Good morning! A big hello to readers who signed up this week. Welcome to The Intersection, The Signal's weekend edition. This weekend we talk about The Merge and its impact on India’s crypto mining ecosystem. Also in today’s edition: we have curated the best weekend reads for you.

Pardeep Narwal’s office is a needle in the haystack that is the HUDA Complex in Rohtak, Haryana. Sandwiched between a Shiva temple and a BSNL exchange, New Edge Soft Sol Private Limited is impossible to locate without directions from its founder. But once inside, you’re struck by the distinctiveness of a business housed in a nondescript building. The sea of wires, rows of humming graphic processing units (GPUs), and the sweltering heat they generate point to one thing: you’ve arrived at one of India’s very few indigenous crypto mining farms.

The 300-odd GPUs at New Edge Soft Sol Private Limited validate Ethereum (ETH) 24x7, which the company says is the equivalent to around 3,000 computers running simultaneously without any break.

Narwal is a gold medallist in electronics and communications engineering and knows a blockchain bluff when he sees one. He was privy to people peddling dubious cryptocurrencies at the height of the pandemic. So it wasn’t long before he transitioned from teaching and selling ed-tech to piloting his own ETH validating business. Because, as he puts it, he wanted to be the first at something:

“All my life, I ended up being the last at everything. If you’re at the last rung of something that’s been done 1,000 times before, chances of you making it big are slim.”

Cut to today, Narwal says he can extend his capacity to a whopping 900 GPUs. He has to wait it out though. The Ethereum Merge, which just concluded on September 15, moved the world’s second-largest blockchain from the power-guzzling proof-of-work (PoW) protocol to the more energy-efficient proof-of-stake (PoS) model. Developers claim this monumental upgrade will slash Ethereum’s consumption by 99.9%. But at the other end of the positive spectrum, Ethermine—the world’s largest ETH mining pool provider—had to shut off its PoW systems.

“Ethereum Merge is a pivot of unprecedented scale and complexity in the crypto ecosystem,” says Ashish Singhal, Co-founder, and CEO, CoinSwitch Kuber. “Ethereum's successful transition to a greener and energy-efficient blockchain will, in the long term, lead to the greater adoption of the technology,” Singhal tells The Intersection. 

Where does this place about 55,000 small and medium-scaled Indian mining operators like Narwal?

 The entrepreneur admits that everything hinges on future demand, not least in a struggling crypto market. But he seems unfazed by both, the heat in the mining room and what the future holds. He reasons that he can outsource GPUs to companies that need high-end infrastructure for graphic designing, video editing, and cloud storage minus the heavy investment. After all, he has an on-site engineer who oversees GPU maintenance round the clock.

For all his optimism, Narwal isn’t just contending with the Merge and the larger crypto downturn. In India—where power backup is more privilege than necessity and whose government has turned hostile to crypto— miners are teetering between survival and failure.

Why the fuss over PoS?

It is pertinent to understand how PoS works before we get to what ails Indian crypto miners.

One of the defining characteristics of blockchain is that it is decentralized. No singular entity is responsible for validating or approving every transaction. Instead, this power is equally distributed between every participant on the chain. 

But how do you get all contributors on the same page, or on a consensus to validate transactions in a uniform manner?

The world’s largest cryptocurrency, Bitcoin (BTC), operates on PoW. Here, miners hustle to become the first to solve a complex, arbitrary mathematical problem. Think of it as an intense game of trial and error, where miners are searching for that one unique, random nonce. It generates a hash whose value is lower than the network's decided level of difficulty. And the first one to find this hash gets to validate the next, freshly-minted block of cryptos. On average, a new BTC block is added to the chain every 10 minutes. 

But this mechanism needs sophisticated hardware that devours about 96.5 terawatt-hours (TWh) of electricity annually, per the 2019 Cambridge Bitcoin Electricity Consumption Index. One TWh represents one trillion watt-hours. 

If BTC was a country by itself, it would come dangerously close to the annual electricity consumption of countries like Pakistan (103.5 TWh) and the Netherlands (116.278 TWh). In fact, it would leave behind Chile (82.22 TWh), Venezuela (78.08 TWh), and Finland (83.68 TWh) by a mile. Other conservative estimates peg BTC’s annual energy consumption at 131.80 TWh, just short of Egypt (149.07 TWh) and Malaysia (150.06 TWh). Phew! 

To sum up, PoW guzzles energy for breakfast, lunch, dinner, and everything in between. Mining top cryptos generates about 140 million metric tonnes of CO2 every year, of which BTC alone generates around 22-22.9 million metric tonnes.

