The implications of blockchain in the chip shortage

The global chip shortage has had a large effect on IT and data centers everywhere. At least one contributor to the shortage is the rising application of blockchain technology, which consumes a substantial share of chip production as a result of its compute-intensive nature.

How consequential the chip shortage might be and how long it might last are among the questions concerning IT practitioners and industry watchers alike.

Chip supply and demand

“Blockchain should be thought of as an application that runs on servers. And servers, in turn, run operating systems using microprocessor chips to provide processing power,” said Ron Howell, software-defined WAN and Secure Access Service Edge architect for Capgemini America. There are only so many microprocessor chips available, and they go to the highest bidders. Blockchain requires high numbers of distributed processing engines to operate effectively.

“The popularity of cryptocurrency adds to the high demand for chips and contributes to the shortages we see today,” Howell said.

While demand for semiconductors increased 17% from 2019 to 2021, there was no commensurate increase in chip supply.

The vast majority of semiconductor fabrication plants already operate at about 90% of their capacity to manufacture chips, meaning they have little immediate ability to increase their output, according to recent studies.

The need for chips is expected to increase, as technologies that use vast amounts of semiconductors, like blockchain processing, cryptocurrency growth, 5G and electric vehicles, become more widespread.
Ron HowellSD-WAN and SASE architect, Capgemini America

“It is getting worse, and the effect is a slowing of the economy overall,” Howell said. “The need for chips is expected to increase, as technologies that use vast amounts of semiconductors, like blockchain processing, cryptocurrency growth, 5G and electric vehicles, become more widespread.”

It boils down to supply and demand: There is currently more demand than supply for specific microprocessor chips. Some companies now stockpile chips in order to build their products for market.

Supply chain issues

Some estimate that overall supply chain constraints and shortages will last another two years, until all the additional fabrication capacity comes online, said Greg Schulz, founder and consulting analyst at Server StorageIO.

“All of a sudden, we needed more chips, but increasing production depended on expanding the factory, and that takes time to build,” Schulz said.

That slow response ripples up the supply chain, with the equipment that produces the chips now in short supply — equipment that itself often requires chips, producing a chicken-and-egg situation.

Some of the disruption can be attributed directly to the COVID-19 pandemic, but Schulz also believes there was too little investment in the sector to prepare to meet demand.

“The surge in all of these things, whether it is memory chips or general-purpose chips or GPUs or RISC or Arm chips — it is easy to point the blame at COVID, but COVID only exacerbated the situation,” Schulz said. “You suddenly had more people who needed smart devices and computers, and on the production side, you had workers who couldn’t go to work.”

Although a lot of chip production is automated, human involvement remains important.

Use cases for GPUs

For Chris Mattmann, chief technology and innovation officer at NASA’s Jet Propulsion Laboratory, the biggest part of blockchain’s impact on the chip shortage is, in fact, its extensive use of GPUs. In the past, GPUs have typically been reserved for complex mathematical operations and AI processing.

“As it turns out,” Mattmann said, “these chips also are quite useful in blockchain, since part of the design of the blockchain calls for dynamic new blocks to be written by linking the new blocks of transactions to previous blocks.”

The act of creating new blocks involves hashing and competing to find the best, quickest and most resilient hash code. Hash code is computer code that functions as a compact representation of a piece of data that can represent the new block. Nodes that find the new hash code the fastest are rewarded with cryptocurrency, such as Bitcoin or Ether.

Now, blockchain nodes, which power nonfungible tokens, media and other widespread applications, increasingly use these chips, driving chip consumption issues alongside demand from AI and deep learning.

“Cryptocurrency mining is based on proof of work that is high computation intense and power-hungry, but mining chip design is much less complex compared to the microprocessor MPU, GPU or [Associative Processing Unit],” said Samuel Wang, research vice president at Gartner.

The wafer demand for cryptocurrency application-specific integrated circuit chips is “totally manageable,” at less than 30,000 300-millimeter wafers per month globally, Wang said. It’s something that was arguably “never in shortage.”

Likewise, on the macro level, Wang said that blockchain operations tend to be segregated from mainstream IT.

“On blockchain, there are companies specializing in the operation of data centers for handling blockchain for customers,” Wang said. Because both PCs and data centers can operate blockchain, when chip shortages hit both, the blockchain business slows down.

“But I doubt blockchain was the cause of the shortage for PCs or data centers,” Wang said.

Designing blockchain

Blockchain can be designed by one of two algorithms: proof of work (POW), which demands power, or proof of stake (POS), which has a lower power requirement.

“POS is a newer method for blockchain as it is faster, less expensive and more energy-efficient than the traditional POW used by cryptocurrency,” Wang said. “My judgement is that more blockchains are moving toward POS; therefore, power consumption and chip demand can be minimized.”