With a date set for ETH we move into an era. Many are asking what is next for GPU minable proof of work. I am frequently asked about what my thoughts are post merge as this is a major shift in the PoW... So here they are.
Mining is a business and the profitability, risks, ROI, and cashflow are unique factors each person needs to individually access and manage. You will not find me trying to run in front of the crowd and try to sell miners on why ERG. The point here is to share my own thoughts.
The GPU capacity coming from ETH is massive. GPU minable Proof of Work tends to be winner take all game. The collective hash rate that has grown over the years has led to an impressive hardware security barrier protecting the Ethereum network, only outdone by Bitcoin itself.
What will that unwind look like? Well I don’t know the future, but here are my thoughts.
The first assumption is that the current market (the remaining GPU minable coins collectively) is not currently structured to absorb this capacity. Therefore, mining profitability is a risk each miner needs to look at based on their own situation. Personally, I think mining will go through a consolidation phase first. It may not happen immediately but the overcapacity in supply relative to demand leads me to believe we will see this occur. The collective search for profitability may drive profitability and consolidate rewards to those who have the lowest carrying costs.
Miners will pick a new ecosystem and ride out this process.
Miners may end up speculative mining with the hope of a future return.
Miners may turn off their rigs and wait until profitability returns.
Miners may end up liquidating their hardware.
Some miners are probably moving into cash positive positions, hoping to catch some bargains from those selling.
All of these will occur, what the actual breakdown is, I have no idea. I don’t think of it as a negative… it is just how markets respond to capacity that is higher than demand.
That being said Proof of Work has a nice internal mechanism of balancing hash rate drop with profitability
Same with the real estate market in a way. Price relative to ROI renting. Markets drop to where investors are cash flow positive with rental investments then start to correct.
My second assumption is that in time some bottom form, profitability will return and most likely hash power will concentrate around a new chain or a few new chains. In the end I do think Proof of Work trends towards a winner takes all for general purpose hardware but that may take a while.
Exchanges may play a large role in this process. ETH miners brought millions of organic liquidity into markets ever day. Ever miner is a liquidity provider, many are traders, defi enthusiasts, gamers etc. Miners collectively are a large, underappreciated user base. I do believe many exchanges are watching and will respond consumer demand.
Post merge I imagine ASICs will move to ETC or whatever ethash fork is most profitable. GPU miners will chase profits as they usually do, whatever is top of the whattomine list, with some case specific considerations (electricity, heat, cooling, cards etc).
It is hard to say anything in general when you have different actors, with different carrying costs, with different risk allocations, and different time horizons in mind.
Some of you that are dedicated to mining may want to move into a cash positive position and prepare to accumulate as things consolidate.
Those of you that are approaching the breaking point of positive cash flow may need to access your own position/carrying costs and make the choice that is best for your situation and risk.
Mining is a unique business, it takes a lot of work and is a greater challenge than most users understand.
Personally, I find the tactic to be like a bad realtor (it’s always a great time to buy!) in poor taste. Timing is important.
Do I think Proof of Work is dead or going away? No.
Markets may need to find a new equilibrium and that isn’t always a pleasant process. However, for some it is a potential opportunity. Some miners have rode through bear markets and periods of low positive cash flow and longer than anticipated ROI on hardware. However, with the recent cycle many miners are new. GPU prices got a bit painful during the last bull run and some may be overleveraged.
The interesting question will be the best technical prospects long term vs best profitability in the short term. It will be an interesting process to watch as things rebalance. Short term profitability will be what it is.
I do think Ergo is well positioned in terms of long-term development prospects, but this is something we need to build and realize to achieve.
I do think long term technical prospects will lead to the rise of a new dominant PoW chain. Whatever that is.
Anyway miners out there, have a plan, manage your risks as things unfold and may the luck of the draw be with you.