The Brownstone office is buzzing with energy right now.
With the relaunch of the Perceptron last week and the breakneck pace of advancement in so many industries right now – artificial intelligence (AI), advanced robotics, biotechnology, and nuclear fusion, to name a few – it’s a thrilling time to be bringing you insights from the bleeding edge of tech.
And my team and I thank you for the outpouring of support and appreciation you all have been sending our way as we work to continually improve and level up our services here at Brownstone Research…
A big huge thank you to Jeff Brown – did not know how much grief I felt over his absence and the vitality of his energy. Neural has risen up anew! Glad we are all back in the game! Jeff, you were greatly missed!!!!
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Now on to the AMA…
Hi Jeff, Welcome back to the limelight! I have a question you’ll probably find elementary but I need some information. I have a friend who uncovered some coding in cryptocurrencies that is over my head but I understand the concept and want to know more. What can you tell me about liquidity pools in the crypto markets? Thanks in advance.
– Dan S.
Hi Dan,
What a great topic.
Liquidity pools are a fascinating niche within cryptocurrency markets. And in many ways, they represent an area where we see a lot of research and development taking place.
To help us understand them, let’s first look at the traditional stock market where shares change hands every second on the exchange.
There are many parties involved whenever a trade takes place. On one side, you might have a self-directed investor buying or selling a stock through a brokerage platform. The brokerage then may buy or sell shares on the open market to help fulfill your order.
The brokerage platform typically makes a small spread on this transaction for acting on our behalf and for holding or taking custody of our shares, even though they advertise “zero-cost” trading.
On the other side of the trade might be a market maker. They are supposed to help the market operate efficiently by reducing “slippage.”
Slippage is the difference in price from what the current market price is and when the trade gets executed.
For example, let’s say we see a small stock trading at $1.20 and we place an order for a thousand shares. But when we check our account, we see fewer shares than we expected. It turns out, the average price per share was at $1.25 when the transaction was actually executed.
That represents $0.05 of slippage per share.
It’s a hidden cost to trading that most are unaware takes place.
Again, market makers are supposed to help reduce that slippage, but in reality, they look to profit from our orders. What might happen in the background is the market maker might front-run our order and sell shares to us at a higher price.
This nefarious practice was very common between entities like Citadel and Robinhood. Robinhood would sell what is known as order flow to Citadel. This would allow Citadel to jump in front of retail investors to profit in the way mentioned earlier.
And while this practice is being scrutinized, it reveals the layers of costs being tacked on to each order when it comes to retail. They don’t get the best price execution.
Or, said another way, regulators are not trying to protect retail investors. Regulators know this is happening and have normalized it, and they permit it to happen.
And that is the problem that liquidity pools look to solve.
They represent financial innovation in public markets. To better understand why, let’s understand how they operate.
We can think of them like a pool of assets where two (or sometimes more) assets might sit in a smart contract. We can think of smart contracts as small programs or applications that operate autonomously.
For simplicity, let’s say the pool holds the stablecoin USDC and the native token of Ethereum, ETH.
Now, anybody – this is the permissionless part – can interact with the smart contract to exchange one asset for the other via a swap.
This means if we hold ETH in our digital wallet, we can swap it for USDC via this smart contract.
What’s important here is this interaction does not require a broker or market maker like Citadel to get involved in the action. It’s merely software code that runs based on the parameters with which it has been programmed – in this case, swapping ETH for USDC.
The way price is determined is elegant. It’s done via a simple mathematical equation determined by the number of tokens of each asset in the pool.
This is even more special because there are no backroom agreements or negotiations happening. The smart contracts simply do what they are programmed to do.
We hold custody of our tokens throughout the process. We can also look at the public ledger to see the transaction.
This is no easy feat in the standard way of trading.
And amazingly, the thousands upon thousands of assets in the blockchain can be easily swapped for other assets. This would be like swapping shares of Apple for shares of a small biotech company all in the same transaction, without having to involve your broker or a firm like Citadel.
