Ethereum’s mining cliff rose from summer season 2022 to December 2021
Something buried in the big Ethereum software makeover that was rolled out on Thursday is a code update known as the Ethereum Improvement Proposal 3554, or EIP-3554 for short. It threatens to accelerate the end of Ethereum mining as we know it.
Since its inception, the Ethereum community has been talking about revising the way it minted Ether, the token connected to the Ethereum blockchain. But getting people to make the change takes a boost – and that boost is known as the difficulty bomb.
“It’s a mechanism in Ethereum that makes mining exponentially more difficult,” said Tim Beiko, the coordinator for Ethereum’s protocol developers. “It’s like we’re artificially adding miners to the network, which increases the difficulty and makes it harder for any other miner on the network to actually mine a block.”
EIP-3554 is postponing the detonation date of this difficulty bomb by six months to December. Once it goes out, it will make Ethereum essentially undegradable.
Cryptocurrencies such as Ethereum and Bitcoin regularly receive flak for the process of mining, which generates new coins. Both currently use what is known as a “proof-of-work” mining model, in which machines solve complex mathematical equations to create new coins. This makes it impossible for a central agency to arbitrarily create new coins – there is no equivalent of central government to print new dollars – which is what crypto enthusiasts believe they are maintaining the value of those cryptocurrencies.
However, these efforts require significant energy to power the computers that are used to perform the calculations, which has been criticized by outsiders who are concerned about energy shortages and carbon emissions.
The Ethereum community has come together around the idea of migrating from proof-of-work to “proof-of-stake,” which requires users to leverage their existing ether cache to verify transactions and mint new tokens. This will still limit the amount of newly created coins without, however, consuming the energy used to power huge computer banks to solve math equations.
Beiko tells CNBC that the original proposal required these so-called validators to own 1,500 ethers, which is now roughly $ 4.2 million. To lower the barrier to entry, the new proof-of-stake proposal would require interested users to only have $ 32, or about $ 90,000.
“It’s still not a trivial sum, but it’s a much more accessible system,” said Beiko.
The Ethereum community has been testing the proof-of-stake workflow on a chain called Beacon since December 2020.
Although proof-of-stake was the plan for Ethereum from the start, the developers postponed the rollout because they had found serious flaws in previous implementations. Beacon solves these problems, according to Beiko.
“We knew there was going to be a lot of engineering work to address things like the increased centralization that we see with other proof-of-stake systems,” he said. “We did that with the beacon chain, where there are an order or two orders of magnitude more validators … than any other proof-of-stake network.”
Migrating the entire Ethereum ecosystem to Beacon, an upgrade known as “Ethereum 2.0,” is the next step in the process. When you get everyone on board the move, the difficulty bomb becomes significant.
The ice age
This is not the first time in Ethereum history that a difficulty bomb has exploded.
It happened a couple of times including 2017, 2019, and last year.
When a difficulty bomb detonates, it floods the system with man-made miners, adding to the difficulty of mining. This means that new blocks appear slower and slower in the network. “If you increase the level of difficulty really quickly, it’s just not profitable for new miners,” explained Beiko.
But every time it ran out, the community would reset the clock to bring the difficulty level back to normal.
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While you don’t need a bomb to introduce proof-of-stake mining, it certainly helps keep things moving by closing the driveway to proof-of-work mining. Beiko calls it a stopgap solution.
Essentially, the whole point of the difficulty bomb is to force miners and node operators to update their software after a set period of time, according to Nic Carter, general partner of Castle Island Ventures and co-founder of Coin Metrics.
In December, if the detonation deadline is not postponed, the bomb will go off and you will see another parabolic increase in difficulty as shown in the graph above. But this time the developers won’t turn back the clock.
It will be the beginning of Ethereum’s proof-of-work “Ice Age”.
Not everyone is happy
While the upgrade to Ethereum 2.0 has a lot of supporters, not all are happy about the change.
“There are some miners who are against it, but it’s in their financial interest to be against it,” Beiko said.
Once the protocol is fully migrated to a proof-of-stake model, there will be no more income from Ethereum mining.
At this point, miners have a few options of what to do next.
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There are many other chains that support GPU-based mining so miners can easily start mining other cryptocurrencies.
They could also choose to stop mining altogether and sell their mining equipment. Beiko expects a lot from it.
“We also saw how many mining farms and mining pools started to get stuck on Ethereum,” he said.
“We have seen mining pools use their profits to set up validators for Ethereum. We have also seen them offer pooling services for their users who may not have 32 ethers but still want to validate the network.” Even if you haven’t parked $ 90,000 in ether, you may still be able to keep some skin in the mining game.