Bet against PoS: Miners and Hardware Manufacturers Continue to Invest in ETH Mining

Large mining companies and ASIC miner manufacturers are increasing investments in ETH mining, despite the network’s upcoming transition to Proof of Stake (PoS) consensus.

Ethereum’s rapid transition to PoS has not slowed the development of the ETH mining industry. Mining companies Hut 8 and Hive are increasing their ether mining capacity, and ASIC miner manufacturers including Bitmain and Innosilicon are set to release new devices this year.

This investment seems strange considering that Ethereum developers plan to move the network from PoW to PoS within five months, which will eliminate the need for ASIC miners and establish a validator system. According to industry experts, the growth in investment in ETH mining may be related to expectations of a delay in the merger of the current version of the network with Ethereum 2.0.

“Four years ago, we were told that Ether mining was about to end, but it is still ongoing,” said Bitpro CEO Mark D’Aria. “This is a wait-and-see approach – it always takes longer than planned to update.”

While the latest hard fork of Ethereum London has brought the network one step closer to merging with Ethereum 2.0, major updates have almost always been activated with significant delays. For example, the Constantinople update, which was a key step towards Ethereum 2.0, was originally scheduled to roll out in July 2018. However, due to an error in the code, it was postponed until February 2019, which delayed the migration of the network to PoS.

“Freezing” of mining

Ethereum Improvement Proposal (EIP) 3554 introduced a difficulty bomb that exponentially increases the difficulty of mining over a certain number of blocks, reducing miners’ profits. Initially, Ethereum developers introduced this EIP in 2015, but this spring once again postponed the activation of the “difficulty bomb” until December 2021.

As the price of ether rises, it may become more difficult to convert the network to a proof-of-stake algorithm, according to Ethan Vera, COO of Luxor mining company.

“We’ve seen Ether go up to $ 3000, decentralized finance (DeFi) is built on top of the network and NFTs. [невзаимозаменяемые токены] are gaining popularity, ”Vera said. “Even those who are optimistic about Ethereum’s move to PoS still want to move slowly to get things done right and without mistakes.”

Apart from technical issues and asset security concerns in Ethereum, potential resistance from the mining community could be another factor slowing down the network’s transition to PoS.

“An underestimated element is the resistance of miners to migrating from PoW to PoS,” D’Aria said. “It’s just crazy to think they’re flipping a switch and turning off billions of dollars worth of miners. That will not happen”.

In early March, Ethereum miners opposed to EIP-1559 announced that they would go on a “strike” on April 1 and consolidate the Ethermine pool. As a result, the strike failed – only a few percent of miners took part in it.

Institutional players

There are far fewer large miners in the ETH mining industry compared to BTC mining. ASIC miners for the ethash algorithm were not much more efficient than video cards, and their distribution remained limited. The relatively low power consumption of a single video card, combined with a small amount of heat and noise generated, allows you to mine ETH at home. However, manufacturers continue to develop more efficient ASIC chips.

According to D’Aria, more than 90% of ether farms are based on video cards, which are also popular with gamers. Last year, Hive Blockchain announced that it became the largest ETH miner in the world with a hash rate of 3,383 Gh / s, which was 1.3% of the total Ethereum network hash rate at the time. Now Hive plans to increase hashrate to 5,500 Gh / s, despite Ethereum’s imminent transition to PoS.

In May, mining company Hut 8 bought special CMP (Cryptocurrency Mining Processor) mining chips from Nvidia for $ 30 million. The company plans to have all the chips delivered and installed at its Alberta facilities by the end of August. The firm wants to increase the hashrate to 1600 Gh / s with a power consumption of 4 MW.

Fast payback

More powerful ASIC miners are entering the market, which shorten the payback period for mining operations and increase profits. ASIC miners for ETH are developed by miner manufacturers like Bitmain specifically for mining, whereas CMPs are usually created by repurposing gaming GPUs.

Bitmain and Innosilicon intend to provide their latest ETH mining devices by the end of this year. According to Paul Yao, VP of Global Business Development at iPollo, miner manufacturer iPollo has received over $ 200 million in pre-orders for its latest ASIC miner model for ETH, which will be released by Q4 2021. According to Yao, the company aims to increase production when it reaches higher capacities.

“We are seeing growing demand in North America and some Asian markets,” Yao said.

Ethan Vera estimates that the payback period for ETH mining devices could be as low as four months if miners use the latest generation ASICs. “As for the production of BTC, depending on the size of operating expenses, the companies expect to reach a payback within a year,” Vera said. By comparison, the payback period for some graphics cards, such as the Nvidia 3070, is still around 18 months, said Wattum CEO Arseniy Grusha.

“The payback period should be less than 12 months – either ETH will rise in price, or prices for video cards should fall,” said Grusha. “Graphics card prices will not drop, and even if ETH rises to $ 4,000, it must remain at that level for the ROI of mining ETH to be attractive.”

The exact date for the migration of Ethereum to POS has not yet been set. Recently, Ethereum Foundation developer Tim Beiko, who is coordinating the updates, said that a merger of the two versions of the network in 2021 is unlikely. According to Ethan Vera, a well-timed investment in ETH mining can still bring big returns.

“The miners who bet against PoS two years ago hit the jackpot,” Vera said.