Ethereum 2.0 will consume less energy — but it may also mean less profit for miners

• Ethereum’s London fork brings some long awaited changes to the platform, which isn’t welcome news for everyone.
• Ethereum 2.0 moves from a proof-of-work to proof-of-stake model.
• Miners will get lower revenues out of the new system.

The world’s leading platform for decentralised applications, Ethereum, is about to undergo some changes this week. In what is called a ‘hard fork’, the underlying software code of the digital currency will see changes in some or all of its fundamentals.

Just like every time the Android operating system used to get an update, it was named after a desert — KitKat, Lollipop, Nougat etc — the update to Ethereum is called ‘London’.

Many have touted the update for its intention to bring down the amount of energy required to verify a transaction by 99%. But, not everyone is as excited about the upcoming changes.

Miners may be earning less per transaction

The biggest change in Ethereum 2.0 is the fact that it’s adopting a new method of rewarding miners. So far, the Ethereum platform has rewarded miners for validating transactions, which happen every few seconds, while also awarding the transaction fees — also called gas fees — for each transaction to these miners.

This is the biggest source of revenue for miners involved in the Ethereum community, and is a model called ‘Proof of Work’, because they are being rewarded for their work.

After the London fork, the transaction fees will no longer be awarded to the miners, which means they’ll lose a big source of their revenue. The new ‘Proof of Stake’ model also requires miners to put up a stake in the form of their own Ether. Only a select number putting up the largest stakes, will be rewarded for validating transactions.

This means most miners, especially those with smaller holdings, will lose a massive amount of revenue. Those who are still getting rewards, will get less.

Silver linings

On the flipside, the new changes will bring down the computing power involved in Ethereum mining, and also reduce the gas fees, which can go up to $150 right now and is a major impediment in building new platforms on top of Ethereum.

As pointed out by Coinmarketcap, “Although there’s nothing to stop miners from becoming validators, one small problem lies in the fact that many of them will have expensive equipment that now serves no purpose.”

There is a way for users to “tip” miners for urgent transactions, but it’ll account for a fraction of the gas fees. “Instead of pocketing 100% of transaction fees, miners will only receive tips from users through an optional “inclusion fee,” paid electively by users seeking priority for their transactions,” Coindesk wrote.

Putting a cap on the supply of Ether

The transaction fees involved in Ethereum transactions may not go to the miners, but users will still have to pay them. With the London fork, these fees will go to an inaccessible Ether wallet, which in the crypto parlance is called ‘burning’ tokens.

Essentially, each transaction is going to take some of the currency out of the supply, which Tim Beiko, an Ethereum developer, says will create a “deflationary pressure on the network”.

Since supply will be more limited than before, the price of Ether on the market is likely to increase. And, unlike Bitcoin, which allows only 21 million coins to ever be in supply, Ethereum has no such cap. This move will put such a cap.

“One reason for BTC’s relative premium is its fixed supply, potentially making it better suited as an asset to store value long-term than one with endless supply With EIP-1559, ETH is taking the first step towards reducing issuance, with supply projected to peak Feb 2022,” tweeted Lucas Outomuro, head of research at Into the Block.

More difficulty in mining

Not only that, Ethereum 2.0 will also actively discourage PoW mining by making calculations much more difficult with time. Aptly called the “difficulty time bomb”, the London fork puts in a system where the calculations that computers need to perform in order to validate transactions become more and more difficult with time. It will eventually lead to an “ice age” where the difficulty is virtually impossible to overcome.

“Finally and perhaps most importantly, when the merge happens, it’ll encourage everyone to hop onto the Proof of Stake system, or else they risk staying on a chain that is unusable,” Ethereum’s client network provider Nethermind wrote in a tweet.

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