Unpacking Canaan’s lawsuit against an upstart rival — and what it means for the Bitcoin mining hardware competition

Canaan, one of the major Bitcoin mining hardware manufacturers, has filed a lawsuit in China against HighSharp, the new mining chip designer for AGM Holdings, accusing it of patent infringement.

The specific patent at the center of the dispute, which has been viewed by The Block, is conceptually similar to the one that was core to a high-stakes legal war four years ago between Bitmain and rival MicroBT.

MicroBT winning that lawsuit in 2018 paved the way for its rapid growth in 2019, which disrupted Bitmain’s market dominance and arguably changed the course of history for the bitcoin mining hardware industry.

At the time of the news report of Canaan's lawsuit earlier in November, it was not clear which specific patent authorization Canaan is building the case on since the firm’s complaint is not publicly available in China’s court database. The only information that the Chengdu Intermediate People’s Court — where the case was filed — has revealed thus far is that the case was formally established on November 10.

Canaan alleges that the KOI C16 Bitcoin ASIC chip, designed by Shenzhen HighSharp and manufactured by AGM Holdings, has infringed one of Canaan’s patents. It is suing HighSharp to cease its production and recoup damages of $14 million. 

The C16 chip, as The Block detailed in a previous report, boasts a computing power of 110 terahashes per second (TH/s) at an energy consumption of 3100 watts and uses the seven nanometer/eight nanometer (nm) silicon wafers from Semiconductor Manufacturing International Corporation (SMIC).

Nasdaq-listed AGM Holdings supplies the chips to North American hardware maker MinerVA, which itself has pending equipment orders for over 50,000 units from U.S. mining firms Stronghold Digital and Terawulf.

The lawsuit comes at a time when Canaan is working on a new generation of mining equipment. SMIC also happens to be a major foundry partner of Canaan.

Nangeng Zhang, the founder and chairman of Canaan, said during the firm’s interim earnings call in September that it expects to conduct tape-outs — the expensive, final-stage testing process that comes before mass production — for new chips during the fourth quarter. Canaan didn’t say at the time which foundry partner it’s going to work with. 

So what is it about this patent that Canaan cares enough about it to go after a new ASIC designer over it?

The "public knowledge" argument

According to Canaan’s complaint, which The Block was able to access, the specific patent at dispute is called “A circuit, computing device and task processing system,” which Canaan applied for in April 2018 and received authorization for in June 2020.

Based on the full patent (here’s an English excerpt), the core is a design that, at a high level, applies series circuits to a Bitcoin ASIC chip. Per Canaan’s description, the design increases the total number of chips — hence the total computing power — without increasing the power voltage by using series and parallel circuits in a Bitcoin ASIC miner.

Kristy-Leigh Minehan, the former CTO at Core Scientific and an ASIC and GPU hardware expert, reviewed the Canaan patent (with a disclaimer that she relied on machine translation). She said that the main claim appears to relate to “basic power optimizations” and refers to a concept in electronic engineering called “Daisy Chaining," which is public knowledge. 

If Minehan is right, that would mean that HighSharp could follow the lead of MicroBT, which four years ago used this “public knowledge” argument to beat back a patent infringement lawsuit brought by Bitmain.

Back in 2016, when Bitmain, which sources wafers from Taiwan Semiconductor Manufacturing Company (TSMC), won a patent for adopting the series circuit design in its Bitcoin ASIC chips, it essentially had no rivals.

The emergence of MicroBT in 2017 set off alarms at Bitmain not only because of its competitive specifications but the fact that MicroBT, whose founder used to design chips at Bitmain, also sourced wafers from TSMC at the time.

MicroBT then applied to China’s patent authority to revoke Bitmain’s patent, arguing that a technology that applies publicly available knowledge to make a new thing should not be a valid invention with ingenuity. 

China’s patent authority reviewed Bitmain’s patent authorization and ultimately decided to revoke it in 2018, explaining:  “If a technological solution sought by a patent has different characteristics than existing technologies, but such difference is public knowledge, then it is obvious the solution would incorporate this public knowledge." 

That means if you have applied public knowledge to invent something — even if no one invented it before — the invention is not considered original in the eyes of China’s patent authorities. 

Indeed, according to people familiar with the matter, HighSharp is now poised to file a countermove to those authorities, based on an argument similar to the one that MicroBT made: that the application of series circuits is basic knowledge in the IC industry that is publicly available.

Minehan thinks HighSharp has a case. "(Canaan) would need to prove in a court of law that this specific 'innovation' was used — and that no one else had used it before they filed their patent. I think that is unlikely," she said. "So yes, I think 'basic public knowledge' is going to apply here."

But either way, like the Bitmain vs. MicroBT case, the outcome of this lawsuit has the potential to either raise or lower the barrier of entry to the hardware market. 

Bitmain’s case was eventually dismissed by the court after the patent was revoked. But had Bitmain won, it would have significantly crippled MicroBT’s business and killed the fast rise of its WhatsMiner equipment, which now takes up a serious part of the market share.