This is innovation.
What it also means is anybody can deploy their own liquidity pool into the ecosystem with just some code… And it’s a process that’s getting simpler and simpler.
It’s nearly to the point where no coding experience is necessary.
In comparison, let’s consider what it would take to get publicly listed on a traditional exchange. You would need several teams of lawyers, accountants, a market maker, and much more. It’s a very expensive process.
As such, liquidity pools represent a 99% reduction in cost to make shares or assets tradable.
That’s a major accomplishment in finance.
Now, I won’t say that everything is perfectly flawless as it stands today. There are ways actors can front-run our orders through a process called maximal extractable value – “MEV.” I won’t go into the details of how this works, but you can think of it as a sort of crypto transaction tax imposed on users by miners.
But this is a bigger topic… and one that only negatively impacts those swapping millions of dollars in cryptocurrencies, at that.
This means most tend to get very good price execution as it stands today.
Instead, I bring up this MEV point to say that many teams are still researching and developing solutions for even better price execution.
I don’t see this type of bleeding-edge iteration happening on Wall Street.
Quite the opposite, Wall Street is working hard to preserve the way things are currently done because that’s how they profit and make their big bonuses.
Some of the best mathematicians in finance are involved in this domain and it represents how technology can make finance more equitable and accessible.
We would never see traditional markets do this on their own accord as it would threaten their profit margins.
In reference to your article “ Open AIs Channel to the Government. You give glowing reviews to Sam Altman and his charge to be the first developing AGI.
I do not like Sam Altman and more specifically I do not trust him. He is a far-left liberal and I have no doubt the AGI he is developing will be very biased to the political left. Great, just what we need. The left already owns and controls the media, the tech world, academia… and, soon to be, AGI.
I rather think an independent thinker like Elon Musk would be far better to root for than Altman.
– MIKE COLSON (TBE)
Hi, Mike…
I don’t disagree with you at all. And I’ve written extensively over the last year about how biased OpenAI’s approach to artificial intelligence has proven to be. It has been easy to discover how bias has been programmed into the AI, as well as, on occasion, even making efforts to rewrite history.
From last week’s Bleeding Edge – The Perceptron Is Back in Action…
At the moment, the most neutral party in the race to AGI is xAI, led by Elon Musk. And, of course, X (Twitter), which is better than ever. Its use of Community Notes has proven to be very effective in identifying false videos, images, and misinformation, and adds material context to any controversial issues.
This particular issue is one for the ages. In Latin, quis custodiet Ipsos custodes? Meaning, who will guard the guards? Or now more commonly known as, who will watch the watchers?
And the answer is us, we the people. When the watchers, the government, Google, Facebook, etc. overreach, it’s our job to stand up and advocate for change. If the system is rigged, we need to advocate to change the system. If the mass media is nothing but propaganda, let’s not give them our business… eventually they’ll go under.
I’ve also been very critical in the past about another one of Altman’s projects, Worldcoin, which I’ve been meaning to explore again soon in The Bleeding Edge. I’m sure you won’t like that project either.
With that said, Altman is an impressive entrepreneur, investor, and executive. What he has done with OpenAI and its partnership with Microsoft is incredible. And the pace of technological development at OpenAI, putting the bias aside, is remarkable.
The company took its first investment from Microsoft in 2019, $1 billion, and today the company just raised capital at a $160 billion valuation.
Altman has also been a strong supporter and investor in nuclear power. He is the chairman of Helion Energy, a promising nuclear fusion company that already has a power purchase agreement in place with Microsoft.
He also has a large position in Oklo (OKLO) a fast reactor nuclear fission technology company that we explored in the very issue you mentioned in your letter, The Bleeding Edge – OpenAI’s Channel to the Government.
Altman has been very fortunate in his timing and investments which put him in a position to be part of building incredible things. And the sudden success of OpenAI will result in Altman having even more resources at his disposal.
