Ethereum Price Mania Leads to Mining Hardware Mania
The mining difficulty for Ethereum has been rising steadily, but it really spiked over the last several days. Coupled with a sharp drop in Ethereum price, this creates an issue which makes mining less profitable, or even a loser. If miners bail on Ethereum that makes the network slower, which is obviously a bad thing.
There are two possible reasons for this:
- More miners jumped into the game, increasing the difficulty
- Its something that the Ethereum developers are purposefully doing
Ethereum Mining Hardware Sold Out
A recent article from TweakTown states “The cards [mining equipment] are either selling out, are sold out, or they’re being sold for ridiculous prices in the second hand market. (As a strange side note: Millennials #1 stock purchase on Robinhood is AMD) PC World says ” mainstream graphics cards like the superb Radeon RX 570 and RX 580 can’t be found right now, with all models either out of stock or selling for wildly inflated prices online.”
Well, more miners means more competition for mining. To me the above means that “speculators” are diving in, rather than guys with a concrete, long term business plan. As competition heats up it means less return on investment for miners, be it huge server farms or the Average Joe with one RX580 in his parents closet. When the Ethereum price drops as it has been recently, this can make mining “cost ineffective” wherein the cost of electricity is more that the value of Ethereum you can mine. If your return on investment is calculated using a price thats up 5000% over the last several weeks, you’re probably in trouble.
I posted the chart below in reference to the Ethereum price, but it could work as an analog for mining hardware, too. The time for buying mining hardware was the “Stealth” or “Awareness” phase. Overspending on mining hardware based on “Mania” Ethereum prices is a recipe for failure.
The Ethereum Difficulty Bomb
Its not 100% if its simple “mining mania” due to speculators, or if the mining difficulty increased. Ethereum uses an algorithm dubbed “DAG” which can essentially vary in complexity. The more complex the solution is to the algorithmic problem, the harder it is to solve aka “mine”. A tougher problem takes more computing power to solve the problem.
From the outset, the plan was to make Ethereum mining impossible at some point in the future.This change will be introduced through an arbitrarily difficult block to mine, which will effectively create the difficulty bomb in question. As this difficulty bomb is activated on the network, the mining difficulty will skyrocket and eventually make Ethereum mining unfeasible and extremely unprofitable.
This “bomb” was apparently an intended feature built by the Ethereum developers and leads to a lengthy discussion around “Proof of Stake”[POS]. (read about that here) For purposes of this post, I’ll just note that POS is supposed to be the answer to this mining issue. The problem is that POS does not have a hard launch date, but should be out “by the end of 2017” according to Vitalik Buterin the head of Ethereum.
Ethereums Future Needs Proof Of Stake
Higher and higher difficult combined with lower prices just won’t work. If prices drop, then some miners should back out and hopefully things find an equilibrium again. Proof of Stake is something that many in the Ethereum community has been focused on for a long time, and its delivery is not just important for the Ethereum technical network to actually operate, but also the confidence people have in the Ethereum product.
I could actually make the case that whats best for Ethereum is people forgetting about it for a while. Mania leads to network issues and things breaking that just haven’t been tested yet. This is the first or second inning of a very long game, and no one can predict the future off of what has transpired in the last few weeks. There are many potentially amazing things in the works, roadmap here.