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For the past few months, there have been many questions from miners around the world about what to do now that Ethereum has switched from a Proof-of-Work consensus mechanism to Proof-of-State. Why this transition has become momentous for the entire cryptocurrency market. Does it mean that mining Ethereum is no longer possible?
Today, we will try to get to the bottom of the mining of Ethereum. We'll find out why mining is going through hard times right now, whether mining is relevant in general, and what could be a replacement for the cryptocurrency.
What is Ethereum?
At its core, Ethereum is a decentralised global software platform based on blockchain technology. It is best known for its native cryptocurrency, ether (ETH). It initially supports smart contracts, an important tool for decentralised applications. Many decentralised finance (DeFi) and other applications use smart contracts in combination with blockchain technology. Since its launch, Ethereum as a cryptocurrency has become the second largest cryptocurrency by market value.
What is mining?
In simple terms, mining is a process in which a computer performs certain algorithmic tasks to generate new cryptocurrency tokens or coins. Miners are vital members of the network who develop the blockchain and are rewarded in return for the amount of cryptocurrency they mine. After successfully solving a mathematical problem, the miner broadcasts this new development to other participants in the network. If 51% or more of the participants agree that the answer is correct, a new block is added to the blockchain. The miners then begin to solve the new problem and the process continues. Mining is only possible if the cryptocurrency blockchain runs on the Proof-of-Work consensus mechanism. The miners verify the transactions and protect the network. In particular, they prevent the problem of double spending. In decentralised systems, some people can exploit several loopholes in the network to duplicate transactions. This threat has been responsible for the delayed acceptance of cryptocurrency. If you are interested in learning all you need to know about how to mine, you can read the article "Cryptocurrency Mining" on our website.
Merger or Ethereum 2.0
On September 15, 2022, a long-awaited event took place for the entire cryptocurrency market, which represents a new era for the Ethereum cryptocurrency. The merger represents the transition of the Ethereum network to Proof-of-Stake (PoS), its new system (also called "consensus mechanism") for authenticating cryptocurrency transactions. The new system replaced the Proof-of-Work (PoW) mechanism with the more energy-intensive Proof-of-Share (PoS) mechanism.
Differences between Proof-of-Work and Proof-of-Stake
If you don't distinguish between these two mechanisms, don't worry, we'll explain it now. Firstly, as we have already mentioned, both of these mechanisms serve to support and ensure the stability of the blockchain. The difference between PoS and PoW is who maintains the network, manages the network, and who has the authority to write a new block of transactions to the network.
In PoW, miners are responsible for publishing blocks by competing to solve an algorithmic problem. In a PoS-based system, this is done by validators. Validators are computers designed to maintain the integrity of the blockchain. Validator nodes can store the full blockchain or a condensed version that is faster to analyse. In simple terms, validators are cryptocurrency holders connected to the internet with special software. These guys send cryptocurrency to a wallet and thus keep the blockchain running smoothly. Validators do not need to participate in mining new coins. Instead, they simply create new blocks and check the blocks of other participants in the network. All of this is done automatically. The process, in which PoS acts as blockchain protection, is called stacking.
How can I make money from ether now, if not by mining?
After Ethereum has been upgraded, mining this coin is no longer possible, but you can make money from ether in a slightly different way. You can mine Ethereum coins. To do so, you need to become a validator for the cryptocurrency. To become a validator, users must invest 32 ETH. Validators are assigned to create blocks at random and are responsible for double checking and validating any blocks they do not make.
To engage in Ethereum stacking, you need a wallet on an exchange that can provide pools for Ethereum. The average return you can expect from cryptocurrency stacking is between 3% and 7% per annum. For the average person, steaking is very similar to a deposit in a bank. However, steaking is surprisingly a much more reliable way to grow your money.
Why did Ethereum need this transition?
It's no secret that Ethereum has a number of problems that stretch back to the days of blockchain's creation. The fact is that it wasn't originally designed for the kind of network loads it currently has. Because of the demand on the network, transaction processing speeds are gradually slowing down. To fix this, the system needs to be built in such a way that it becomes scalable. Ethereum creator Vitalik Buterin admitted that Ethereum could not achieve scalability because of PoW. PoW blockchains have a limited number of transactions that can be verified per block. In addition, their blocks must be created at a constant rate. It was to solve these problems that the merger was developed.
Green Coin
In addition to solving the above problems, Ethereum no longer needs powerful computing systems, which in turn has led to a 99% reduction in power consumption. This makes Ethereum a green coin. It has also reduced the cost of video cards on the market.
What do miners who mine Ethereum have to do?
Owners of mining farms or ACIS machines have several options nowadays:
Sell their equipment
Rent their equipment
Switch to mining other coins on PoW
With first two I think everything is clear, but what about third one? As you already know, there are other cryptocurrencies that can be mined instead of Ethereum. Below is a list of the most popular ones:
1)ZCash(ZEC)
2)Vercoin(VTC)
3)Ethereum Classic(ETC)
4)Ravecoin(RVN)
5)Ergo(ERG)
Of course, profitability of these coins will be much lower than that of Ethereum, but at least this way you can keep on mining.
Swapping ETH for ETHW
If you think that you can say goodbye to mining Ethereum, we have a bit of news for you. After the merger, many miners were unhappy with the move and for many it would have meant the demise of mining if not for the launch of an Ethereum hardfork called Ethereum PoW, which still uses the PoW consensus mechanism. Behind the development is Chinese miner Chandler Guo, who has spoken out against PoS, and not for the first time. Back in 2016, he was one of those who supported the creation of Ethereum Classic. This fork aims to support ETH miners. ETHW miners receive rewards in the form of Ethereum tokens, exactly as they did before the merger. However, by itself, this hardfork is not a replacement for Ethereum itself. Due to Ethereum's "glacial period", this hardforward will last a couple of years, after which the mining complexity will simply become unprofitable for miners.
Conclusion
Let's summarize some of what we've learned in this article. Ethereum's transition to PoS consensus mechanism led to the fact that about 30% of all miners switched to other coins, since it was no longer possible to mine Ethereum itself. Because of this, the hash rate of all those coins that turned out to be a replacement for the miners increased dramatically. The complexity of the mining calculations, of course, also went up. Today, the situation with mining is not the most pleasant, as it may take more than one year to pay back the equipment in this situation. Of course, we cannot say that mining is already dead, but compared to previous years, the profitability of mining has decreased significantly. That's why if you are just getting into mining, you might want to consider other ways of making money from cryptocurrency