We can expect that he’ll continue to invest in and build revolutionary technologies for decades to come, and as such is someone that we should follow closely.
And yes, I will continue to cheer for Musk and his team at xAI, and others who are neutrally building this incredible technology without any intention to manipulate users.
It is up to us, as well – the people, the consumers – to hold accountable those attempting to use artificial intelligence to propagate political narratives to manipulate an unassuming population.
Hi Jeff,
So you are saying that AI requires more energy than we can provide, therefore we should allow AI to create and operate nuclear fusion reactors for us!? What a circular and dangerous argument that really opens the risk for a dystopian future.
Certainly not worth the risk as the short-sighted recent statements of Jensen Huang make clear where he advocated that we no longer need to learn to code. Talk about selling our soul to the devil, this is akin to saying we no longer need to learn maths now that we have computers.
With thinking such as this, the light at the end of the tunnel certainly is an oncoming train.
– Ivo J.
Hi Ivo,
No, I’m definitely not suggesting that AI requires more energy than we can provide. Quite the contrary, the resources are there… trapped behind anti-nuclear stigma and miles of red tape stuck to the walls of nuclear facilities everywhere.
Energy production is not the issue. The real question is how the industry will choose to generate the required baseload energy to meet the requirements to power these massive AI-specific data centers 24/7.
Should we use more coal? Natural gas? Or oil? Geothermal could be a good, clean solution, but it’s highly limited to certain locations. I’d prefer that the energy source be clean and emissions-free, which means nuclear fission or nuclear fusion.
AI can be used to assist in the design of nuclear power plants.
For example, optimizing the materials for magnet design. And AI will likely be used to help manage something as complex as the magnetic field to control a fusion plasma, but there will still be human operators overseeing the plant operations.
And you’re definitely right, we do still need to learn how to code. And we also need to learn how to use AI to assist in coding, debugging code, and optimizing software code.
Not only that, to your point, science and mathematics still need to be a core component of education systems.
These subjects are critically important not only because they provide a foundation of understanding for the real world, but they also help teach logical, rational thinking, and problem-solving skills… something in increasingly short supply these days.
Education is actually one of the more interesting areas for the application of AI. It can be a fabulous tutor, providing personalized instruction to each student on these subjects and teaching each student in a way that is best suited for their individual learning style.
If we focus our energies on how best to use the technology to affect the best possible outcomes, I believe that we can avoid the dystopian future you mentioned.
With that said, after what we’ve experienced in the last few years, we’re going to have to work hard to make sure that individual rights are upheld, freedom of speech is preserved, and we don’t cede control of our lives to tyrannical governments around the world.
Can you tell me about the company with a new tech for delivering satellites into orbit that is 92% less expensive than SpaceX’s … without ever launching any rockets? It uses Jets flying to 45,000 ft and then launching rockets into low orbit to deploy small satellites. They are located in Cape Canaveral, FL. They are a private company looking for Alpha round investors now, with ambitions to go public in the near future.
Is this a company you know about or have any done due diligence research?
Thanks, Jeff!
– Mark F.
Hi Mark,
I believe that you’re referring to Starfighters Space, which is a private company that is trying to raise capital via Reg A+ crowdfunding regulations.
I had a look at this company after receiving your question. This is a business that provides pilot training on F-104 fighter jets and even provides rides to civilians who want to experience what it is like to fly in a fighter jet.
It appears that the company is trying to rebrand itself into more of an aerospace company with an aspiration to start providing launch services of small satellites that would be the payloads of small rockets dropped from F-104s at altitude.
It’s important to note that there are no notable institutional investors who are active in the aerospace industry backing this company.
The company had zero revenues from operations in both 2022 and 2023 and only small amounts of revenues in those years from training and test flights. This is a company with more than $11.5 million in liabilities that will suffer dilution due to a number of issued warrants and convertible debt that has been issued.
