The thirdening and the difficulty bomb: how the Constantinople fork affected small Ethereum miners
Last time, we discussed how Ethereum block rewards decreased with time — from 5 ETH to 2 ETH during the latest Constantinople fork. This so-called “thirdening” was the most contentious and potentially damaging of all award reductions. This time, we’ll see why.
As you know, Ethereum is supposed to transfer from Proof-of-Work mining to Proof-of-Stake. PoW is extremely wasteful and slow, and a PoW-based coin cannot scale efficiently, because all miners have to work on the same puzzle simultaneously. Proof-of-Stake is easier, more environmentally friendly and cost-efficient. It’s probably the way of the future — but for miners, it’s not great. With PoS, they will only earn the transaction fees — and no block rewards at all. If Ethereum suddenly rolls out a critical update that includes PoS, chances are that most miners won’t accept it.
So how do you make miners switch to PoS? That’s right, by making the old PoW way unprofitable. To achieve this, Ethereum has embedded in its code a nifty and dangerous device — the so-called difficulty bomb. Difficulty means how hard it is to find the solution to each block’s puzzle. The more difficult the puzzles are, the more time it takes to produce each new block — and the more energy a miner needs to expend. At first, difficulty increases just a little bit every once in a while. But then, it starts to speeds up. New blocks take more and more times to discover. Transactions take longer to confirm. And as miners find fewer new blocks, they get less rewards. Sooner or later, the network grinds to a halt. This is called the difficulty bomb, and it’s the main incentive for miners to agree to Proof-of-Stake.
But as Vitalik Buterin and the others realized that it will take much more time to switch to PoS then they had thought, they had to postpone it for a year and a half. At the same time, the block was cut by a third. The founders thought that the price of ETH would grow enough to compensate for the losses. And it sort of did, but just about. Now the exchange rate of ETH to USD is around one third higher than it was at the moment of the thirdening. But miners expected it to rise more.
Another issue is the increasing competition with mining farms. Ethereum used to be the best coin for small, independent GPU miners to mine. The ETH mining algorithm — Ethash — is very different from the one used by Bitcoin. It makes it more difficult to produce ASIC hardware for mining Ethereum. As you know, ASICs dominate over BTC mining, and it’s impossible for an independent miner to be profitable in the Bitcoin business.
Ethereum was even considered ASIC-proof for a while, because its algorithm regularly changed. An ASIC is programmed to do just one task, so if you modify the algorithm, all current ASICs will have to be scrapped and replaced by a new model. For a long time, ASICs for Ethereum weren’t much more efficient than GPUs, so small miners could prosper.
But those good times are gone. The new generation of ASICs is twice as efficient as GPUs, leaving small miners almost no chance. Their rewards are cut to 2 ETH, the price remains low, mining farms using ASICs are starting to dominate, electricity costs are growing… It seems like all is doom and gloom for GPU miners.
Here’s where 2Ether comes onto the stage. With our dynamic block rewards, small miners will finally have a level playing field with mining farms. In our next post, we’ll begin to explain how it works!
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