The tech industry is undergoing significant chip shortages that threaten to slow economic output worldwide. The supply chain meltdowns following the COVID-19 pandemic showed us how fragile our logistics networks can be. Furthermore, the increasing demand for faster and cheaper consumer electronics coincides with rising prices across the board. It is now more expensive than ever before to manufacture the most in-demand electrical component on earth.
As more smart devices populate our homes and computer chips become further ingrained in our daily lives, chip shortages couldn’t have come at a worse time. The potential for these shortages to inhibit technological innovation cannot be understated. However, the implications of chip shortages in the blockchain industry are more nuanced than one might first think. When we think of cryptocurrency mining, we often think of computationally intensive ASIC miners. Though ASIC miners have been in low supply for several months already, disruptions to the supply of semiconductors could prove to be detrimental to the blockchain industry in the coming years.
In this article, we’re going to explore the reasons behind the recent chip shortages. We discuss how chip shortages affect supply chains among industries and what it means for the blockchain industry. Also, we explore the recent US CHIPS Act, what it means for chip manufacturers in the US, and how it could affect international trade.
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Global Chip Shortages
Most developed economies are feeling the knock-on effects of global chip shortages. Furthermore, MOSFET transistors found in modern chips are among the most frequently manufactured electrical devices in history. These days, it isn’t easy to find electronic devices that don’t rely on at least one chip of some description. As such, a slump in chip production has the potential to cause ripple effects in almost every industry.
The COVID-19 pandemic highlighted the frailties of our current supply chains. After much of the world came out of lockdowns, the effects of supply chain disruptions were amplified when a rapid increase in consumption could not be met by a stable supply of components and materials. However, the response to the pandemic and the subsequent economic fallout was perhaps of greater detriment to the global chip shortage.
Unprecedented money printing, short-sighted economic policies, and a lack of economic output are resulting in spiraling price hikes for goods, services, components, and raw materials. Also, chip supply shortages could bring an abrupt end to the trend of consumer electronics becoming increasingly faster and cheaper, as most chip manufacturers are unable to scale to meet the rising demands for semiconductor chips.
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The US CHIPS Act
In August 2022, the Creating Helpful Incentives to Produce Semiconductors for America Act, also known as the US CHIPS Act, was signed into law. The act saw $52 million in funding allocated to domestic production of and research into semiconductors. Further, it aims to bolster the production of integrated circuits in the US and reduce reliance on external sources.
Semiconductor chips are essential for all kinds of electronic products, including smartphones, TVs, vehicles, and washing machines. Our reliance on chips continues to grow, and we expect it to skyrocket in the coming years as more of our devices become “smart” and interconnected.
Leading chip manufacturer ASML estimates that there are currently around 40 billion smart devices. The company expects this number to increase to 350 billion by 2030. Accordingly, this would see a growth of more than 16% in the semiconductor market in one year, the second consecutive year of double-digit growth, according to the World Semiconductor Trade Statistics (WSTS) group. Part of this growing demand for chips comes from a surge in demand for electric vehicles. Moreover, some electric vehicles use more than 300 semiconductors, and this number is increasing yearly.
The growing demand for chips is causing a ripple effect throughout supply chains. Not only are companies stockpiling chips, but they stretch manufacturing capacity. This means that the equipment used to make these chips is in high demand. Furthermore, the demand for chips far exceeds the creation of new manufacturing facilities. Such disruptions create problems throughout supply chains. Moreover, this often bleeds into other supply chains for other industries.
Why Does the US CHIPS Act Exist?
The COVID-19 pandemic shook the world in 2020, sending ripples throughout every supply chain and economy across the globe. As the world came to a standstill, it became apparent that supply chains were going to suffer. During this period, semiconductors became one of the most sought-after imports for US car manufacturers. Without these chips, vehicle production would come to a halt in the US, causing untold financial loss and economic despair.
Estimates suggest that the North American automotive market has produced up to 100,000 fewer vehicles than expected, at the time of writing, due to chip shortages and supply chain issues. However, demand for electric vehicles and smart devices continues to rise. To address this, President Joe Biden signed the $52 billion CHIPS Act. The act also aims to incentivize the creation of new chip manufacturing plants in the US so that the country can gain a larger share of the market and rely less heavily on foreign imports.
Although semiconductors are the nation’s fifth largest export, the US does not subsidize the production of chips like some competing nations. Furthermore, US companies account for seven out of the top ten most prominent chip manufacturers by market cap. However, the US currently holds little more than 10% of the global market share for semiconductor manufacturing.
