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It’s been a bizarre week in the crypto world. Even by crypto world standards, where weird things happen all the time.
First, there was this.
A husband and wife were arrested in Manhattan on Tuesday for allegedly conspiring to launder $4.5 billion in stolen cryptocurrency. In an announcement, the Department of Justice called its confiscation of 94,000 bitcoins, which amounts to $3.6 billion, the agency’s “largest financial seize ever.”
The department named Ilya Lichtenstein and Heather Morgan as the individuals responsible for allegedly attempting to launder 119,754 bitcoin stolen from the cryptocurrency exchange Bitfinex.
The announcement shared little about the identities of Liechtenstein and Morgan except that they are in their early 30s. But court documents also identified the duo by their aliases, “Dutch” and “Razzlekhan.” Twitter users and journalists have already found what appear to be numerous profiles belonging to Morgan, who, before her arrest, was seemingly pursuing a career as an influencer.
On Twitter, Morgan allegedly identified herself as a “serial entrepreneur,” “surreal artist,” “rapper,” and “also Forbes writer.” Indeed, a Forbes contributor page for Heather R Morgan lists numerous posts, including a story titled “Experts Share Tips to Protect Your Business From Cybercriminals.”
A Woman Accused Of A $4.5 Billion Cryptocurrency Laundering Scheme Has Moonlighted As A Rapper And Forbes Writer, Buzzfeed News
Then, just a day later, there was this.
Binance, the world’s biggest cryptocurrency exchange, is making a $200 million strategic investment in Forbes, the 104-year-old magazine and digital publisher, CNBC has learned.
The funds will help Forbes execute on its plan to merge with a publicly traded special purpose acquisition company, or SPAC, in the first quarter, according to people with knowledge of the deal.
That would make Binance one of the top two biggest owners of Forbes, which will be listed on the New York Stock Exchange under the ticker FRBS, the people said. The crypto company will also get two directors out of nine total board seats, they said.
Binance, led by the world’s richest crypto billionaire, is taking a $200 million stake in Forbes, CNBC
A Forbes contributor arrested in the largest ever crypto theft, immediately followed by a large investment by a crypto company into Forbes.
Coincidence?
Well, in all likelihood, yes.
Personally, I found the story of how a rapper and Forbes contributor ended up being the perpetrator of the largest Bitcoin theft ever hilarious. Of course, many people took this opportunity to point out the inherent failings of crypto:
- Bitcoin is not secure (because anyone can steal it)
- Bitcoin is not private (you can easily get caught)
- Bitcoin people love Forbes (no idea why)
I mean, I love this take, but I love Matt Levine’s take even more. Levine, who writes the second best newsletter in the world, Money Stuff at Bloomberg, in a brilliant, hilarious piece breaking down the sequence of events involved in the heist, comes to the opposite conclusion. If anything, he writes, the hackers stole $4.5 billion dollars, had a horrible time laundering it, and managed to convert only a small fraction of it to real money, which is incidentally how they got caught.
Anyway, the best part is that this wasn’t even the most bizarre thing that happened in the crypto world last week.
It begins with a company called Polygon.
Polygon, founded by three Indians on the Ethereum blockchain, raised $450 million in a round led by Sequoia Capital India. Nearly every investor of note in India participated in the round, including Tiger Global, Elevation Capital, Accel Partners, Steadview Capital, and Softbank Vision Fund II. After the round, the company was valued at a little over $13 billion.
I’ve still not come to the bizarre part.
The way fundraises normally work is that once the company raises money, the investors cut out a cheque and the company takes it to a bank, which credits the money into its account.
Instead, Polygon’s investors paid money to buy the company’s native token, MATIC. I’ll explain this in detail later, but essentially, it’s a little bit like someone investing into, say, American Express, and instead of getting equity, they get Amex reward points.
Which finally brings me to the bizarre part.
Polygon is not like other companies in the web3 world, many of whom do a lot of fuzzy stuff on the blockchain or just act as an exchange to buy or sell crypto assets. In fact, Polygon represents the future of web3, probably more than any other company, and nearly everything in web3 hinges on them succeeding.
Polygon is the world’s most important crypto company.
And that may not necessarily be a good thing.
Let’s dive in.
Polygon’s solution for the most important crypto problem
[Photo by Jeremy Bezanger on Unsplash]
Alright, so a few disclaimers. First, if you have a fairly decent idea of crypto and web3, please stop reading right now. I mean it. This is not for you, and you won’t enjoy it. In fact, chances are you’ll find this edition grossly oversimplified, bereft of nuances, and you’ll probably end up writing me an angry email, which I’ll probably reply to saying that this is written for someone who is curious about crypto but gets a headache when their internet searches throw up scary words like DAO, NFT, HODL, WAGMI, etc
Second, I am not an expert in crypto (is anyone?), but I decided I want to be able to explain what’s going on at a high level minus the jargon. So, if you are okay with me sacrificing some nuance or resorting to imperfect analogies, then let’s go ahead.
Cool?
Cool.
Chances are, when you read the word crypto, you probably think about Bitcoin. And for good reason. For a long time, crypto and Bitcoin were practically synonymous (it’s also the oldest crypto asset). So let me start by telling you that for all intents and purposes, Bitcoin is not where the most exciting stuff is happening in crypto. In fact, in most crypto communities, Bitcoin is looked at with disdain since it has no value other than as a speculative commodity. Sure, it may have been the place where everything began, but Bitcoin is, for many reasons, quite useless. It has little value as a currency, because it fluctuates wildly. It also has no other application as a financial instrument. Depending on who you ask, it’s an asset or a commodity (some say it’s both). And as we found out this week, if you have a lot of it, you can’t even convert it into real currency.
