Salvete amici mei, it’s Colton from Hedgehog, the app that helps you buy baskets of cryptocurrency and automate your digital asset exposure wherever you custody funds. Don’t forget we also now support an on-chain TBILL token for those of you who want highly liquid, Aaa-rated US government debt, and you can reply here for more details!
The theme of this thrilling week is “Quis custodiet ipsos custodes?” for all the enforcement actions, hearings, and sentencings that have dropped. Remember to stay strapped out there and always err on the side of caution:
25 to life
FTX founder Sam Bankman-Fried, often abbreviated as SBF, was sentenced today with $11B damages owed to his depositors and 25 years of prison time, less 9 months already served, for several counts of fraud and conspiracy to commit fraud, along with witness tampering. This is a far cry from the maximum sentence of 114 years he could have served, and a fair amount greater than the 6 years the defense requested, but one hopes this will be justice well-served for his outright theft of customer funds, which were stolen to temporarily hide holes in the balance sheets of FTX and its subsidiaries. You can read a live xeet of the hearing by @innercitypress here.
SBF is not the only one hurting though, as popular exchange Kucoin is being charged under the Bank Secrecy Act for violating Anti-Money Laundering laws and operating an unregistered exchange for US customers. Additionally, it looks like the SEC is looking for a $2B penalty in their case against Ripple Labs, and Coinbase’s motion to dismiss the SEC’s case has been denied. This last one is interesting though, because the court ruled that Coinbase Wallet was not an unregistered broker, which provides much-needed precedent for the categorization of wallet softwares within the realm of financial services providers.
As always, we believe these sorts of enforcements are signs of health in the industry, cleaning out bad actors and slowly providing more guidance to future service providers that wish to operate in the space. If only we could get that guidance via rulemaking instead of learning it after the fact via enforcement.
If I could turn back time
The most interesting story of the week for me, though, is the $62M Munchables theft by possibly North Korean state actors and the subsequent return of funds when the contract owners threatened to rollback their contract state to steal the funds back from the hacker. It has everything: a heist, a national security apparatus, a fraught philosophical dilemma, and a happy ending.
The theft is remarkable mostly for the way in which it occurred: an inside job by a single developer who masqueraded as another 3 devs that all recommended each other for their positions. Truly an outstanding talent for shipping the Munchables game and protocol, all while keeping up the charade that he was actually 4 people. Every founder must be thinking to themselves, “I can fix him.”
But the more interesting angle on the story was the solution that the community came up with for denying the hacker his ill-gotten gains. You see, Blast is setup as an optimistic rollup that points at Ethereum, so transaction finality isn’t really final until the funds exit the Blast contracts on Blast and enter the hacker’s wallets on Ethereum. If you remember our conversation from last week about L1s and L2s, money spent on Blast doesn’t mean that money is spent on Ethereum. So the community had an idea to upgrade the Blast bridge contract as if the hack never happened. This could work because the hacker may have stolen the funds on Blast, but they hadn’t yet managed to steal the funds on Ethereum, and so the contract could just pretend that the Blast funds on Ethereum belonged to the original Munchables contract again.
For crypto enthusiasts who have been around for a while, this is very reminiscent of the DAO hack on the Ethereum mainnet back in 2016. There was such a big hack that the Ethereum community held a vote and hard-forked to undo the hack. Some people thought that this was a terrible idea, and undermined the idea of an immutable ledger and a neutral territory where code is law, and others thought that it set a bad precedent to let bad actors get away with crime when it was easy for everyone to agree the crime never happened. The resulting vote was overwhelmingly in favor of rolling back the hack, and the losers went on to call their chain Ethereum Classic while the winners still call their chain Ethereum.
All the same dynamic was at play here, but quickly rendered moot when the hacker saw an opportunity to save some of his effort by accepting a bug bounty and returning the funds. But nonetheless, it is important to remember that as much as we like to believe that code is law in the land of digital assets, the code is still deployed by people, (at least for now). Even Bitcoin is still susceptible to all the developers and miners agreeing that somebody should not have as much Bitcoin as the ledger says they do.
Fortunately, just like Ethereum Classic still exists, you will always receive a choice in the event of a hard fork of any protocol. You can keep running the old code, sell the tokens you still own in the new network, and evangelize the old network in the hopes that people eventually choose like you did, or you can put the past behind you and exchange your tokens for the new paradigm espoused by the revolutionaries that copied the old network’s code and made a few changes. Or, as long as they didn’t explicitly single you out to remove you from the new ledger (looking at you, Justin Sun), maybe you can even hold onto both!
Which is better, this sort of mob justice that trades pitchforks for hard forks? Or the opaque deep state actions made by the enforcement arms of your local national government? At this stage, I’d personally rather deal with the network of degens trying to roll back my tokens than with the NSA or the KGB freezing my bank accounts. But that’s just me.
Weekly feature
This week we’re featuring TAO, the decentralized AI token built on DOT’s Substrate technology that supports parallel blockchains. Polkadot is getting ready to roll out their version two network, and the AI narrative is still running strong with a new coalition coin for some of TAO’s competing AI networks, the YTD performance of RNDR, and several brand new additions to the sector like OLAS, DCI, MDAI, MVERSE, and others.
Now, there are a lot of things that have to be figured out to actually make decentralized AI training, model design, and agent hosting economical, but that’s really the whole purpose of these tokens, to kickstart that research effort with strong incentives for early node operators and network participants.
TAO is relatively uncorrelated with other AI tokens like RNDR, FET, and AGIX, so it could be a good one to watch for upside as the rest of the contenders enter overbought territory. Keep an eye out for the narrative to flip though, as AI has been hot for over six months now.
Shoot me your best tips for inspecting a home you want to purchase. For those of you paying attention last week, that’s part of my upcoming move.
Keep hedging,
— Colton