The latest hard fork from Ethereum, London, went live today with several changes designed to prepare the cryptocurrency for long-term success. But one change in particular could drastically reduce the profitability of Ethereum mining.
Ethereum Improvement Proposal (EIP) 1559 makes several changes to ETH transactions that cryptocurrency users prefer over miners. The first is the introduction of an algorithmically determined basic fee, which is burned after the transaction is completed, i.e. permanently withdrawn from circulation.
The basic fee introduced by EIP 1559 can be supplemented with a priority fee that a transaction can offer miners as an incentive to be included in their blocks. However, transactions can also set a maximum fee, meaning they only pay the priority fee if they don’t exceed the amount they want to spend. (The basic fee is always paid.) Here’s how the authors of EIP 1559 explained the purpose of the proposal:
“This ensures that only ETH can ever be used for transactions on Ethereum, which solidifies ETH’s economic value within the Ethereum platform and reduces the risks associated with the Miner Extractable Value (MEV) block reward and priority fee to miners. Finally, it is important to ensure that the miner of a block does not receive the base fee, as this removes the incentive for the miners to manipulate the fee into charging more fees from the users. “
You can see ETH start burning at block 12,965,000, but since that was the first block after the switch, only 0.03 ETH was burned. More interesting is the running total, which you can see on the Etherscan.io blocklist at the top. At the time of writing, almost 900 blocks after the London fork went live, around 760 ETH have already been burned – and destroyed. That’s over $ 2,000,000 worth of cryptocurrency if you’re wondering.
We also did some quick calculations to see how the London fork affects mining rewards. Before the fork, the average block reward at 100 blocks (12,964,992 to 12,964,893) was 2,581 ETH. After the fork, on another set of 100 blocks (12,965,779 to 12,965,680), the average reward dropped to 2,234 ETH. That’s ‘only’ a difference of 0.347 ETH, but in the long run it’s still around 15% less profits for the miners. It’s also roughly $ 280,000 an hour in potential pooled earnings that will no longer be available.
(Photo credit: Etherscan.io)
The not-so-calm before the proof-of-stake storm
The change is effectively reducing the short-term profitability associated with mining, in return for improving the Ethereum platform, which is capitalized. But that’s not the only threat to miners’ profits – the network’s plan to move from a proof-of-work to a proof-of-stake model with Ethereum 2.0 should already prevent mining.
In the proof-of-work model, the Ethereum miners are responsible for “the mechanism that enables the decentralized Ethereum network to come to a consensus or agree on things like account balances and the order of transactions,” Ethereum said .org. The proof-of-stake model shifts this responsibility from the miners to the ETH owners.
CNBC reported that “in a few years, once the protocol is fully switched to a proof-of-stake model, the entire Ethereum mining industry as it exists today will no longer be relevant.” Ethereum miners had a clear incentive to make as much profit as possible before that happened; EIP-1559 directly hinders these efforts.
The report also noted that another change introduced with the London hard fork, EIP-3554, served as a reminder of the impending move to a proof-of-stake model. EIP-3554 is a self-described “difficulty bomb” in which mining clients “calculate the difficulty based on a forged block number that suggests to the client that the difficulty bomb adjusts 9,700,000 blocks later than the actual block number”.
EIP-3554 author James Hancock said the difficulty bomb is aimed at ensuring that the Shanghai upgrade and / or merger occur before December 2021 and that they can “be readjusted at that time or removed all together” once that happens. (Shanghai is the code name assigned to Ethereum’s next hard fork.)
All of this means that Ethereum’s miners are watching the base fee ruin their profits, the difficulty bomb threatens to dramatically reduce the effectiveness of their mining efforts, and the move to a proof-of-stake model makes them irrelevant. Perhaps that means enthusiasts can finally buy graphics cards in retail stores.
We suspect those who manage to grab a GPU will be delighted with the miners’ problems. You won’t find much consolation elsewhere either, as the market has so far responded positively to the London hard fork. CoinDesk data puts the ETH price at around $ 2,800 at the time of writing, up about 6% from yesterday.