecology due to the approach of "merger"

Ethereum in mid-July Core developer Tim Beiko predicted that the implementation date of the merger upgrade of Ethereum's consensus algorithm to PoS will be September 19, which caused shocks in the entire Crypto industry. The merger is to merge the beacon chain run by PoS with the original chain run by PoW, and gradually stop the PoW part of the original chain. This upgrade means that Ethereum will switch to the PoS consensus in the near future. This is a key step on the road to Ethereum 2.0, and it has also attracted much attention because it involves changes in the consensus of the public chain. Among them, the group of miners who pay the most attention to this trend may be because it is highly related to their vital interests.

The data that can directly reflect the boom and bust trend of the mining industry is the computing power of Ethereum. According to OKLink data, the current computing power scale of Ethereum is about 0.88P. Compared with the 1.05P scale in early May, its computing power has shrunk by 16%. This shows that many miners are gradually withdrawing from Ethereum mining. On the other hand, some miners have united and are waiting for an opportunity to promote the fork of Ethereum.

(The average computing power of the whole network of Ethereum, the picture comes from OKLink)

Then, the reasons for the decline of the computing power of Ethereum What are there? What does "merging" have to do with Ethereum's fork? This report aims to use roughly comprehensive clues and closely linked derivations to dismantle the changes that will occur in the Ethereum mining industry under the background of "merger". At the beginning, this report will also dismantle the reasons for the recent huge drop in computing power in detail, and the role of "merging" with Ethereum in Ethereum 2.0, and discuss the impact of Ethereum's transformation from POS consensus to POW on Ethereum. what impact. This report is for reference only and does not constitute any investment advice.

1. Reasons for the decline in computing power

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Ethereum’s computing power has shrunk by 16% in two months. The reason is that, on the one hand, the fading of the industry bubble and the cannibalization of competing products have jointly led to a decrease in project demand for ETH, which further led to a decline in the price of ETH. On the other hand, established improvement plans such as EIP-1159 and Ethereum 2.0 have changed the income structure of Ethereum miners. From EIP-1159 to the launch of the beacon chain directly led to a decrease in the share of POW mining, and then after the "merger" It is expected to gradually shift from POW to POS mining. All of them will lead to a reduction in the profitability of the current Ethereum mining machines, and together contribute to the shrinking of the scale of the Ethereum computing power.

The most direct factor affecting the mining behavior of miners is profit, according to the mining machine profit formula:

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Profit = mining machine ETH revenue - mining machine operating costs

Profit = ETH current price * mining machine gets ETH amount - mine Machine operating costs

The main factors affecting the profitability of miners are the amount of ETH obtained by the mining machine, the current price of ETH, and the operating cost of the mining machine. Since the operating cost of a single mining machine will not change significantly in a period of time, this article will conduct further dismantling and analysis from the perspective of the current price of ETH and the amount of ETH obtained by the mining machine.

1.1 Price drop due to reduced ETH usage

The relationship between supply and demand is the law at the bottom of economics, and prices are determined by supply and demand. If demand falls and supply remains the same, prices will fall. Ethereum is positioned as a world computer. When a program needs to run on the Ethereum network, Ethereum needs to allocate sufficient network resources (computing, storage, bandwidth, etc.) for it, and ETH acts as a service fee for the use of Ethereum network resources. From the perspective of supply and demand, the prosperity of the Ethereum network ecology determines the demand for ETH, and the current industry bubble recedes and competing products cannibalize the market share, resulting in a decrease in the demand for ETH in Ethereum projects.

1.1.1 Industry foam extrusion

After experiencing the DeFi boom in 2020 and the NFT boom in 2021, the industry bubble has gradually subsided, the applications on the chain tend to shrink, and the frequency of users paying with ETH has been greatly reduced.

In other words, the tightening of the industry caused by cyclical reasons has compressed the circulation and application scenarios of ETH. According to the OKLink chart, since March, the single-day burning volume of ETH has continued to decline, which has shrunk significantly compared with the previous burning volume data, which indirectly reflects the reduction in the number of transactions processed on the Ethereum chain.