Place this in the context of the climate emergency—average temperatures between 2010-2019 were the highest on record—and you understand why crypto mining needs a makeover: at a time when the world needs saving, PoW is pulling it right back into the grey fumes of environmental destruction. 

Enter PoS.

In this mechanism, each validator must lock a minimum of 32 ETH (around $50,000) to stake on the blockchain. The chain then selects a few validators at random every 12 seconds. Because PoS validators stand to lose a whole lot if they compromise the network in any way, logic dictates that they are likely to act in the community’s best interests. This is the model ETH has shifted to, something Ethereum co-founder Vitalik Buterin had been considering since 2014. And now, it’s finally done.

Rajagopal Menon, Vice President, WazirX, says the Merge does not directly address issues of scalability or high gas fees but it paves the way to address them in future updates. “One of the key benefits of the Merge is the dramatically reduced ETH issuance which has been dubbed the "triple-halving" of ETH,” Menon says.

Upheaval

2022 is the year of reckoning for cryptocurrencies. Macroeconomic factors such as rising interest rates and a looming bear market made a corpse out of crypto. The industry’s market cap plummeted below $1 trillion a little over a week ago. ETH sunk 54% this year, falling a further 5.6% after The Merge. Some of the worst hit are ETH’s PoW miners, now rendered virtually redundant after collectively raking in $19 billion in revenues last year. 

Sandeep Gupta would know. The man who runs a rig in Ambikapur, Chhattisgarh, is experiencing an overwhelming sense of disassociation from his ambitious venture. What started as a mining operation for BTC and ETH in 2017 with a 400-strong workforce is on the brink of collapse.

“No way I am making any further investments in crypto mining. In fact, I’m looking to sell my equipment as soon as possible. Mining has no future in India,” he says.

Mining rigs are a microcosm of the whirring of computer screens, high-end hardware, and cooling vents that struggle to stave off heat (especially in India). As mentioned above, not everyone can afford this investment. Prakash Taank, who runs a mining facility named Foxxknit in Rajnandgaon, also in Chhattisgarh, says a basic rig comprises five GPUs, a motherboard, sufficient random access memory (RAM), a custom central processing unit (CPU), riser cables, and solid state drives (SSDs), among other things. The bare minimum capital expenditure can run up to ₹7 lakhs. To top it all, mining operations cannot function without consistent electricity supply or backup– which as we all know is hard to come by in the country.

In Chhattisgarh, the per-unit electricity cost touches ₹8. According to him, the minimum cost for running a single rig is ₹5,000. Depending on the setup, the bills per rig run as high as ₹10,000 per month.

Over in Rohtak, Haryana, where Pardeep Narwal runs New Edge Soft Sol Private Limited, electricity for commercial consumption costs ₹7.1 per unit. Narwal pays ₹3 lakh per month on average since his rig’s monthly consumption exceeds 35,000 units.

“We made it clear to our clients that there is no backup facility in case of a power cut. Although the electricity supply here is fairly consistent, there are infrequent blips where the validation process completely stops,” he says.

Foxxknit’s Prakash Taank has dealt with even greater obstacles. Currently disillusioned by the crypto pushback, both by the Indian government and the larger public, he tells The Intersection that his life—and those of his loved ones—were at stake.

“I’d prefer not to talk about my crypto ventures because I’ve paid a terrible price for getting coverage in a few Hindi publications. I received threatening calls from policemen and extortionists. One of my friends was even kidnapped. I don’t want to go through this again,” he shares.

Top all this with the fact that the crypto downturn is yielding returns of just 2%-3% for mining rigs here, and you realise the full scale of what these entrepreneurs are up against. Back in crypto’s halcyon days, Pardeep Narwal would charge 10%-20% of monthly profits earned by his clientele. They’d also foot the electricity bills. But now, his clients’ earnings have dropped to less than $100 (Rs 8,000).

No wonder he’s considering revenue sources such as GPU outsourcing; his earnings depend on how much his 45 clients make. Narwal is also introducing a new system that will include a fixed base charge of ₹1,500-₹2,000. This amount, which will cover the rig’s basic expenses, will be charged over and above the profit percentage. The mining rig honcho is mulling a return to edtech as well: he wants to create blockchain curricula for schools and universities.

Pardeep Narwal perhaps has what it takes to HODL (Hold On For Dear Life, in crypto slang). Sandeep Gupta and Prakash Taank in Chhattisgarh, however, have had enough.

Ira Puranik is New Delhi-based a freelance journalist and a 2022 Tow-Knight Center Fellow. She writes on personal finance, markets, and crypto. She can be reached at @puranikira on Twitter.

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