Bitcoin's Biggest Rival Faces Overhaul as Computing Power Rises

(Bloomberg) -- A fight is on for the soul of Ether.

With a market capitalization of $73 billion, the biggest cryptocurrency after Bitcoin has been hailed as the future of digital finance because of its ability to layer software applications on top of transactions. But as Ether rises in price and importance, powerful players within the virtual currency world such as equipment maker Bitmain are angling for greater control and profit.

What’s at stake is domination of the process known as mining, where scores of computers solve complex mathematical riddles to win newly minted coins in exchange for processing the transactions that allow the network function.

Bitcoin's Biggest Rival Faces Overhaul as Computing Power Rises

Ethereum developers have always wanted the project to be "a world computer," in which millions of people’s PCs and graphics card-based machines run the digital ledger. Such a wide web of participants "gives Ethereum extreme levels of fault tolerance, ensures zero downtime, and makes data stored on the blockchain forever unchangeable and censorship-resistant," according to Ethereum’s documents.

The range of participants could be about to shrink, as Bitmain and others move in with a new type of computing hardware that could give them disproportionate power when it comes to confirming transactions. The new hardware, which should become available in July or sooner, could push out smaller miners and is "a nightmare for decentralization," said Lucas Nuzzi, a senior analyst at Digital Asset Research.

Ethereum developers are rushing to stop the invasion. During a call last month, Ethereum co-founder Vitalik Buterin said that the risk will go away once the community deploys Casper -- software that will get rid of miners altogether and confirm transactions in a different way, which would expand the number of people involved in the process. But the date of Casper’s deployment is uncertain, with the project having already been delayed for months.

Bitcoin's Biggest Rival Faces Overhaul as Computing Power Rises

Members of the community have also debated capping Ether supply or changing algorithms to combat miners using the so-called ASIC-based hardware.

ASIC, or application-specific integrated circuit-based computers, are more efficient than traditional PCs, phones or graphics cards in running specific algorithms used in confirming transactions -- so they can earn tokens more cheaply and faster. They have long been used to mine Bitcoin. Later, they spread into Litecoin and Dash. Bitmain announced the first-ever ASIC computer able to mine Zcash in May, and an ASIC miner for Ether last month.

“That could have a negative impact on the Ethereum community and therefore on Ethereum price," said Sam Doctor, managing director at Fundstrat Global Advisors who holds some Ether. The coin “may underperform the space," though that may be short-lived, he said.

The greater mining power could let Bitmain -- or other large miners that buys its gear -- to gain control over the network in what is known as a 51-percent attack, in which they could falsify transactions and make away with other users’ coins.

"If Bitmain miners became so large that it would present a 51-percent attack risk, this could undermine prices," Susquehanna Investment Group’s Christopher Rolland said.

Bitmain said the company has specifically made an effort to avert reaching the transaction processing threshold. Such a move "would not be in the economic best interests of any participant in a cryptocurrency ecosystem as it would weaken faith in the currency, causing its value to fall," according to an emailed statement. "Further, in selling its Ethereum mining devices to its customers, Bitmain worked to ensure that no one participant received an undue allocation of units. This further reduces the possibility of any one party controlling the network."

It’s not just Bitmain that looks to disrupt this market. At least three other companies are working on Ethereum ASIC miners as well, Rolland said in a recent note. And some of the makers may be deploying ASICs for mining Ether already.

"There’s a concern in the community that a lot of the ASIC manufacturers are hoarding a lot of chips and doing their own mining," said Timothy Tam, co-founder of market intelligence platform CoinFi.

Bitmain’s $800 Ether miner will ship in July, according to the company’s website. It can deliver a hash, or processing, rate of 180 megahashes a second. By comparison, Bitmain’s own GPU-based machine used to mine Ether at 220 megahashes is for sale online for about $4,000. So the new gear is many times cheaper and more efficient than anything that current Ether miners use.

"These are the conservative estimates," the company said on its website. "We expect the miners to deliver higher performance and efficiency when they are ready to ship."

Many investors say ASICs are just something they may have to live with, as mining equipment makers grow more powerful.

"ASICs & Mining (and Bitmain) is certainly a reality in today’s market," said Dave Balter, partner at Flipside Crypto, which runs investment vehicles for cryptocurrencies. "These things tend to create a lot of noise and news, but we tend to stay focused on the fundamentals. Ethereum is a great project, it will continue to be one, regardless of how fast it gets mined."

©2018 Bloomberg L.P.