(ETH burning amount, the picture comes from OKLink)

1.1.2 Competitive product cannibalization rate

Many public chains are committed to solving the expansion and performance problems currently faced by Ethereum, and most of them are compatible with Ethereum codes at the smart contract layer so that The developer who undertakes Ethereum most quickly diverts a large number of ETH usage needs. The typical representatives are Solana, Avalanche, Tron and so on.

According to the public chain TVL comparison data, although the left pie chart shows that the Ethereum public chain still ranks first with 65.42%, but the right The area chart can clearly reflect that the TVL ratio on Ethereum has declined due to the encroachment of other competing products.

(TVL diagram of the public chain, the picture comes from defillama)

1.2 The reduction of POW mining reward share caused the miner to obtain ETH The number is reduced

According to the mechanism setting, the income of Ethereum miners previously came from block rewards (fixed at 2 ETH) + handling fees, and usually block rewards bring The income is higher than the handling fee. Starting from August 2020, affected by the DeFi and NFT boom, activities on the Ethereum chain have increased sharply, Gas fees have risen sharply, and the proportion of handling fees in the total income of miners has also gradually increased.

Due to the high gas fees and waiting for packaged transactions caused by frequent congestion events in Ethereum, the user experience has become very poor, which is to a large extent This limits the development of Ethereum. Established improvement plans such as EIP-1159 and Ethereum 2.0, while committed to improving the performance of Ethereum, have also changed the income structure of Ethereum miners. From EIP-1159 to "merging" POW mining shares are gradually decreasing. until it is 0.

1.2.1 EIP-1559 reduces miners’ income

EIP-1559 is an improvement proposal proposed by the Ethereum community to solve the Ethereum congestion problem. Previously, miners' income came from block rewards and handling fees. Among them, the block reward is fixed at 2 ETH, and the handling fee changes dynamically, and all of them belong to the miners. After the implementation of EIP-1559, the service fee will be destroyed, and the miner's income will only come from fixed block rewards and tips (Tip), and the tips are completely paid by users. Therefore, under the setting of EIP-1559, part of the miners' income sources will be destroyed, and their profits will be reduced.

(The change of miners' income before and after EIP-1559, the picture comes from the Internet)

According to the previous Coindesk related research report, the implementation of EIP- After 1559, it is roughly estimated that the income of miners will drop by 20% to 35% when the tip income is zero. According to OKLink data, since the implementation of EIP-1559, the estimated supply of Ethereum is 121,693,647.47 and the actual supply is 119,136,265.16. At present, the Ethereum blockchain has destroyed 2,557,382 ETH, which is the part of the original miners’ income reduction.

(ETH supply, picture from OKLink)

1.2.2 Beacon Chain Launch

Ethereum 2.0 is an established plan to solve the current network performance bottleneck of Ethereum, and is committed to greatly improving Ethereum without reducing decentralization. Scalability and performance on the Fang network. In order to achieve this goal, it has set four development stages, the first three stages adopt the PoW model, and the fourth stage will complete the transformation from PoW to PoS, as well as important upgrades such as sharding, replacing EVM by eWASM, etc. It is the final form of Ethereum. The Ethereum 2.0 network introduces fragmentation to improve network scalability and processing capabilities, and the beacon chain is the "command and control center" of the entire Ethereum 2.0 network.

Its latest roadmap shows that the main node beacon chain of the fourth phase of Ethereum upgrade is online, "merged", and sharded. At present, the beacon chain has been launched in December 2020. Since then, the beacon chain has operated in the form of PoS. The process of generating blocks at the execution layer is still carried out by the original chain in the form of PoW. Ethereum has entered a stage of PoW+PoS hybrid mining , paving the way for the transition of the entire network to PoS.

