Trezor crypto wallet’s transition to the semiconductor industry is not for everyone

Crypto wallet maker Trezor recently decided to start producing its own hardware wallet chips to quickly respond to demand-triggering events like the FTX collapse.

Trezor announced on February 27 that it would begin manufacturing the chip package, a crucial component for the Trezor Model T flagship. The move will reportedly cut delivery cycle lead times from two years to a few months in the production of Trezor wallets.

According to Trezor, the decision will also address shipment delays of finished products and protect customers from price fluctuations caused by changes in supply and demand of components. After the November 2022 FTX crash, investors rushed to move their crypto holdings away from centralized crypto exchanges, causing demand for Trezor wallets to increase by over 300%.

Štěpán Uherík, CFO of Trezor, told Cointelegraph that the chip shortage in recent years also led to the decision:

“Trezor decided to take control of parts of the chip production process in response to the global chip shortage at the turn of 2021 and 2022. This decision was made to ensure continuous production of our devices, despite the extended lead time from the usual 12 weeks to 90 weeks.”

The semiconductor shortage has been a problem for the world in recent years.

These complicated electronics are central to today’s world, as they carry electricity between metals and insulators. Silicon-based semiconductors are found in virtually every modern gadget – from smartphones to computers to cars.

Semiconductor sales reached a global peak in 2021 as people stranded at 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 was rising, and semiconductors were hard to come by for manufacturers of related goods.

Additional demand was attributed to cryptocurrency miners using GPUs for mining proof-of-work (PoW) based cryptocurrencies. Over 10% of semiconductor sales in Taiwan in 2018 came from cryptocurrency-focused buyers. The struggle to keep up with demand in 2021 led to Nvidia limiting the use of the gaming chip for crypto mining – citing the industry-wide shortage.

Demand for semiconductors from the crypto market further declined with the emergence of the long-term bear market in 2022 and Ethereum’s transition from the PoW consensus mechanism to proof-of-stake (PoS). The transition to PoS cut off a significant portion of crypto miners from the market, which has had a negative effect on the demand for semiconductors.

Chip manufacturing is not everyone’s cup of tea

While Trezor believes that producing its own chips is the right move, not all crypto companies are willing or able to become their own semiconductor supplier. Veronica Wong, CEO and co-founder of SafePal – a crypto hardware wallet maker backed by Binance – told Cointelegraph that her firm had not faced a shortage that would require 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 they do not see any supply problems in the foreseeable future.

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Wong stated that manufacturing chips is incredibly complex and can “present an extremely high technical barrier that requires the right expertise and investment in infrastructure,” adding that “without proper management, it can affect production costs without necessarily delivering additional value or security to consumers, which is net negative.”

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

During the pandemic, smaller businesses were hit harder as larger orders requiring semiconductors were prioritized, resulting in an uneven distribution of resources and lead time. Solving international shortages of such magnitude requires cooperation between suppliers, manufacturers and distributors.

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

Trezor’s Uherík said the best option combines both approaches – using mass-produced chips and creating in-house solutions. He added that taking control of parts of the chip process gives the company greater 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. A combination of both mass-produced chips and Trezor’s own solution provides optimal flexibility to ensure stable prices and continuous product availability,” said Uherík.

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

Manufacturing proprietary hardware in-house reduces supply chain issues plagued by various external factors such as delays, product quality and shipping damage. This potentially reduces their exposure to the kind of shortages that have plagued manufacturers in recent years.

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However, the same approach may not work for all other crypto-related firms, especially crypto mining companies. Zeppettin cited the example of application-specific integrated circuits used in cryptocurrency mining, which require advanced manufacturing techniques for their production:

“It will likely 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 companies of strategic interest to diversify their manufacturing bases.”

Trezor’s decision to produce its own hardware wallet chips highlights the growing interest of crypto companies in diversifying their businesses. However, the same approach may not be possible for all crypto companies with chip requirements. Third-party imports are a more sensible solution for some crypto firms due to technical and financial barriers in setting up such production units.