Mining Ethereum vs. delegating Tezos: the finer points
Updated: Aug 6, 2019
Last month @tzbakeoven released a tweet and subsequent calculation chart (pictured above) comparing the returns on a $50,000 investment between mining Ethereum and delegating Tezos. For Ethereum, the investment would be used to purchase mining rigs to be run constantly, and on the Tezos side it would be used to purchase a little over 38,000 XZT (the equivalent to $50,000 at the time of the original tweet), which is then delegated and receives passive rewards every three days. Ethereum is long expected to adopted a proof-of-stake consensus algorithm, while Tezos already has a variant of this which has been dubbed liquid proof-of-stake. The math here is fairly accurate, save for the change in prices over the past month of course, but the comparison chart omits a few factors both internal and external that should be addressed to fairly inform potential investors.
1. Timeline of rewards
As soon as Ethereum mining rigs are configured and join a mining pool they will begin generate ETH, at a rate of 124 ETH going off the chart. Tezos rewards will not begin immediately — it takes 21 days for a full cycle at which point rewards are generated every three days.
2. Tezos will compound, proof-of-work Ethereum will not
Unlike Ethereum mining, Tezos rewards will compound — meaning that the principal (the number of coins) constantly grows and since the rewards are based upon the principal, so will the rewards. As with comparing simple and compound interest on savings, we see a steep climb both in the rewards and the total amount, especially over longer time frames. The below graph demonstrates this growth in returns over a period of 10 years — longer than the majority of investors may consider, but it demonstrates the effect of compounding. Using the same 8.37% return per annum as in the @tzbakeoven comparison, someone staking 38,168 tokens would double their total holdings in just 9 years. In comparison of course, the Ethereum miner will generate 124.4 ETH steadily each year (until Ethereum adopts proof-of-stake and does away with its mining completely).
3. Selling the principal: the devaluation of mining rigs
We know that the mining rigs will depreciate in value, very quickly in fact — between 10–40% per year. With Tezos the principal, 38,167 XZT in the original chart, can be sold at any time (hence the ‘liquid’ in liquid proof-of-stake). In short — with mining the principal will certainly devalue over time, with delegation the principal may devalue or gain value, depending completely on the price of XZT.
4. Delegate fees vs. maintenance costs of mining
The electricity costs as detailed on the comparison chart are quite high, and one must also factor in any maintenance on mining rigs and the physical space they will occupy. With Tezos delegating comes with no electricity or upkeep costs. There are power requirements for maintaining a node and baking, but this is incomparable to mining. There are fees to consider however, as delegators pay a percentage of their rewards (usually 5–15%) to delegates, who collect this when distributing rewards back. Further, if too many Tezos are assigned to one ‘baker’, they will become over-delegated and new delegations will receive no rewards. Research is needed to ensure that the desired delegate can support new delegations of XZT.
5. Market cap economics
The comparison also shows the return on investment in the case of 3x or 10x higher prices. This is ambitious, but to date crypto bull runs have regularly been measured in multiples instead of percentages. This is entirely speculation but by process of simple math, in order for one Ethereum to be worth ten times more than it is today its market cap would need to go from $11.8 billion to $118 billion — which is almost double Bitcoin’s market cap. For 10x gains in Tezos its market cap would need to go from $0.3 billion to $3 billion — just over one quarter of Ethereum’s current market cap.
6. Environmental impact
The resources consumed by cryptocurrency mining are regularly overstated. In 2017 mining accounted for as much energy consumption — 30 terawatt hours — as the country of Ireland. Tezos baking and delegating has minimal energy requirements, and nodes can be maintained on cloud platforms like Amazon Web service. Ethereum will also negate its energy consumption once it implements a proof-of-stake algorithm.
In conclusion, this brings about an interesting conversation on the many choices available to investors within the cryptoasset market. At current prices mining is not nearly as profitable as it has been in the past, and it will take either a significant amount of time or a massive uptrend in prices to pay off the initial hardware costs. On the other hand, passive income via proof of stake currencies (or some derivative thereof) are not hindered by considerable hardware costs. The emergence of new consensus algorithms by projects like Tezos, Lisk, Cosmos, BitShares and more offers new opportunities to approach income generation in the sphere of crypto assets. As such it is hardly surprising to see the anticipation for Ethereum’s shift from mining to its own version of staking.
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