Mining is not that easy anymore, AMD and Nvidia have both been downgraded

Foreign media reported that Susquehanna analysts downgraded AMD and lowered its target price based on Nvidia's ASIC developed specifically for Ethereum mining. Analysts believe that 20% of AMD's revenue comes from the cryptocurrency market, so they lowered the company's rating. In this article, we will explain what ASIC is, why it is used for cryptocurrency mining, and why Ethereum ASIC is unlikely to replace GPU mining?

ASICs benefit cryptocurrency mining

Basically, when mining cryptocurrencies, powerful computers are solving complex mathematical equations. The faster your computer can solve these problems, the greater your mining gains will be. Early mining of the cryptocurrency Bitcoin was first done with CPUs, but soon, most miners switched to GPU mining. GPUs have more accelerated cores than CPUs, which allows them to mine a large number of coins in parallel.

Basically think of it this way - the CPU has to read from the hard drive to process every event in the computer, access the main memory, drive the USB ports, etc. The CPU is like a jack of all trades. On the other hand, the GPU is specialized for calculating vectors, shading pixels, and a number of other graphics-related tasks. These graphics-related tasks are mathematically intensive, and therefore, the GPU has a lot of floating point calculation cores, which makes the GPU more suitable for crypto mining.

However, at least in the Bitcoin space, GPUs still provide unneeded precision and unnecessary functionality inside the chip. As the name implies, an ASIC is a piece of silicon designed specifically for a specific algorithm. Basically, the algorithm is designed directly into the chip instead of running as software. This makes the ASIC very energy-efficient when running a specific application for which it was designed.

So, for example, let's say you have a formula like (X+Y)/Z, and you want to make an ASIC that can execute that formula very efficiently. You can create such an ASIC by designing a chip to execute that specific formula. However, if that formula has to change in the future, then the ASIC chip becomes obsolete because you can't change the formula it was designed to execute. Of course, if the formula is too simple, no one will design a chip to run it, but this example illustrates that ASICs only run tasks that don't change over time.

Bitmain AntMiner S9 Module

Since Bitcoin's underlying SHA-256 cryptographic algorithm is fixed, it makes perfect sense to create ASIC chips that run this algorithm and create higher mining efficiency. This actually happened in previous years. However, this has a major drawback — centralization. Due to application-specific hardware, Bitcoin mining pools are highly centralized and have a huge amount of power in the Bitcoin ecosystem. With this in mind, Ethereum was designed to be ASIC-resistant.

As described in the white paper, Ethereum is designed to be ASIC -resistant from the beginning to reduce the risks of centralization. To achieve this goal, ASIC-resistant Ethereum uses two methods: random data selection and "poison well" contracts.

Random data selection is a requirement for Ethereum mining in order to perform computations on data in smart contracts that are pre-built into the blockchain. The data to be computed is randomly selected by the network, so miners have no choice about which contracts they compute. Because smart contracts can have essentially arbitrary code, this means that Ethereum ASICs must be at least as close to general-purpose computers as possible to running software, not just simple circuits that execute a single algorithm.

The second line of defense is the "poisoned well" contract. As mentioned above, Ethereum allows the execution of code in any smart contract. These contracts must be executed by Ethereum miners. If ASICs are able to execute certain types of contracts, then the Ethereum network can still be executed through contracts. It is difficult or impossible for ASICs to solve these contracts. Since ASICs are essentially software that cannot be upgraded, because the software is essentially fixed on the silicon chip, once the investment in ASICs in Ethereum becomes rampant on the Internet, contracts cannot be executed.

(PandaMiner B3 Pro with 8 x RX 470 GPUs from AMD)

In the past, companies have had Ethereum-specific miners that were little more than low-level GPUs plugged into a black box and sold to novice miners. While some parts of Ethereum's code may stop being downloaded to ASIC processors, the general nature of Ethereum's algorithms and smart contracts ensures that the code will continue to execute on relevant general-purpose processors that can execute random code. Because of the heavy reliance on math acceleration, the processor of choice will still be the GPU.

Risks of AMD and Nvidia In the past, analysts believed that AMD and Nvidia were highly dependent on the crypto market, and the stock gains of both companies were driven by the bubble in the cryptocurrency market. For example, Susquehanna analysts believed that Ethereum-related revenue accounted for 20% of AMD's revenue and 10% of Nvidia's revenue.

AMD disputed this in a statement on CNBC: AMD published a report that assumes that Ethereum-related GPU sales are very high. As a reminder, we said in our fourth quarter 2017 earnings conference that the percentage of revenue related to blockchain was about half of the percentage in 2017. Our GPU business grew very fast in the fourth quarter of 2017, in addition to blockchain, there were Radeon Vega products, GPU computing products and our Apple business soared. We also talked about the growth of AMD Ryzen and AMD EPYC products. We have injected long-term drivers into the company, including PCs, servers and graphics, and our financial guidance for the first quarter of 2018 illustrates this.

We appreciate investors' continued interest in blockchain and cryptocurrency, and we look forward to continuing to grow AMD's prospects.

We think AMD's management has a better grasp of the situation than outside analysts. Therefore, we will estimate the mid-point percentage point contribution of its cryptocurrency GPU sales to its revenue. Nvidia did not make a statement, but given that Nvidia is also a major GPU manufacturing company, a 10% estimate sounds fair.

However, a drop in cryptocurrency-related sales is not what investors fear most. Their biggest worry is that GPU mining becomes unprofitable or that cryptocurrencies fall out of fashion, flooding the second-hand market with GPUs previously used for cryptocurrency mining.

First, as mentioned above, we don’t see this happening in the near term. Second, if GPUs become unpopular in mining and even enter the second-hand market, they will likely face a lot of pent-up demand from gamers and the secondary data center market looking to get into the AI ​​application hosting space.

With the used GPU market flooding, we think Nvidia is hurt more than AMD because of the cards used by both companies in cryptocurrency mining. For cryptocurrency mining, miners tend to use higher-end Nvidia cards, which are still very ideal for gaming and AI applications. In contrast, AMD's older versions, which miners prefer, are far less ideal for gaming. Therefore, used sales are likely to hurt Nvidia's bottom line much less than most analysts think, and should not hurt AMD's bottom line as much.

Obviously, neither AMD nor Nvidia want to rely on mining. They are immersed in the surprise of the substantial growth brought by mining, but they are also afraid and worried about this rapid growth. Once mining is no longer popular, how will AMD and Nvidia develop? Who will they sell their GPUs to? Therefore, we have recently seen that AMD has emphasized its development of the gaming market and the development prospects of EPYC products in the server field. Nvidia also has autonomous driving and gaming. Mining seems to be their unexpected gain. Under the premise that the prospects of cryptocurrency are not so clear, they are still acting cautiously, but they will never exclude the demand of this market.