The Beacon Chain is online and the Staking function is enabled. Users can deposit their Ethereum on the Ethereum 2.0 network. People can lock (stake) 32 ETH in the software to become validators and participate in verifying transactions to ensure the decentralization and security of the network. In return, stakers will be eligible for ETH rewards. This part also leads to less POW mining rewards.

As of July 29th, the beacon chain is running smoothly. The data on the chain shows that the Beacon Chain already has about 411,000 nodes, with a total pledged total of about 13.132 million ETH, of which the effective voting participation rate reached 99.83%. In addition, since December 2020, the number of nodes and the total amount of pledges have grown steadily, and the daily income of validators is also growing slowly. Currently, the total daily rewards of the beacon chain are about 110,000 ETH.

(beacon chain block data, picture from https://beaconscan.com/)

1.2.3 "Merger" is approaching, and will gradually switch to POS mining

According to what V God said , the "merger" planned by Ethereum in the third quarter of 2022 will merge the consensus layer (PoS beacon chain) with the execution layer (PoW original chain), and gradually stop the PoW part of the original chain. This upgrade represents With Ethereum officially switching to the PoS consensus in bu jbu ji. Under the PoS mechanism, the Ethereum revenue that miners can obtain will be related to the ratio of their pledged ETH to the entire network's ETH pledge, without the need to purchase hardware such as mining machines. This means that Ethereum PoW mining will soon withdraw from the stage of history, and it also brings a certain amount of pressure to the miners who are conducting PoW mining.

The conversion of Ethereum POW to POS mining is a gradual process. The merge launch difficulty bomb in September is the beginning of the merger. The specific process can be briefly summarized as follows:

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Difficulty Bomb Launched->Block Time Extended-> Miners Gradually Leave->Network Computing Power Declines->Set TTD->Achieve the Final Goal Difficulty

->Switch from PoW to PoS (realize mainnet merger)

After that, in Under the PoS mechanism, the Ethereum revenue that miners can obtain will be related to the ratio of their pledged ETH to the entire network's ETH pledge, without the need to purchase hardware such as mining machines. This means that Ethereum PoW mining will soon withdraw from the stage of history, and it also brings a certain amount of pressure to the miners who are conducting PoW mining.

Second, the impact of PoW to PoS mining

According to the previous analysis, the Ethereum merger represents that Ethereum will switch to the PoS consensus in the near future, which will have a huge impact on the Ethereum mining industry. The main impact of PoW to PoS mining on the Ethereum mining industry is manifested in the following four aspects: hardware equipment, total computing power, interest pattern, and development direction. Let’s talk about it one by one:

2.1 Mining hardware equipment—hardware suppliers such as graphics cards have shrunk their shipments

The industry's most upstream hardware provider has benefited a lot from Ethereum's POW mining. Last year, Nvidia CEO Jensen Huang revealed that Nvidia achieved a profit of US$155 million within three months after launching the Ethereum mining processor; last year, Q2 Nvidia graphics card mining revenue reached US$266 million, the highest in history. Previously, Nvidia had publicly admitted that Ethereum's transition from POW to POS was a potential threat to demand for graphics card (GPU) products. On May 20, a week before the release of the Q1 financial report, the chip giant Nvidia announced a slowdown in recruitment, which aroused special attention and key interpretations from practitioners in the encryption circle. Machine demand plummeted.

As a leading player in the world's high-end electronic hardware equipment suppliers and the most upstream component manufacturer of encryption mining equipment, Nvidia will still be affected by the market decline And the impact of the conversion of Ethereum to POS, and lowered shipment expectations, not to mention other large and small players in the middle and lower reaches of other industrial chains. Of course, the conversion of Ethereum to POS will have a greater impact on them, because after all, compared with Nvidia, computing power mining is their "pillar industry", and they even draw their salaries from the bottom. Therefore, it can be seen that with the intensification of the market downturn and the implementation of POS mining, the global shipments of physical mining equipment and its components will decline in the short term.