It’s raising at a $65 million valuation which, from my perspective, is way too high, and with a number of related party transactions that give me concern.
Too many red flags for my liking. This is not a deal I would ever recommend.
Jeff,
Great insights and data analysis, I agree with you here…
This isn’t a short-term, multi-year trend.
It is a multi-decade unwinding that has the tailwinds of cost and operating benefits, as well as political and geopolitical support.
Investment question is who to add to our portfolios to take advantage of the recalibration? The few you’ve sighted below?
Major beneficiaries are Intel (INTC), Taiwan Semiconductor Manufacturing (TSM), Global Foundries (GFS), Samsung Electronics, Micron Technology (MU), and most recently, Texas Instruments (TI), which was just granted $1.6 billion in grants and $3 billion in loans for projects in Sherman, Texas, and Lehi, Utah.
Are they building the “80” new sites or are there other companies you have vetted that we should be adding to create a U.S. chip portfolio?
I can see Tesla supplying their Optimus robots to these 80 sites to ramp up the facilities’ timetables and then improve efficiency and lower costs.
Second question for you as AI and Autonomous robots take over mfg jobs, there will be a dramatic reduction in Federal and State income taxes, do you see the Fed making a move to charge companies using robots to pay taxes just like the humans they replaced? Or how do you make up the lost revenues like SS FICA etc.? Like to hear your thoughts.
– Anthony P.
Hi Anthony,
This topic concerning the intersection of AI, manufacturing, robotics, jobs, and the economy is such a dynamic topic.
In the short term (i.e., the next few years), the primary adoption of AI/robotics technology will be to a) accomplish jobs that humans simply can’t perform and b) help to address the large labor shortages that we are seeing in so many industries.
These two categories are what I see as the low-hanging fruit for technology companies in this space. This is where the need is the largest and adoption will be the simplest.
In the mid-term, there will be job displacement as AI-powered robotics are adopted to replace workers, specifically in jobs where there is a large amount of turnover.
Again, from an industry perspective, anywhere there is a large turnover of employees, is an area that is ripe for the adoption of technology. These are typically jobs that are less desirable to humans, hence the high turnover rates. For example, warehousing where there’s a nearly 50% annual turnover rate.
And in this transition, there will be numerous new jobs created to support the employment of, the monitoring of, maintaining, and repairing of robotic systems. Retraining will be involved, but there will be vast employment opportunities for those willing. During times of great technological change, the workforce benefits by being flexible and adapting to our new realities.
AI and robotics will bring about the largest productivity boom in history. And anytime we have a major productivity boom, we have a thriving, expanding economy.
This means that we may very well see federal income taxes increase, not decrease, from all the new economic activity. I believe there will be more nuance at the state level.
Poorly run states with antagonistic regulations and taxes will likely see an outflow of talent and economic activity, thus a decline in state tax revenues. Well-run states with economic incentives and reasonable taxes will see an increase in economic activity and state tax revenues.
As for the semiconductor companies, I have been bearish on Intel and have written quite a bit about this topic in the issues of The Bleeding Edge – Preying on Intel. And The Bleeding Edge – Farewell, Intel.
There are a lot of great developments coming out of the CHIPS Act, which is tied into something that I have called The Great Recalibration in the past.
This movement, the recalibration, began in earnest in 2017. It kicked off this multi-decade trend towards reshoring manufacturing, increasing supply chain resiliency, and decentralizing manufacturing using automated manufacturing technology. We’re still in very early days.
This is a trend that we research and write about a lot at Brownstone Research, and we do have a model portfolio of companies that are benefiting from this trend in our investment research product The Near Future Report. (You can go here to learn more about it).
We’ll be profiting from this trend for years to come…
That’s all we have time for today. Many thanks to everyone writing to us. You can always reach us by email right here. My team and I love hearing from you. We read everything you send in.
Have a great weekend everyone.
Regards,
Jeff
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
