How has mining changed since the Ethereum Merge?
I thought I'd give a comprehensive insight on how mining for PoW Coins is going now that a few days have passed since the Merge.
What took place following the Merge
Since Ethereum's transition to a Proof-of-Stake (PoS) consensus method, it may seem as though not much has changed. This is because macroeconomic factors influence market sentiment and price movement. Since the merger, the value of ETH has decreased while the dollar's strength has increased.
Essentially, all PoW Coins experienced saturation as a result of what transpired. When you look at the profitability, it simply means they have reached their limit. The majority of PoW coins actually existed, thereby tripling the total hashrate.
But Ethereum Classic is the one that jumps out. And this is a result of the majority of application-specific integrated circuit (ASIC) miners switching to this coin. They had no choice but to do that. Compared to any other PoW Coin, this implied an even greater growth.
I would refer to the increases observed the same day and the days that followed as the "mining gold rush." As all of the miners rushed to exchange their riggs for other currency. Similar to the earlier gold rush, this led to the majority of individuals losing money. And how can I know that for sure?
The total hashrate of the Ergo network or the Ethereum Classic experienced a fairly abrupt surge that was followed by a gradual decline. The miners' rigging was basically turned off, which resulted in a decline. People were mining at a loss as the profitability decreased to almost zero.
This led to speculation mining, which refers to mine at a loss because you believe the price will rise. This is typically done when there is a high yield. However, with the networks being so overloaded, it essentially means that you're not just mining at a loss, you seldom receive any coins.
What awaits us in the future?
I predict that some new PoW Coins will emerge attempting to fill the void created by Ethereum. However, I believe they will only last a short while. Not in the immediate future, at least.
The PoW Coin that manages to grow the most before the next bull run is what I believe is more likely. So I'm estimating in the next six months or so. It will be the PoW coin that truly succeeds.
What happened to the miner rewards?
The integration has significantly altered ETH's tokenomics in the background. As many readers may already be aware, miners who had formerly been motivated to create and authenticate the blocks for the Ethereum mainnet are no longer required as a result of the switch from Proof-of-Work (PoW) to Proof-of-Stake (PoS).
This is due to validators taking over the role of validating chain blocks after staking ETH to support network security. In other words, this modification has reduced ETH emissions per block by about 95%. The ultrasound money website page tracks all statistics on the current emissions of ETH in comparison to a PoW Ethereum and provides real-time updates on this.
The new standard is staking ETH
The hazards of staking ETH and the appropriate value for liquid staked ETH, such as stETH, were topics of discussion earlier this year. Many of these worries seem to have vanished now that the merger was accomplished. The recent convergence of the values of ETH and stETH suggests that both should have an equivalent economic worth.
The new standard appears to treat liquid-staked ETH tokens and ETH interchangeably. Other options, including Rocketpool's rETH, have been gaining popularity as means to reap the benefits of staking while also being able to utilize the commodity elsewhere, like DeFi. stETH from Lido is already well known.
Mining rewards have disappeared, but stake payouts have increased
The emissions have been decreased without miner awards. Rewards are still being given to ETH stakers, although in lesser amounts. Validator nodes are rewarded for each block they effectively contribute to the chain by proposing and validating. The particular ETH stakers who entrust their ETH to the validator are subsequently given their share of these incentives.
The cost to acquire these incentives is negligible in comparison to the expense of setting up a mining operation, even though they are lower than what was emitted to keep miners validating.
Retail and institutional participants can now take part in the process and reap the benefits more easily. Finding validators who are increasing their rewards using maximal extracted value (MEV) approaches is the current alpha to achieving the best staking rewards. This is accomplished using tools like Flashbots' MEV-Boost product or independently developed MEV techniques.
Increased staking rewards do not simply benefit Lido. Elias Simos recently summarized the block rewards during the previous week and found that validators that use one of the MEV methods to increase rewards get, on average, twice as much reward as validators who propose blocks without it.
As more validators accept MEV-boosted blocks to obtain larger rewards, these discrepancies in block payouts and yields for stakers will probably get less over time. Stakers who stake with validators utilizing MEV should still benefit from higher APYs despite payouts most certainly declining.
Gas prices are widely misunderstood to increase automatically, but they won't change until the first phase, known as the "Surge," is finished. Ethereum did manage to reduce gas fees, they have just not yet been felt.