2.2 The main body of the mining industry—POW miners moving elsewhere

All market players are driven by profit, which is especially evident in the encryption circle, especially the mining circle. After Ethereum changes from P0W to POS mining, the original POW miners will not be able to continue to participate in Ethereum mining, and the usage flow of their existing ETH mining machines is worthy of attention. The Ethereum POW computing power plays an important role in the entire encryption mining track and accounts for a large proportion. Once converted to POS, the original POW computing power may flood into other mining markets like smashing the disk, which may have a huge impact on the existing mining track and restructure the entire encryption circle hardware mining to a certain extent. The interest pattern of the mining track.

2.2.1 Fork of the original chain

In the face of the redistribution of mining interests, miners may proceed from the perspective of interests and not follow the Ethereum community to complete the PoS consensus mechanism conversion when the Ethereum 2.0 is merged and upgraded. In this way, it is possible for Ethereum to fork into two chains of POW and POS mechanisms at the merge node.

2.2.2 Turn to ETC mining

The hard fork of the DAO event caused the Ethereum community to split into Ethereum and Ethereum Classic, and Token was also divided into two——ETH and ETC. At present, the two algorithms are not the same, and the ETH ASIC mining machine may need a firmware update to be compatible with the ETC mining algorithm ETCHash. But there is no technical barrier between the two. Existing ETH ASIC miners can mine ETC only by upgrading the firmware of the mining machine. The graphics card does not need to be upgraded and can directly mine ETC. The switching cost is very low. This is likely to attract a large number of ETH ASIC miners to switch to ETC mining.

2.2.3 Other miner compatible coins

< p>In theory, the graphics card can directly mine Grin, BEAM, RVN, XMR, BTG, AION and other currencies.

2.3 The overall output of the mining industry - the total computing power has dropped temporarily

Undoubtedly, according to the previous article, after the conversion of Ethereum to POS, the method of pledging Token is mainly used instead of mining machine computing power for mining, which is also in response to the call of "carbon neutrality". Therefore, a considerable number of mining machines are temporarily shut down and forced to stop, waiting to find a new usage scenario before restarting. Therefore, it is foreseeable that in the short term, the overall output of the mining industry—the total computing power of Ethereum will drop sharply, and the total computing power of the entire network will also temporarily decline to a certain extent.

As mentioned above, after switching to the POS mechanism, the original miners and computing power of Ethereum will flood into other miners using the POW consensus Among the public chains and currencies of the mechanism, its computing power is more abundant. Then, this part of computing power may exert more uncertain influence on the currency price trend. Because the supply and demand relationship between the two has undergone certain changes. Previously, the market demand for its currency increased, which led to an increase in price, which in turn resulted in a large supply of computing power. Today, these public chains and Token Under unexpected circumstances, a certain scale of computing power has been undertaken, and more Tokens have been spawned. Coupled with the weakening of market liquidity under the Federal Reserve's interest rate hike, the currency price will become more volatile in the later period.

2.4 The development direction of the mining industry - the rise of staking and pledge mining

< p>After the "merger", Ethereum will gradually switch from P0W to POS mining, and the threshold for users to participate in mining will be lowered. Only 32 Ethereum can be pledged to apply to become a verification node to participate in mining. Therefore, the form of Ethereum mining will undergo a fundamental change, that is, from offline equipment mining to online pledge mining. With the increasing pressure of "carbon neutrality" on the encryption circle, it is not ruled out that some public chains will learn from the leading Ethereum and also choose POS in the later stage. This will further compress the living space of the physical equipment mining industry, but this is more Just a trend.

Returning to the present reality, after switching to POS, projects based on Ethereum pledge services will become mainstream, and Ethereum pledges before and after the merger The proportion will increase significantly. The staking service also has a scale effect. In the case of limited cakes, projects with higher market share are more likely to increase the proportion of staking through scale advantages, thereby further increasing their market share. The top project of this track is worthy of attention , such as Lido.

