Dear Reader,
It continues to be an incredible week of developments in the blockchain industry.
This time, it’s one of the largest cryptocurrency hacks of all time.
Poly Network – a non-U.S.-based project backed by blockchain projects like Neo and Ontology – was just hacked for $611 million.
Poly Network has developed a protocol for swapping digital tokens across different blockchains. This area of the industry has become critically important due to the number of blockchains in use and the need to interoperate between them.
This particular hack is very interesting as it reveals some of the nuances and misunderstandings about blockchain technology and cryptocurrencies.
Ironically, the cause of the hack was an issue with the Poly Network cryptography, not some other kind of clever engineering or market manipulation. It’s unusual for cryptography to be the problem in the blockchain industry. But the hacker found a weakness in Poly Network’s technology and exploited it.
The assets stolen were:
$273 million in Ethereum tokens
$253 million in tokens on Binance Smart Chain
$85 million in USDC (a stablecoin) on the Polygon Network
Of course, the industry jumped into damage control to recover the funds. And it didn’t take long for a blockchain security firm to track down the hacker’s ID, email address, IP information, and even the electronic fingerprint of the device the hacker used.
And yes, that’s enough information to eventually find the individual in real life (IRL). It only took a matter of hours. And the hacker has already returned $258 million of the stolen funds. It isn’t clear if he’ll return the rest.
It demonstrates just how difficult it is to get away with a hack of this magnitude. It’s largely misunderstood that the ability to track transactions over blockchain technology is enhanced compared to fiat currency transactions.
Assuming a bad actor can steal funds, it is far more difficult to “launder” those tokens and somehow exchange them into U.S. dollars or euros. It’s almost impossible to off-ramp those funds without being caught.
Stablecoin company Tether immediately blacklisted any of its own stablecoins (USDT) associated with the attack – about $33 million. By doing so, Tether was able to freeze those assets. That’s a lot of power for one company to have. Fortunately, in this case, it is for good reason.
Even more bizarre is that the hacker held an Ask Me Anything (AMA) about the hack. He went online and engaged with the community to explain how he did it.
Having realized what he’s done, he is likely positioning himself as a “white hat” hacker in hopes that he can get himself out of the pickle he is now in.
He said of the hack:
When spotting the bug, I had a mixed feeling. Ask yourself what to do had you facing [sic] so much fortune. Asking the project team politely so that they can fix it? Anyone could be the traitor given one billion. I can trust nobody! The only solution I can come up with is saving it in a trusted account.
Let’s hope he gives it all back.
A far better option would have been to report the bug for a bug bounty from the Poly Network – a normal practice in the industry.
Aside from the obvious problem of him breaking the law, on paper, he may look like he’ll come out ahead keeping the funds. However, in reality he may never be able to access them, and that presumes he isn’t found – something I highly doubt.
It’s a fool’s errand to try and run off with the funds… The blockchain industry, being so highly technically competent in nature, does a remarkably good job of self-policing bad actors.
And the actions of Tether raise a critical point related to central bank-backed digital currencies (CBDCs). Stablecoins, by design, act much like CBDCs. They will have centralized control dictated by a central bank and represent an underlying fiat currency 1:1.
And central banks will be able to freeze each and every digital dollar, euro, etc. of any transaction that they believe to be suspicious or tied to illegal activity.
What government wouldn’t want that power? CBDCs aren’t just motivated by being able to track, monitor, and tax every transaction. They are motivated by absolute power and control.
That’s something that they don’t have with fiat money. After all, can a central bank stop drug smugglers or human traffickers from exchanging large duffle bags of currency? Can they freeze those individual dollar bills or stop them from being laundered? No way.
We should expect to see an explosion in CBDCs over the next few years. Along with that, we’ll see a complete disruption in the financial services industry.
For consumers, transactions will get faster, better, and cheaper. And as investors, we’re going to make an absolute fortune.
Blockchain company Paxos just raised $300 million in its Series D funding round. This values the company at an impressive $2.4 billion. And what’s most notable is who was behind the round…
PayPal Ventures, Coinbase, and even Bank of America invested heavily in Paxos’ Series D round. This is telling.
We have seen an incredible level of excitement around blockchain technology in recent months. There has been a noticeable increase in industry investment since the Coinbase (COIN) direct listing on April 14 this year on the Nasdaq.
It’s not a surprise either. After seeing Coinbase’s financials, the entire industry can now see its financial reports and what a fantastic business it is. Coinbase’s revenues are forecasted to grow 408% year-over-year in 2021 at 92% gross margins. And it will generate more than $2.4 billion in free cash flow… Wow!
There is especially great interest around building out the industry’s core infrastructure. This includes exchanges, settlement, and custodial services. That’s where the large financial institutions are looking to align themselves with the top players in the blockchain space. We see that here in Paxos’ big raise.
We have talked about PayPal’s foray into digital assets several times this year. What PayPal’s users likely don’t know is that the technology enabling cryptocurrency trading on PayPal’s platform isn’t native. PayPal partnered with Paxos to enable much of the core functionality.
And we just learned that PayPal is going to offer high-yield savings accounts for digital assets. That means PayPal will pay investors interest on the digital assets they leave on deposit. And the yield is much higher than anything an investor would get from their U.S. dollar savings account from their bank.
This is an interesting move. And guess what? Paxos is the company behind this offering.
So it’s no surprise that PayPal is investing heavily in Paxos in the private markets.
Then we see Bank of America on the list… I’m very interested to see if the banking giant also has plans to get into the digital asset space.