Another misperception about the merge is the idea that 32 ETH are needed for staking. This isn't totally true because you can run your own node or stake with exchanges and providers in a pool. However, if you manage your own node without having any ETH staked, you won't receive rewards.
The problem with using exchanges and platforms that provide ETH staking is that they excessively consolidate ETH, which is detrimental to centralization and also increases the risk in the event they are hacked or if something untoward occurred. The fact that withdrawals have not yet been introduced means that even after the two-year lockup period has passed, you won't be able to receive your ETH back if this feature isn't eventually added. It won't really be a problem by then, but it's still necessary to be aware of this danger when you stake. Validators won't receive their stake unless withdrawals are authorized, but they will keep getting fees and MEV right away.
There is a fear that all users will leave at once when withdrawals are activated, but there are limits on the number of validators that can leave, with only six validators leaving per epoch or every 6.4 minutes. Out of the over 14 million ETH staked, that equates to 1350 epochs each day or around 43,200 ETH. Since the annual percentage rate (APR) is also fluid and will incentivize more individuals to stake should validators quit, it is ideal that things will balance out during this period since it would take almost a year for all validators to exit if that was their objective.
The upcoming phases of Ethereum
The Surge, Verge, Purge, and Splurge are the four phases that will make up the upcoming post-merge phases of Ethereum.
The Surge is the most significant update due out in 2023 and will incorporate sharding, which Vitalik claims will greatly scale Ethereum and enable 100,000 transactions per second while potentially lowering gas fees to as little as $0.005–0.05. Vitalik shared this information at the Blockchain Futurist Conference in Toronto in August.
Sharding enables Ethereum to operate sidechains or miniature blockchains known as shards where it could process transactions in bundles that it could later combine into a single transaction on the main chain. They want to build a 64-linked database sharded system. Considering that Ethereum can presently process 15 transactions per second. With those 64 databases, users could now process 960 transactions per second. Additionally, each transaction that is sent back to the main chain can be used for a number of transactions, scaling roughly 100 more times and bringing us closer to the target of 100,000 transactions per second.
This implies that we would log approximately 100 transactions on a single sidechain before sending them back as 1 transaction to the main chain.
That was a very wordy way of explaining that all transactions would be compressed and bundled to bring Ethereum almost 6000 times faster. Additionally, rollups, which carry out operations outside of Ethereum's foundation layer and then upload data to the main layer, will be introduced. So, the key issues the Surge phase addresses are scale and gas prices.
The Verge addresses scalability through its proofs by moving away from Merkle proofs and toward Verkle trees. Storage will be improved, and node sizes will be decreased. In the end, this will increase the scalability of Ethereum. In the end, this will increase the scalability of Ethereum.
In perspective, Merkle trees transform data blocks into lengthy strands of code in order to create trustworthy encryption. The newest informational units, known as leaves, are gathered into branches. The Merkle root, which holds all the prior information, is then traced as a result of this. This approach was initially tested on the Bitcoin blockchain before being modified for Ethereum.
The Purge tries to "purge" or "reduce" unnecessary historical data. Under the new proof-of-stake consensus mechanism, validators will be able to validate the blockchain with more efficiency by reducing the amount of historical data. This should reduce network traffic and enable the blockchain to perform a large number of additional transactions. According to Buterin, Ethereum should be processing 100,000 transactions per second by the time this phase is complete.
The "fun stuff" will be put into place during the last phase, Splurge. This will primarily concentrate on implementing non-problematic network updates and updates to earlier sections. The difficult task of increasing Ethereum's scalability will be accomplished.
This last phase is still decades away, and there will undoubtedly be bumps in the road as with every technological advancement. Given that the Merge has taken far longer than anticipated when the Splurge does occur, the Ethereum network will enter a much-deserving period of celebration.
The future of Ethereum
It's an exciting time to be an Ethereum supporter, even though the near-term geopolitical and economic outlooks suggest it will be very volatile across all risk-on assets. The merge was a remarkable achievement that shows off the great talents of the developers that have contributed to Ethereum's code and mission.
Moreover, as validators include additional revenue sources in the rewards they give out to stakers, annual percentage yields (APYs) for ETH investors are increasing. Finally, the implications of the contraction in the supply of ETH haven't yet been fully realized. ETH might turn deflationary when mainnet activity picks up again and gas prices begin to rise.
First published on Sep 24, 2022