Economic Returns of Casper

April 16, 2019

I recently set up a small mining rig to mine Ethereum. My housemates have audio-visual evidence of this. My first thought was to mine Ethereum. However, the big thing looming over this particular foray into hardware is the switch to Casper, Ethereum’s new PoS. When that switch happens, I want to start staking ETH and participating in that consensus protocol as well.

On ethresear.ch, you can find active discussion spurred on by Vitalik and Jon Choi on the potential economic outcomes of the switch and how they might drive monetary policy.

We can look at the current rate of return on PoW mining right now. While the profile of stakers vs miners may be completely different, I wonder if the total deposit level will be adversely affected. We may have fewer deposits than we have posited, somewhere between 0.1% - 0.5% of total deposit (TD) or 60 - 300M of USD worth of deposits. I arrive at this conclusion now by looking at the current rate of return that miners get compared to what is being discussed on the site. At the current return, we’d only have about $300M in staked deposits. Which feels quite low to subvert a $70B dollar chain.

The market-driven rate of return for the consensus protocol driven returns in relatively stable protocols (BTC, BCC, ETH) has remained relatively high in comparison to ranges shown in the Google Spreadsheet that Jon has shown. The range between 20% (Equities) and Multiples (Cryptos/startups) is very large. The current PoW yield is closer to a startup's risk-reward profile than an public market equity, with an estimated yield of 150%--back of envelope math below.

Given the current hash rate, factoring in fixed, variable (electricity), and non-recurring engineering costs such as physical space to find the current yield, outside of appreciation. Right now, given the price of ETH, it’s pretty damn profitable to mine. I arrive at an estimated yield of 150% per year. The total cost of the network including the aforementioned costs is $3-$5 Billion. Of a security to network value of 5%.

This checks out as well, given that the rate of return on a single GPU is around 7.5 months for payback period for an NVIDIA 1070.

It seems like we might see a much smaller TD Ratio given the market rate of return on mining now. Given the stated target inflation rate of 0.5%, I’m afraid we might see a much lower participation rate given the modeled yield. PoS with the 4-month lockup is seemingly based on the same risk/reward and liquidity profile of PoW. PoW is potentially even more liquid given I can start mining on some other token if the price of token drops. Of course, the biggest driver of this is perhaps that returns from HODLing have been so extraordinary right now. After all, we know the price of ETH has basically 100x YTD. When the returns for crypto assets start to stabilize, we might see PoS return to being a stable source of returns 15% - 20% not including appreciation of assets seems pretty good [1].

  • Looking at current hashrate gives ~150000 GH/s. an NVIDIA 1070 GTX gives ~30MH/s, so there are approximately 5,000,000 GPUs working to secure ETH. These GPUs each cost $500. If we estimate that overhead expenses are 1.2x of per GPU cost, we arrive at an all in fixed and NRE cost of $3 billion dollars
  • If each GPU is pushing ~150Wh, Electricity costs are 5,000,000 / 6   * .05 * 24 * 365 or 7,300,000,000 to 10,550,000,000 kWh/y. An all in electricity cost per year of $365,000,000.
  • Taking that into account we have $3 - $5.19 Billion / $30 Billion network or a TD Ratio of 11 - 16%
  • We’re paying out $3,858,570,000 in USD, or 12,861,900 token per year, 13.83% at $300 per Token
  • Yield of 74 - 100%
  • At a $700/ETH price, we have $5.19 Billion / $70 Billion network or a TD Ratio of ~4 %. This is with the current inflation rate of 15%. Miners currently zero out at 7.5 months, so 4.5 months of profit. This gives a yield of 165-55% hmmm…
  • We’re paying out $9,000,000,000 in USD, or 12,861,900 token per year, 13.83% at $700 per Token

[1] https://ethresear.ch/t/casper-validator-yield-as-a-function-of-td-and-issuance/222