Thursday, 16 August 2018

What will happen to other cryptocurrencies when Ethereum switches to proof-of-stake, assuming large amounts of hashing power are refocused?

I’ve been looking for and answer for this too… and not being able to find one, I’ll just write one instead.

To answer your question, we need a key piece of understanding:

The value of crypto-currency holds ground or rises in response to demand at the exchange. We have to follow the demand.

Miners don’t create demand. They mine new coin, then either sell the new coin they mined or hang on to it, but they don’t become the people buying the coin on the exchange (at least not by virtue of being miners. They might be investors too, but that’s when they basically perform two separate roles).

They also don’t drive excess supply. When heaps of new hashing power hits a PoW coin like Ethereum Classic, the network algorithm raises difficulty in response, reducing the payouts to each miner, rather than producing much more coin than would otherwise be produced.

So what happens when Ethereum switches to PoS?

Everyone who has GPUs switches to whatever the next profitable thing says. The mining difficulty of whatever coin dominates the top row rises, the profit from mining it shrinks over the next weeks, whattomine responds by ranking it lower, it goes down the list, rinse, repeat. Over time, the combined bulk of miners will beat the smaller cryptocurrencies down until something with the spine of Ethereum halts it, or all profitable currencies run out and we all go ebay off our GPUs to gamers.

The other player worth mentioning is nicehash, as they’re a marketplace of GPU grunt sellers and buyers. They’re also a row (several in fact) on and they’ll be themselves a shock absorber. As long as there’s some commercial value to distributed GPU mining, they’ll keep selling it, and feeding in that demand for our GPUs.
Can they find enough willing and able buyers for it to stay at the top of whattomine? For a while at least, I think they will. Time will tell.

It all boils to demand for that stuff we mine, which is PoW coin.
If PoS coin takes all the demand away, and no new PoW demand emerges, it’ll eventually spell the end of the line for GPU mining, as has happened for CPU mining.

As for demand, bulk demand, at scale, for cryptocurrency comes primarily from: 

- Application developers designing heaps of cool new stuff who need a smart contract platform (And these guys are not leaving Ethereum, on which they already sit… Ethereum going PoW is nothing but good news for them).

- People who live in countries with hyperinflation, who need a way the government can’t block and a predatory black market can’t overprice, to preserve what wealth/income they have. This is not a tech public, and they don’t care about mining. They just buy the “one big cryptocurrency brand” - bitcoin - because it’s what they’ve heard about. They are the biggest reason why bitcoin is different to all others, and why it’s “The US dollar” of cryptocurrencies.

- Institutional investors. These guys are going to flock to PoS currencies because the model resembles better how they know banking to work, they get how commissions work, it raises fewer long-term sustainability questions (of the “if bitcoin stays course, in 2030 adding a transaction to the ledger will require the power it takes to run a suburb for a month” variety), which is stuff someone managing the retirement funds of a lot of people cares about.

- Black market players who need cryptocurrency primarily as a means to achieve financial anonymity. These guys don’t care if it’s PoS or PoW, they just care it can’t lead the authorities to their doorstep.

Then there’s fake demand - various ICO-time spot demand - much of which is done by various pump&dump players - demand that promptly vaporises on day 2.

And of course, there’s an idealistic group of people who want de-centralised system. They don’t want one player who runs 10,000 antminers in a warehouse in China to dominate the network and its rules and be able to change them, because they’re the big fish. They don’t want someone with 1,500 or 1,500,000 ETH to be the rubber stamp on (maybe fraudulent) transactions. PoS makes them itch. They want 1,000,000 people with a small mining rig at home to form the guts of their cryptocurrency. But are they a large enough group to justify enough demand, at the exchange (remember, mining alone does not turn them into demand) to keep buying our hard-earned coin from us? Perhaps. But I suspect not.

I’m neither an economist nor cryptocurrency expert. I don’t know how cryptocurrencies will respond.
But it stands to reason that someone needs to buy what we mine or we won’t get paid in real world money.

Maybe one by one we’ll swamp all the current PoW coins with our GPUs until all their difficulty levels make them non-viable to mine, and until only those of us who have dirt cheap or stolen power remain.

Maybe Nicehash or someone like them will sell our services to whoever is building datacenters full of racks of number-crunching purpose-built GPUs, as a cheaper alternative to those datacenters, and keep us all in the game for years to come. Commoditised number crunching.

Maybe the Nicehash CEO will reply to this thread and tell us what they think.

Ah.. So many maybes.

Either way, I’m not selling my GPUs just yet.

By Mike Shapiro

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