Some analysts cite economic stability and national security as driving factors for the CHIPS Act. The competition from overseas manufacturers has also led US policymakers to commit $10 billion in tax breaks for chipmakers in the state of New York, which could be replicated in other states in the future.
The CHIPS Act Debate
Legislators claim that the CHIPS Act will bring sovereignty and sustainable growth to chip manufacturers throughout North America. Nonetheless, accepting government funding for creating new chip fabrication plants is not without obligation. Any US company accepting these grants must agree not to make large investments in Chinese tech companies.
These guardrails are somewhat ambiguous. Furthermore, some analysts believe the bill does little to prevent such funding from being channeled overseas. However, the debate stretches far beyond chips. In fact, the discussion refers more broadly to how lawful and favorable it is to backtrack so quickly on a decade-long reliance on Chinese manufacturing.
Additionally, the CHIPS Act could create a scenario whereby those companies that invest domestically in the US are prevented from investing in China, while those that don’t invest domestically are free to invest where they like. Either way, any restriction on access to Chinese markets could cause further disruption to global supply chains. Nonetheless, recent legislation could be the start of a continuing debate among US policymakers. Furthermore, supply chain disruptions and the subsequent spiraling of price increases are largely deemed to be negative. However, the recent chip shortages present an opportunity for developing healthy competition among chip manufacturers.
How Do Chip Shortages Affect the Blockchain Industry?
The widespread adoption of blockchain and cryptocurrencies increases the number of chips required to bring cryptocurrencies into circulation. As blockchain networks grow in size, they usually become more secure and decentralized. While this is great for participants of any given network, the downside is that more machines are required to secure the network.
Bitcoin’s proof-of-work (PoW) mining is computationally intensive. As the network grows, it uses a larger number of distributed computers and semiconductors. Although many newer blockchain networks opt for the less-intensive proof-of-stake (PoS) consensus mechanism, they still require chips.
Furthermore, the outlawing of cryptocurrency mining in China has resulted in a mass exodus of mining power into North America. As the number of mining companies in the US and Canada increases, so too does the demand for chips. However, the domestic supply of chips in the US and Canada have not risen to meet this demand. Furthermore, there is little in the pipeline to suggest that production capacity is likely to increase substantially in the immediate term.
However, some experts believe that the growing demand for and stagnating supply of microprocessors and semiconductors affects other consumer-facing industries more than others. Although cryptocurrency mining uses a lot of energy, the common GPUs among miners are somewhat less complex in design than those powering other devices in competitive consumer markets.
How Does This Affect Bitcoin?
Since the Chinese cryptocurrency mining ban came into effect in 2021, ASIC miners responsible for most of the hash power throughout the Bitcoin network came into extremely high demand. Though this makes it difficult for new miners to enter the network, it doesn’t necessarily impact the security and decentralization of the network.
Even if the ASIC shortage causes a fall in hashrate, the Bitcoin protocol can adjust the mining difficulty accordingly. The Bitcoin network has experienced huge fluctuations in hash power over the years. This means that any disruptions are somewhat priced-in. However, the ASIC shortage could result in a reduction in Bitcoin adoption. Alternatively, it could spur the adoption of energy-efficient blockchains and layer-2 solutions.
In the immediate term, Bitcoin hardware wallet manufacturers could experience the most disruption out of any part of the industry. If this problem persists, it could make it challenging for Bitcoin holders to take ownership of their assets in the future. In response to the global chip shortage, we can expect to see hardware wallet prices increase.
Chip Shortages and How They Affect the Blockchain Industry – Summary
Chip shortages threaten to slow down the global economy and inhibit innovation sector-wide. The US CHIPS Act aims to reduce the nation’s reliance on foreign imports while incentivizing the creation of new domestic manufacturing facilities. As North America becomes a hotbed for cryptocurrency mining, it makes sense that policymakers would create such initiatives. An increase in chip production could cement the US and Canada as leaders in the crypto mining industry.
However, global chip shortages are causing knock-on effects on global supply chains. Furthermore, as the economic downturn edges ever-closer and inflation causes prices to soar, we can expect the global chip shortage to cause disruptions to other industries and countries. Moreover, share prices of US chip makers are reacting positively to the news of the CHIPS Act. Additionally, the announcement of a new “blockchain specialist” role in line with the act suggests that policymakers and regulators are moving closer to Web3 adoption. Nonetheless, the shortage of chips in global markets creates an interesting dynamic between competing nations.
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