8.2 C
New York
Sunday, April 18, 2021
Home CryptoCurrency Ethereum mining is at a critical point: Coin Metrics explains it in...

Ethereum mining is at a critical point: Coin Metrics explains it in 3 keys

Ethereum mining is at a critical point, says Coin Metrics in its latest report on the state of the network. In the document, the analyst Karim Helmy reveals the advances of the research that he carries out with the aim of understanding the role that miners play in this ecosystem that is in the middle of a broad transformation process.

As Helmy explains in his document, to understand the critical state of mining activity in Ethereum, three key elements must be taken into account.

  • The first it has to do with the transformation that, of course, occurs in the network as part of the future transition of the Proof of Work ( Proof consensus algorithm of Work ) Proof of Stake ( Proof of Stake ).
  • The second key element is related to the implementation of the Ethereum Enhancement Proposal EIP-1559 and how this will impact the income of miners.
  • While, the third highlighted point is the growing ac tivity of commercial bots and of the arbitrage technique popularly known as Miner Extracted Value (MEV) or maximum value extracted from mining. This practice is producing negative effects that can unbalance the ecosystem, according to experts.

In their report, Coin Metrics details each of these keys and states that “at this critical point in network development, it is more important than ever to understand the role miners play in the Ethereum ecosystem.”

Miners have more and more ETH, but The mining economy is going through a transformation process.

In his analysis of Ethereum mining activity, Helmy found that mining has increased dramatically over the last year. Consequently, these network workers control an increasing amount of ether (ETH). In fact, the amount of coins that remained in their possession during 2020 increased substantially in relation to previous years. But, there is also the suspicion that much of this activity is carried out by traders and arbitrage bots who are not directly affiliated with the miners.

The graph shows that the supply of ETH that remains in the power of mining groups decreases (blue color), while that of miners increases ( green color). Source: Coin Metrics.

However, the mining economy is going through a constant process of transformation. This, taking into account that the migration of the proof of stake network has begun. It means that eventually the ultimate goal of completely bypassing the role of miners will be achieved.

In any case, until the Ethereum 2.0 development phases are completed, the network will continue to be proof-of-work compliant. This, in turn, is subject to momentous changes that will impact the block rewards that miners receive, as the report points out.

Ethereum upgrades would potentially alter the profitability of miners

In his analysis, Helmy points out that Ethereum’s upgrade proposal, EIP-1559, which plans to burn a portion of commissions rather than send them to miners, will affect the income that they receive, at least in the short term, after its implementation.

To know how the income of miners will vary in the future, it is It is necessary to know how they behave today, but in trying, the researcher encountered several obstacles that prevent him from determining it accurately. “The income of miners from block rewards is somewhat unpredictable due to the fluid monetary policy of the network and the high volatility of commissions,” he said in this regard.

The analyst adds that the broad role that Ethereum miners play in the ecosystem is not fully captured only in 0 hop streams or « 0-hop «, which corresponds to mining pools; and 1-hop activity or « 1-hop «, which corresponds to miners. This is the formula on which it is based, in its effort to understand how the mining economy works.

But it details that these metrics are not enough to analyze an ecosystem much broader and that continues to expand. Especially, in the last year, when the bots that identify and point to certain transactions waiting in the mempool or Ethereum temporary memories.

A One element that stands out from Helmy’s study are the insignificant flows of transactions from the mining pools . Regarding this, the analyst highlights the importance of looking for metrics that help to evaluate mining activity in all its magnitude.

Among the elements discovered by the investigation, the insignificant flow of transactions that come from the Ethereum mining pools stands out. Source: Coin Metrics.
Ethereum trading bots strategies play an increasingly important role in miners profitability

The study also points out the growing activity being performed by trading robots taking advantage of perceived flaws in Ethereum’s infrastructure. In fact, it is believed that this may be the key to understanding what is happening in the mining economy.

«Entities with relationships with mining pools may be conducting arbitrations and chain liquidations to win money outside the block reward specified by the protocol, ”the report adds. At the same time, he observes that the method used for the analysis may be interpreting that this activity comes from the miners, when in reality it may come from other actors.

In any case, if we go a little further From the Coin Metrics study, we found research from the Flashbots group. This confirms that the trading bots activated on the Ethereum network have recently managed to extract more than USD 180 million. They also found wasted commissions totaling USD 4.5 million for failed MEV transactions, equivalent to 4,500 wasted blocks.

This practice, which is commonly known as MEV, it refers to the maximum profit that a miner, trader or validator can make through its ability to arbitrarily include, exclude or reorder transactions within the blocks it produces.

To better understand what is MEV? Suppose there is a $ 10,000 arbitrage opportunity available on the decentralized exchange Uniswap, as part of a large trade. A arbitrage bot realizes the opportunity and submits a transaction to capture it, offering a fee of USD 10 to the miner.

So, one of two things can happen: one is that the miner sets aside the offered rate to take advantage of the opportunity for himself. The other possibility is that other bots who also noticed the opportunity, offer higher rates and a war of offers for the right to capture arbitration. This bidding war is called “Priority Gas Auction” (PGA).

The potential profit of USD 10,000 is MEV. If a miner does not capture it and a PGA is initiated, the commission amount is shared between the merchant or bot who captures the transaction and the miner. For example, in this case if a fee of USD 7,000 is paid to a miner, the remainder will be for the merchant.

The example offers a high resolution view to understand what the activity consists of around MEV, but it does not show the complete picture, because these small financial games create negative effects on the network. It is because the Lurking bots waste commissions in their attempts to capture transactions and when they fail they increase congestion on the Ethereum blockchain, as noted by the Flashbots group.

The effects that MEV capture can produce on the Ethereum network are also studied by Paradigm researcher Charlie Noyes. It points out that MEV can harm users because they become a kind of invisible tax that users may be being charged.

On the contrary, we can observe that the MEV surface in Ethereum is growing exponentially, mainly as a result of the large value streams through DeFi applications. Financial platforms that look so promising could alternatively be seen as parasites of Ethereum: weaving an unlimited network of MEVs that gets bigger and more complex by the day.

Charlie Noyes from Paradigm Research.

While MEV grows exponentially becoming a danger that could contaminate the Ethereum ecosystem, too The reasons that lead Coin Metrics analysts to determine why mining is at a critical point are evident.

In the meantime, the activation of the Ethereum improvement proposal (EIP ) 1559 that would be activated next July with the hard fork London. As reported by CriptoNoticias, the expectation surrounding this initiative is that it will help solve the problems caused by high transaction fees on the network.

Follow World Weekly News on

Sandra Loyd
Sandra Loyd
Sandra is the Reporter working for World Weekly News. She loves to learn about the latest news from all around the world and share it with our readers.

Leave a Reply

Must Read