The transition of the Trezor crypto wallet to the semiconductor industry is not for everyone

Cryptocurrency maker Trezor recently decided to start producing its own hardware wallet chips to quickly respond to demand trigger events such as the collapse of FTX.

Trezor announced on February 27 that it will begin production of the chip packaging, a key component of the Trezor Model T – its flagship device. The move will reportedly reduce the delivery cycle time from two years to several months in the production of Trezor wallets.

According to Trezor, the decision also addresses delays in deliveries of finished products and protects customers from price fluctuations caused by changes in supply and demand for components. After the FTX crash in November 2022, investors rushed to move their cryptocurrencies from centralized cryptocurrency exchanges, resulting in an increase in demand for Trezor wallets by over 300%.

Štěpán Uherík, Trezor’s chief financial officer, told Cointelegraph that the chip shortage in recent years has also prompted the decision:

“Trezor decided to take control of part of the chip manufacturing process in response to the global chip shortage in late 2021/early 2022. This decision was made to ensure the continuity of production of our equipment, despite the extension of the delivery time from the usual 12 weeks to 90 weeks.”

Semiconductor shortage has been a problem for the world for the past few years.

These intricate electronic circuits are critical in today’s world as they transfer electricity between metals and insulators. Silicon-based semiconductors can be found in virtually all modern gadgets, from smartphones to computers to cars.

Semiconductor sales hit a global high in 2021 as people left home during the COVID-19 pandemic bought more consumer electronics. Major graphics processing unit (GPU) manufacturers such as Nvidia saw record production as the number of GPUs produced skyrocketed. The cost of electronics skyrocketed and semiconductors were hard to come by for manufacturers of related goods.

The Nvidia RTX 3060 family of GPUs included anti-mining protections. source: Nvidia

Further demand was attributed to cryptocurrency miners using GPUs to mine proof-of-work (PoW) cryptocurrencies. More than 10% of semiconductor sales in Taiwan in 2018 came from cryptocurrency-focused buyers. The struggle to keep up with demand in 2021 has prompted Nvidia to limit the use of its gaming chip for cryptocurrency mining – citing an industry-wide shortage.

Demand for semiconductors from the crypto market has fallen further with the onset of the extended bear market in 2022 and Ethereum’s transition from a PoW consensus mechanism to a Proof of Stake (PoS) mechanism. The move to PoS cut off a significant portion of cryptocurrency miners from the market, which had a knock-on effect on semiconductor demand.

Chip making is not everyone’s cup of tea

While Trezor believes that producing its own chips is the right move, not every crypto company wants or can become its own semiconductor supplier. Veronica Wong, CEO and co-founder of SafePal – developer of a cryptocurrency hardware wallet backed by Binance – told Cointelegraph that her company was not facing a shortage that required an in-house chip manufacturing unit.

She added that the supply chain problems in the semiconductor industry caused by the pandemic are almost over and she does not see supply problems in the foreseeable future.

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Wong stated that IC manufacturing is extremely complex and can “provide an extremely high technical barrier requiring appropriate expertise and infrastructure investment”, adding that “without proper management, it can affect production costs without necessarily providing consumers with added value or safety, which is a net negative result.’

“For crypto wallets, user security should always be the top priority, and we would only be forced to manufacture our own chips if none of the existing chips met our security requirements.”

During the pandemic, smaller companies were hit harder as larger orders requiring semiconductors were prioritized, resulting in unequal distribution of resources and lead times. Solving international shortages of this magnitude requires cooperation between suppliers, manufacturers and distributors.

Trezor T model. Source: Trezor

Wong noted that while in-house production reduces reliance on third-party manufacturers, “proper supply chain management can help counter this problem in the first place. Additional operational costs may also be borne by end-users or consumers, which is not ideal.”

Uherík of Trezor said the best option combines both practices – using mass-produced chips and creating your own solutions. He added that taking control of part of the chip process gives the company more flexibility and ensures stable prices and continuous availability of products.

“Unlike mass-produced chips, prices and delivery times can vary depending on market demand. Which also means that the price can drop significantly. The combination of both mass-produced chips and Trezor’s proprietary solution provides optimal flexibility to ensure stable prices and continuous product availability,” said Uherík.

Jonathan Zeppettin, a strategy leader in the blockchain-based cryptocurrency ecosystem Decred, told Cointelegraph that the move makes sense for Trezor because Tropic Square – a startup backed by SatoshiLabs, the company behind Trezor – has designed its own secure chip, TROPIC01.

In-house production of in-house equipment mitigates supply chain problems that are plagued by various external factors such as delivery delays, product quality, and damage in transit. This potentially reduces their exposure to the types of shortages that have plagued producers over the last few years.

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However, the same approach may not work for every other cryptocurrency company, especially cryptocurrency mining companies. Zeppettin cited an example of application-specific chips used in cryptocurrency mining that require advanced manufacturing techniques to produce them:

“It would probably take years and tens of billions of dollars of investment to become competitive with TSMC and Samsung’s 7nm chips. However, states recognize the importance of chip manufacturing as a national security issue and encourage strategic companies to diversify their manufacturing bases.”

Trezor’s decision to produce its own hardware wallet chips underscores the growing interest of crypto companies to diversify their business. However, the same approach may not be feasible for every crypto company with chip requirements. Third-party imports are a more reasonable solution for some crypto companies due to technical and financial barriers to creating such production units.