Bitcoin’s only purpose is speculation. You buy low and try to sell high. And its value has nothing to do with any fundamentals. Sure, that works for some people who trade with it, and I wish them luck.
A few years ago, some crypto people looked at Bitcoin and felt that its narrow application as a currency was a problem. But they liked the underlying blockchain technology and felt that a better solution could be created.
And that’s how Ethereum was born.
Ethereum’s core proposition was to use blockchain technology, but not just for money. In essence, a blockchain is a distributed, decentralised database. Bitcoin was using the database to store transaction history. Ethereum just extended it for any object—it could be land records, or identity cards, or ape paintings, or even applications. Oh, but also money. Specifically, a cryptocurrency called Ether.
This was great because while Bitcoin had created a currency, Ethereum had created a platform. Ethereum invited users to build decentralised applications on top of it and had created an inbuilt currency which could be used to trade resources across the platform.
However, there was one problem.
In theory, decentralisation on the web is a seductive idea. The premise is that instead of having a single database controlled by one company, it’s better to have the same database shared by multiple people—all of whom can add things to it while keeping the same “version” of the database at the same time. The argument is that an opaque database controlled by a central, single entity is bad, while the same database spread out across everybody is good. This is true for some use cases but in many others, it introduces more problems than it solves.
The most important of which is a problem called consensus.
When a database is centralised, the decision on what to add and delete is simple because it’s done by the entity which owns the database. If you send me some money using an online transfer, your bank changes the database entry to deduct your balance, and makes another entry to add it to mine. And we trust the bank to make this transaction and to keep track of it. Similarly, if you buy a subscription to The Ken, add someone on Facebook, or apply for an Aadhaar card, entries are made against your name in databases.
But what happens if there’s no centralised authority? How are these transactions validated? And how do all participants ensure that everyone has the same latest database all the time.
That’s the problem of consensus.
The solution was that someone had to take the pains to “validate” the transaction, potentially a time-consuming operation. There would be an incentive offered to this person to do this—usually a part of the currency itself. That’s how the system runs: crowdsource the validation, and reward the person doing it.
In crypto terms, this is called proof of work. This solved for consensus, and for reasons we won’t get into here, it also solved for security.
Proof of work was, and in many ways still remains, the best way to achieve both consensus and security on web3. But it has one big problem. It’s computationally expensive, which is why a lot of people (rightfully) criticise Bitcoin for being environmentally unfriendly.
And it’s not just Bitcoin, even Ethereum employs proof of work, which places a significant cost on validating every transaction on the network. In Ethereum, this is called “gas fees”.
It’s a lot.
And of late, it seems to be getting more expensive.
Proof of work is what makes transactions on the Ethereum network prohibitive. It costs anywhere between $6 to $150 to validate a single transaction, with the value fluctuating wildly depending on demand and supply.
The people who’ve made Ethereum have been trying to change this to another model. But it’s been taking time.
Enter Polygon.
Polygon is a unique company in the sense that it offers something called a layer 2 solution to Ethereum. It exists on top of the network and validates the transaction outside it, at a much lower gas fee. This is why Polygon exists.
And one of the things Polygon does is that it has a different model to validate transactions called Proof of Stake. This is a method that has some weaknesses, but it has a key feature—validators are picked, not by their computing power, but by how much money they are ‘staking’. Very simplistically, the ones who end up validating transactions are the ones who have the most money, or tokens, to spare. People who have $450 million worth of tokens have a solid advantage, I’d imagine.
For a long time, many companies fought to build a layer 2 solution. And now, VCs like Sequoia and Softbank have decided to pick a winner. Polygon’s ambition is to build the “AWS of the web3”, or the architecture of the web3 world itself.
Right now, Polygon isn’t infallible. In fact, applications have led to a soaring transaction fee on Polygon too.
But they are doing one thing well.
They are accumulating power in web3, and making it more centralised.
“Polygon has become what we see as a platform of choice for folks who are trying to build and scale low-cost applications that we think could actually get adoption. Probably 70-80% of the startups that we run into in crypto are using Polygon today.”
Shailesh Lakhani, managing director at Sequoia India.
In web2, if you see the timeline, fewer and fewer companies controlled applications, devices, operating systems, and then, finally, the infrastructure, which led to the rise of companies like AWS, Azure, and Google Cloud.
In web3, the order appears to be reversed. Centralisation is beginning with the infrastructure layer. This is what’s needed to build applications on web3.
And that’s why its success is critical.
Take care.
Regards,
Praveen Gopal Krishnan
https://sg-mktg.com/MTY0NDY0MDU2NHw0czBObm1TUUloM3JxSGNSTW9PXzFxZnlFa2M0dEU0NjJrUU91UWJ5REJaX19iYW10VzVpMkZENUZkekw5aFI0Nlg4ZG9LYzgycWlYNWVLb2xYblQ0QjgybDBjNV9SX3JOaVVIdXVCVjhGdEY0UE1XV2dzaERrQUJ6N20xY21WUzktaTZheHVuQ1RqcXpmTVpJd2lkcTg0VVBTR0tWM1Q0LVdzelJjcVp0T0ItS2laMzRhLWlUOUczSVo3blpsTnJUSktKWlpVSUVIRFdCdjZHaTBtS0wxRExTSW1CUDVxUlVhMGFIMWJTUkFPNmNLRHNSTHl2X25uUTVVREtuVXlFZUZ1Nmt5UT18QAetHbvTTHlDVP_oqHAXV8IOulse2ZfaYUwJG75NQws=
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