In addition, because the centralized trading platform naturally precipitates various PoS chain assets, and has relatively professional knowledge reserves and equipment resources , occupying an advantage in pledge operation services. In addition, the trading platform can directly open the trading pair service of pledged derivatives to release liquidity, so the current mainstream centralized trading platforms in the industry are mostly ETH2.0 self-running node pledge service providers.

Ouyi OKX provides ETH2.0 lock mining node operator services, Ouyi undertakes all ETH2.0 For the construction and maintenance costs of nodes, users can participate with 0.1 ETH, and 100% of the income on the chain will be distributed to users. ETH2.0 mining income is dynamically adjusted according to the amount of locked positions on the chain, and the estimated annualized rate of return is between 4% and 20%. The platform issues mining certificate BETH at a ratio of 1:1, takes a snapshot of user positions at 00:00 (HKT) every day, divides the on-chain income in proportion to the user’s BETH holdings, and distributes mining income at 11:30 (HKT) the next day. When the ETH2.0 mainnet is launched, it can be exchanged back to ETH according to the amount of BETH held at 1:1. And the platform has opened BETH/USDT and BETH/ETH trading pairs. When you don’t want to hold BETH, you can sell it at any time, with high flexibility.

(Ouyi ETH2.0 lock mining)

Conclusion: The transfer of Ethereum from POW to POS is a technological upgrade and a redistribution of benefits

Integrating the above analysis, we can get The conclusion is as follows:

The extrusion of industry bubbles and the encroachment of competing products have jointly led to the growing demand for ETH in Ethereum projects Reduction, established improvement plans such as EIP-1159 and Ethereum 2.0, while committed to improving the performance of Ethereum, have also changed the income structure of Ethereum miners, resulting in a reduction in the mining share of miners. This leads to a reduction in the scale of Ethereum computing power. But this also has an invisible and important connection with this round of Ethereum mergers.

Under the established route of Ethereum 2.0, the transfer of Ethereum from POW to POS is a technical upgrade on the one hand, and a redistribution of benefits on the other. In the POW era, miners contributed to maintaining the high-quality operation of the system, and also received huge ecological rewards. After converting to POS, the original POW miners will not be able to continue to participate in mining, and there is a possibility of forking a new chain, "mining" ETC or other miner-compatible coins. Nodes and pledge services based on Ethereum Staking in the ecosystem will become mainstream.

Ethereum has experienced two rounds of industry cycle tests since its birth, and is still the benchmark of public chain ecology and the source of blockchain innovation. Many attempts have been made to break through the underlying technology, including Layer 2 and Ethereum 2.0. The previous POW mining contributed to the security and stability of the system. After the "merger" and gradually converted to POS mining, the competition of the public chain ecology will enter the 2.0 stage. Competition is worth looking forward to.

Based on the present, for assets with unlimited total amount such as ETH, there is no "story" of constant total amount of BTC, and the price mainly depends on The "supply and demand relationship" is maintained: that is, the dynamic balance between the new increment and the combustion amount. The amount of burning is closely related to ecological applications. It represents the need to maintain "trust" in the decentralized digital world. Only when the ecology becomes richer and the demand for "trust" increases, can the prosperity of the ETH ecology continue. Therefore, what determines the development prospects of the blockchain is the prosperity of its developer ecology, and the "out-of-the-circle" application is the existence that leads the future of the blockchain.

It can be seen that the impact of Ethereum’s transition from POW to POS mining on the Ethereum mining industry is particularly far-reaching, comprehensive, and even fundamental. In addition, we will follow up research and pay attention to the impact of the merger itself, including the future Ethereum 2.0, on the Ethereum ecosystem and the entire encryption circle. Including a series of potential impacts on the development trend of the subsequent pledge track, whether it will reverse siphon the ecology of other public chains, and where the projects of the Layer2 track will go, etc., the Ouyi Research Institute will choose an opportunity to publish a special research report in the later stage , in-depth interpretation for readers.

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