Looking at the bigger picture – this level of investment sets Paxos up to go public at some point within the next year or two. That’s an important milestone for blockchain companies providing key infrastructure to the industry.
As we discussed when Coinbase went public through its direct listing earlier this year, both financial services firms and regulators will take blockchain companies more seriously once they are public companies.
That’s because the quarterly financial filings make public companies transparent. Everyone can review their quarterly reports and other filings to confirm that they are financially healthy, stable, and high-growth businesses. It’s a coming-of-age process in the industry.
We are in for a fantastic run over the next few years in the blockchain, digital assets, and cryptocurrency space.
As more industry companies go public this year, even more investment will flow into the industry and this asset class. Now that the core infrastructure has been built, tested, and deployed at scale, we are on the cusp of a major multiyear trend here.
And that will bring with it a wealth of investment opportunities.
I recently recorded a presentation on one of the most interesting opportunities in this space. Go right here to watch.
We talked about Facebook’s partnership with Luxottica, the parent company of Ray-Ban, back in March. The idea was to partner on a pair of smart glasses that look and feel just like a normal pair of Ray-Ban sunglasses.
Well, Facebook CEO Mark Zuckerberg just said on the company’s earnings call that the first pair of smart glasses will launch before year-end.
Facebook has not released the specific design yet, but it will likely look a lot like the image below with a bit more bulk in the frame and temples to account for the electronics and small batteries:
Potential Model for Facebook Smart Glasses
Source: Ray-Ban
To keep the form factor small, the glasses will need to be tethered to a smartphone. That will enable them to run applications from Facebook’s universe of software apps.
Facebook, Facebook Messenger, Instagram, and WhatsApp are the most logical apps to start with. If that’s the case, users will be able to see their Facebook feed, read messages, and browse pictures right in the lenses of the glasses. And the information will all be overlayed on their field of vision.
We can expect to get more details on the glasses in the next couple of months. And I believe this launch will be the precursor to a full-blown augmented reality (AR) product next year.
We’re about to see an explosion of different options in the smart glasses and AR glasses space within the next 12 months.
With major players like Facebook throwing their weight around, there is going to be a landgrab to establish a foothold as the leader in the industry for the next massive consumer electronics product.
And we know Apple intends to do for the eyewear industry exactly what it did for the watch industry.
We can plan on getting ready for some fun.
We don’t expect to talk about Ford much here in The Bleeding Edge, but I must say the company has pleasantly surprised me recently. Ford talked about its F-150 all-electric pickup truck on its quarterly earnings call, and preorders are going extremely well.
Ford calls the electric vehicle (EV) version of its iconic truck the F-150 Lightning. And the company adopted Tesla’s model for gauging demand for the product – it took online reservations in exchange for a $100 deposit.
Of course, this isn’t a guarantee of future sales. Those who make a reservation can always back out. However, this is a great way to get a feel for how much interest is out there.
And Ford announced that it now has more than 120,000 reservations for the F-150 Lightning. That’s very encouraging. For comparison, Tesla’s Cybertruck received 200,000 reservations shortly after its announcement. And now the Cybertruck has surpassed 1.2 million preorders.
So it’s likely that reservations for the F-150 Lightning will continue to roll in ahead of the launch. That’s expected next year.
As for pricing, the low-end models will start at around $40,000. That’s roughly the same as the low-end Cybertruck model. From there, the F-150 Lightning can get as expensive as $90,000 if all available options are chosen.
Here’s a look:
The F-150 Lightning
Source: Automobile Magazine
As we can see, the Lightning will look exactly like the classic F-150. And it will have the same power and torque as the classic version as well.
I think that’s a smart move. Customers who buy the F-150 obviously have a need for its hauling capability and power, so going to market with an electric version that might be perceived as “weaker” wouldn’t make a lot of sense.
The only shortcoming, at least at first, is the Lightning won’t have the same range as the classic model on a full tank of gas. That will change as battery technology improves, however.
To that end, Ford is partnering with a company called SK Innovation, a subsidiary of South Korean conglomerate SK Group, on the batteries. The plan is to manufacture lithium-ion batteries for the Lightning in the United States.
So I see Ford’s early success here as encouraging for the overall EV trend. It’s clear that investments are being made, and consumer demand is rising. That’s a good sign. And as investors, we should make sure we’re in position for this trend. Click here for my top recommendations)
This leaves us with two major hurdles to clear…
First, we need to continue building out the core infrastructure of charging stations necessary to make EVs viable throughout the U.S. and around the world.
Right now, long-distance EV travel needs to be planned around where charging stations are available. We need to get to the point in which charging stations are pervasive along all but the most remote roads.
And second – we need to start producing baseload power from clean energy. After all, there isn’t much point to driving EVs when the electricity that fuels them is produced by coal, natural gas, and petroleum. If we want clean transportation, then the industry must address where the electricity comes from in the first place.
I know EVs have been touted as “clean” because they don’t burn gas. But if the power used to charge them comes from burning fossil fuels, then EVs are fueled by carbon-based energy. The only difference is that the carbon emissions are displaced. They happen at the power plant, and not in our neighborhood.
The negative impact to our environment is the same, or possibly even worse considering that anywhere between 7–20% of electricity is lost through transmission over the electricity distribution grid.
Regular readers know that my favorite technology for producing clean energy in abundance is nuclear fusion. To me, the development of nuclear fusion reactors is a critical piece of the burgeoning EV trend.
And I expect to see major breakthroughs in both nuclear fusion and battery technology in the next three years. We have so much to look forward to.
Regards,
Jeff Brown
Editor, The Bleeding Edge
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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.
