The Basics of ASICs
What exactly are ASICs, and what do they do? Pandacoin’s Crypto Crash Course takes a look at how these little chips have made a big difference in the mining process.
Before these ASICs (Application Specific Integrated Circuits) existed, mining was done purely by Computer Processing units (CPUs), and Graphics Processing Units (GPUs) that exist inside regular computers. ASICs are specifically designed circuits that are hardwired to mine coins. These pieces of hardware are connected to a computer by USB, and are used as a processing unit specifically for mining. These ASICs are usually only useful for a single algorithm, meaning that SHA-256 ASICs can only mine SHA-256 coins and Scrypt ASICs can only mine Scrypt coins. There are a few exceptions to this general rule of thumb, but usually, if a new algorithm is created, it is immune to ASICs designed to mine older algorithms.
ASICs, although they provide an opportunity to get a higher rate of mining for lower cost than buying GPUs for the same purpose, it also has an unfortunate effect on the market. As everyone begins to get their hands on ASICs, because the total processing power mining coins goes up, it makes it less profitable to mine with regular GPUs. This is because, if you are mining, and you have X amount of processing power (hashrate), and the entire world has 99X hashrate, that means you have 1% of all the hashrate. That means that you get 1% of the coins released by the blockchain on average.
However, if you still only have X hashrate, and everyone else buys ASICs, but you stick with your trusty GPU, and the rest of the world’s hashrate rises to 999X, then you only get 0.1% of the total coins released by the blockchain, making it less profitable for you to mine it. Under this scenario, the only way for you to mine as you used to is to purchase an ASIC, or to change the coin you’re mining so that the algorithm of the coin you’re mining cannot be mined by ASICs, and trade for the coin you really want.
Beyond that, the surge of hashrate can damage some coins by dissuading regular users from mining it, and also exposing those coins to unfortunate attacks that can be orchestrated if a single individual has a large portion of the hashing power on the network. These are called 51% attacks, which are explained in the article on the Risks of Cryptocurrencies..
Needless to say, ASICS overall are a disadvantage to the market, and if an individual can have a coin that is “immune” to ASICs, that would usually be very helpful in supporting the health and longevity of the coin. POS coins are one such coin, because you do not mine them as you do POW coins. The only way ASICs can impact POS coins is by impacting digital currencies as a whole, making it less effective to mine other coins so that when you want to mine other coins to trade for the POS coin you really want, you can’t get as many! This effectively increases the value of a POS coin, as it makes the interest they make worth more, as coin production in the POW coin markets decreases. In essence, POS coins are the natural response to the ASIC problem, and they protect the investors both big and small, from a mining industry that is being ruined by these powerful machines.