DeFi is a set of technologies that enables people to manage their funds on a peer-to-peer basis and it's changing the way money can be used.
Between March and April last year a sudden rise in the price of Ethereum sparked the equivalent of a crypto gold rush. After Googling how to build a computer with six graphics cards and doing a quick return-on-investment calculation, people started buying up powerful GPUs en masse.
If you ran the numbers on sites like CryptoCompare and WhatToMine, the result was that you would make the money back you spent on your mining rig within a few months. From there on, everything you mined would be clean profit.
Those who jumped in and were able to secure hardware quickly managed to achieve good returns before reality set in. However, those who ran afoul of the graphics card stock shortages caused by the rush and only got hardware in May or June, soon found that their earliest return on investment would be in a year.
What many of these gold rush miners didn’t know that they didn’t know about Ethereum was that—like most proof-of-work distributed ledger systems—it has a built-in mechanism to increase the difficulty of mining depending on the amount of computational power on the network.
Referred to as your hash rate, or hash power when you’re talking about the whole network, your mining rig’s effectiveness is measured in the number of solutions it can produce to mathematical problem Ethereum requires that miners solve to validate transactions on the network.
Ethereum attempts to adjust its mining difficulty so that, on average, one block is produced by the network every 12 seconds. (In reality, the average block time is currently between 14 and 15 seconds.)
Another factor budding Ethereum miners didn’t take into account when they bought their hardware was the directed acyclic graph (DAG) file the network generates every 30,000 blocks.
The larger the DAG gets, the slower the hash rate of your graphics cards becomes. While the DAG affects all miners on the platform, it impacts some graphics cards more than others as it reaches certain size thresholds.
The Ethereum Ice Age
One thing any half-informed Ethereum miner knew was coming is the platform’s move away from using Ethash, the modified Dagger-Hashimoto proof-of-work consensus mechanism it has been using so far.
Ethereum’s developers are working on a proof-of-stake system called Casper which will not only be more energy-efficient, but, according to the project’s co-founder Vitalik Buterin, also hopefully make it easier to defend the integrity of the system than it would be to attack it.
To “encourage” the switch to proof-of-stake, Ethereum’s developers have built a difficulty bomb into the platform, which will be activated when Casper is ready.
ASICs for GPU-focused algorithms
Another concern for miners who may not have made back their returns, or who do not want to retire their mining rigs just yet, is that specialised hardware for algorithms which used to favour graphics cards is starting to appear.
These specialised miners use a technology called Application-specific integrated circuits (ASICs) which are chips designed for a specific use, as opposed to general-purpose computers.
Outside of the world of cryptocurrencies examples of ASICs might be chips used in satellites and the transceivers used in cell phones for wireless connectivity.
Algorithms like Ethash, and those used by coins like Zcash (Equihash) and Monero (CryptoNight) were designed to be ASIC-resistant, but manufacturers appear to have found a way to build hardware that could make GPU miners obsolete.
The world’s biggest cryptocurrency ASIC manufacturer, Bitmain, has produced ASICs for Ethash, Equihash, and CryptoNight, causing concern among GPU miners.
While Buterin indicated that he is not too concerned about Bitmain’s Ethash miner, Monero’s developers responded with a plan to maintain the coin’s ASIC-resistance.
Monero forked its blockchain and updated the version of CryptoNight it uses to make Bitmain’s miner useless for mining its coin. It also announced a plan to update its algorithm twice a year to try and make it difficult for ASIC developers.
However, this may only be delaying the inevitable.
Sia’s lead developer, David Vorick, recently wrote in a post summarising the state of cryptocurrency mining and said that ASIC manufacturers will always be able to create custom hardware that can outperform general purpose hardware.
Vorick also predicted that ASIC makers will come up with ways to ensure that their miners can adapt to remain effective even if blockchains decide to fork to try and maintain their ASIC-resistance.
Monero’s lead developer, Riccardo Spagni, agreed with Vorick’s assessment, saying that maintaining Monero’s anti-ASIC stance is unworkable long-term.
Spagni said that they are basically just going to stall for time until the ASICs for some algorithm have been commoditized.
He clarified in a later tweet: “I consider ASICs sufficiently commoditized when they’re giving them out as swag at conferences.”
Where does this leave Ethereum miners?
Where does this leave Ethereum miners specifically, and GPU miners in general?
Effectively we have two choices:
- Dismantle your miners, build a sweet gaming PC or two and sell the card you won’t be using.
- Keep mining until ASICs take over.
If you choose to keep mining, you will need to select a new coin to mine when Ethereum makes the switch to proof-of-stake.
Depending on which graphics cards you have, Equihash-based cryptocurrencies like Zcash or coins using the updated CryptoNight algorithm like Monero may be a good place to start looking. You could also continue to mine Ethereum Classic after Ethereum switches to Casper.
Those who are willing to shoulder more risk can instead use their hash power on promising coins that are easier to mine. If you’re lucky, the coin might see a hundred-fold surge in price like Ethereum did and make you rich. However, it could also end up going nowhere and leave you in the red.
For those who don’t want to place bets on what the next big crypto will be, you can use multi-algorithm software like Nicehash to help you mine whatever is most profitable at any given time.
There are other options for multipool mining, such as MultiPoolMiner and Awesome Miner, but Nicehash has provided us with the best results, despite its hack last year. Nicehash has agreed to repay all money lost due to the hack in instalments, and five waves of reimbursements already made.
Unlike systems where you mine coins from a pool directly and automatically convert them to a coin of your choosing, Nicehash allows people to buy mining power from its distributed pool of miners, then pays those miners a share based on the work they contributed.
For now that is what I am using, as it is a great way to get relatively consistent returns.