What is ASIC and how does it work?
So many coins out there are boasting ASIC resistance nowadays that it seems to have become the norm to try to be ASIC resistant. But what does ASIC resistance means? First, we need to explain what ASIC is and how it works. ASIC stands for Application Specific Integrated circuit, which simply means that it is great at doing one thing. In the case of Cryptocurrency mining, it is great at mining a specific hashing algorithm.
ASIC can be built for anything. You can consider a GPU as an ASIC for graphical processing. ASIC is another generic name like a CPU or GPU but is most popularly used in relation to mining. Bitcoin ASIC miners are made as powerful as they are by having a large amount of physically built pipelined and parallel threads in a much smaller space on each chip.
What is the purpose of being ASIC resistant?
With GPUs and CPUs, the general rule is that the more money you spend, the better they are, and it is somewhat linear if you are considering power-to-cost ratio. If you can mine only with a GPU or CPU, then the amount you earn from it should grow equally with the investment you put in. This means that it is all fair. You can invest a small amount of money and see a certain percentage of profit, and you would see roughly the same percentage of profit if you were to invest a larger amount.
This is something you want if you consider that the original purpose of cryptocurrencies was decentralization. This means that everyone has a fair chance at mining, and no hardware is made obsolete. That means your network is much more decentralized. Taking into consideration that everyone mining would be using generic equipment, there is no possibility of controlling the supply of mining equipment.
Bitcoin went a completely different route. With CPU mining this was exactly the case, but as soon as GPU mining became a thing, then CPU mining instantly became obsolete. The advantage of mining with a GPU made the profitability of mining on a CPU so minuscule that most people lost money on it. The same thing happened with FPGAs (programmable hardware). And then it happened again with ASICs. Today, if you mine Bitcoin with anything other than an ASIC miner, you are losing money. This means only those who have ASICs can mine Bitcoin, introducing centralization of the coin.
ASIC resistant mining
Some hashing algorithms try to counter ASIC miners by requiring more memory, like X11 used on DASH or script used on Litecoin. The only problem is that this does not defeat ASICs, it simply means that a new ASIC needs to be designed to mine that specific hashing algorithm. In the case of mining script, they simply needed to make space for more memory.
Then there are coins like Monero that use a hashing algorithm known as CryptoNight. While it is possible to build an ASIC for this, it just wouldn’t be profitable. CryptoNight is an incredibly memory-intensive hashing algorithm and building an ASIC for it would simply be so expensive that you would be losing money on it. Sadly, despite this, it will become profitable once Monero reaches a certain value. However, the Monero team have a solution for this. It will eventually be possible to mine any hashing algorithm with ASICs at a profit. So, to solve this problem, they simply tweak their hashing algorithm regularly. If you keep updating or changing the hashing algorithm, then you can maintain complete ASIC resistance.
This is similar to what Ethereum is attempting to do. They are changing their hashing algorithm to make ASIC mining unprofitable. They simply change the algorithm as such to make it as disincentivizing as possible to build ASICs for Ethereum.
ASIC resistance is good for keeping the network decentralized. There is no way to secure ASIC resistance forever, as there will always be specialized hardware that can compete with and outperform generic equipment. However, making this unprofitable is a viable solution. With regular maintenance, you can stay ASIC resistant by simply making it unprofitable as opposed to impossible.