Most devices we use, such as PCs, tablets, and smartphones are built to run multiple applications. We use them for everything from a work Zoom call to playing games (possibly at the same time!).
To perform these different functions and computations, these devices are fitted with multi-purpose integrated circuits called CPUs (central processing units) which can handle the instructions from different programs. These CPUs are built for a variety of functions, but not for efficiency.
In contrast, an Application Specific Integrated Circuit (ASIC) is designed to perform a single function very fast. ASICs are used across various areas of computing, such as machine learning and IoT devices. Since 2013, they have also been used for bitcoin mining. Bitcoin mining was first done with basic CPUs, then high-end GPUs (Graphic Processing Units), then field-programmable gate arrays (FPGAs), and finally with ASICs.
WHY ARE ASICS SUITABLE FOR BITCOIN MINING?
For a new block of transactions to be written to the blockchain (the public database), computers (bitcoin miners) work on finding a proof-of-work code for this block by performing a complex calculation known as a hash.
The miner that gets the proof-of-work code is rewarded with bitcoin, which is how new bitcoins enter into circulation. That’s why bitcoin mining is a competitive process: the more hashes you perform, the higher the chances of you getting bitcoin, which incentivizes people to invest in machines and chips that can perform these calculations faster.
In addition, the difficulty of these calculations is constantly increasing so mining power is added to the network to keep up, which also creates an incentive to invest in faster throughput.
This is why bitcoin mining is now done by ASICs and why these ASICs get faster all of the time.
The Avalon chip, produced by Canaan Creative, was the first application-specific integrated circuit (ASIC) designed for bitcoin mining and it entered the market in 2013.
Like all chips, the R&D expenditure is extremely high which means the chips must be produced at high scale for the chip maker to be profitable. This results in a highly concentrated industry.
Today, the three largest producers of ASICs for bitcoin mining, Microbt, Cannan, and Bitmain – all Chinese – collectively have over 90% market share.
Most bitcoin miners are formed into pools to spread the risk/reward: to split the cost of the equipment and to increase the chances of getting bitcoin. While some of the pools are located in places like Iceland, where electricity is cheap, the majority of these pools are in China.
WHAT TO KNOW MORE?
For a deeper dive into how hardware for cryptocurrency mining has evolved, as well as the economic impact and much more, we recommend this excellent report from ARK Invest.
THE METACO VIEW
“Bitcoin mining is a competitive process that incentivizes the industry to invest in producing ever more efficient ASICs. Inevitably, this weaponization of the mining industry leads to concentration in large specialized firms and pools, which some people argue increases the risk of 51% or other attacks.
However, we see this as just another sign of the professionalization of the crypto ecosystem. The more specialized firms invest in ASICs and other technology, the more skin in the game they have and the less likely are to want to disrupt it.”