The Risks of Moving Onchain

Managing Editor’s Note: We’re on the cusp of a “Hyper Acceleration”…

Some of the world’s most exponential technologies are converging… something that’s only happened twice in U.S. history. And when it did, it created some of the largest fortunes the world has ever seen.

Jeff’s sharing all the details on Wednesday, August 20, at 8 p.m. ET. From the previous times we’ve witnessed a technological convergence of this scale… to the wealth surge that followed… and a couple of stocks Jeff is watching (both under $50) that he believes have massive potential from this convergence.

You can go here to automatically sign up to join.

One of the more interesting developments of this week has been the possible U.S. government intervention in Intel (INTC), the struggling semiconductor manufacturer whose demise I have accurately predicted for many years.

Intel, sadly, has declined more than 70% since 2021. It is currently trading at levels not seen since 2013, which is pretty incredible considering the boom in artificial intelligence and data centers.

The argument is that Intel is critically important to the U.S. semiconductor industry, and it has fallen years behind the competition, namely TSMC and, more recently, Samsung Electronics. And because Intel’s chips are so widely used by both the government and the private sector, it is a matter of national security.

Even more embarrassing than the above truths is that Intel’s most advanced semiconductors are actually manufactured by TSMC.

Intel has already received $7.9 billion from the Department of Commerce under the CHIPS Act, and an additional $3 billion from the Pentagon. But the reality is that it’s not enough to get Intel back on track.

Intel is sitting on about $24 billion of net debt and burning through cash. This year alone will result in a negative $8.6 billion in free cash flow. The company has been bleeding badly since 2022 in an effort to catch up, but it’s been one mistake after another.

Perhaps there is a deal to be done. Perhaps there is a way to save Intel.

The new CEO does indeed have strong ties to China, but that doesn’t mean that he’s not the right person for the job. He has already shown fiscal restraint and made some tough decisions. He’s moving in the right direction, and he needs to do more.

I will say this… having Intel as a counterbalance to TSMC would be good for the industry and good for consumers. TSMC has unfair pricing power as it is so far ahead of the competition, and this results in higher prices for electronics as a result.

And the reality is, in this current AI infrastructure buildout, TSMC is capacity-constrained. It has more business and backlog than it knows what to do with. The pie is getting bigger, and both companies can win if they make the right investments in manufacturing.

Have a great weekend,

Jeff

The Threat of an EMP?

The Financial System Is Going On-Chain…

With Titles of Seniors being stolen on a frequent basis from a manual paper system…

With quantum computing on the horizon…

With the ability of quantum computing to break almost any current state-of-the-art security system…

With adversary foreign governments breaking into our systems frequently…

If the Government and the whole U.S. economy go on a chain-based computer system…

What are the chances of the whole economy being hacked, bringing our entire economy to a halt? Would that type of attack on the chain-based economy-wide computer system be the equivalent of an EMP wiping out all our electronics and bringing the food distribution system to a halt??? Reference: “One Second After” series by William R. Forstchen.

– Thomas L.

Hi Thomas,

I’m glad you wrote in with the question, as it gives me a reason to share some interesting news about development from earlier this week.

I certainly share your concerns. All of the threats that you mentioned are very real possibilities. Technologies used by bad actors will always be a threat to both individuals and nations alike.

Given that there are a few threads in your comments, we’ll break them down into the key points that you raised.

One of the best advantages of blockchain technology (i.e., being onchain) is the decentralized nature of most blockchains. Many blockchain networks maintain their onchain histories over thousands of computing systems. And these computing systems, or nodes, are typically not located in just one country, but in many jurisdictions.

This is one of the reasons that many blockchains are so resilient. It’s like having a database backup of every transaction that happened onchain in thousands of locations. Naturally, this kind of distributed architecture is highly beneficial as a defense against something like an EMP, which would only impact an area beneath which the EMP was used… more on that later.

But yes, theoretically, quantum computing exists today, but it is still too error-prone to be able to crack today’s widely used RSA or AES-256 encryption technologies. It is also too error-prone to crack/hack blockchain technology today.

It is going to take a few more years before quantum computing technology evolves to become more fault-tolerant to be able to achieve a monumental task like that.

And, fortunately, the industry and the government have been working on post-quantum encryption technologies and quantum-resistant blockchain technology. After all, blockchain technology is “just” software, and it can and will be upgraded as technology evolves.

And the government – specifically the National Institute of Standards and Technology (NIST), a division of the Department of Commerce – announced its fifth and final key algorithm for post-quantum encryption this March.

NIST’s work on post-quantum encryption standards began almost a decade ago in 2016. There has been substantial collaboration with industry to develop these five standards. The timing of finalizing these standards is also important, as once the standards are in place, it takes years for the industry to integrate the standards into its information technology (IT) products, both hardware and software.

And just two days ago, NIST finalized what it calls “lightweight cryptography” related to post-quantum encryption designed for smaller devices with less computational resources.

The standard is called Ascon-based Lightweight Cryptography Standards for Constrained Devices, and it was just published. It is specifically designed for electronics devices like RFID tags, medical implants, smart home appliances, car-mounted toll devices, low-power sensors, or any other kind of small embedded device.

It’s worth mentioning this because every electronic device and computing system will need to be upgraded to employ these kinds of post-quantum encryption standards. Everything will have to change in order to protect against the threats that you mentioned.

A much shorter-term threat, as you mentioned, is an EMP detonation. The target altitudes for an electromagnetic pulse (EMP) are in the 30 km to 400 km range and most likely carried out using a nuclear weapon.

Source: Defense Technical Information Center

The higher the altitude, the larger the radius of the damage. As we can see above, at 400 km altitude, the impacted geographic area is large enough to cover almost all of the lower 48 states of the U.S. and most of populated Canada.

I used the map above as an example, but the threat to Western Europe is even worse. A single EMP could take out all of Europe.

The trade-off with EMPs is that the higher the altitude, the wider the radius of impact, but the lower the voltage per meter on the ground. The worst impact, of course, is being closest to the point of detonation, and the impact lessens the farther away you go.

It’s a horrible thought. U.S. or European power infrastructure is already old and struggling to maintain existing demands. The impact of an EMP would be devastating in this regard, but the world wouldn’t come to an end.

The Cybersecurity and Infrastructure Security Agency publishes EMP protection and resilience guidelines that are widely used by the U.S. government and private industry.

There are more than 50 EMP-proof data centers scattered throughout the U.S. where critical information is maintained. They’re used, for example, by the banking industry to avoid a scenario in which the entire financial services industry collapses.

And of course, the U.S. government has many “hardened” facilities in place to ensure an operational government and military in the event that something terrible like this happened.

It is frightening to think about this, as an EMP detonation would almost certainly be the beginning of World War III. It’s natural for us to feel like there is nothing that we can do in a situation like that, but there are some simple things that we can do to protect against an EMP.

I actually wrote about this in June 2024 in Outer Limits – The Threat of an EMP, with some specific ideas on products that we can use to protect some of our electronic devices.

We covered a lot of ground, but this is an important topic to be aware of. I hope this is helpful, and I hope for peace as we look into the future.

To me, this is why proactively investing and building new technologies is so critically important. Just hoping that there won’t be an attack is not a good plan of action.

Leaning in and proactively building both post-quantum encryption technologies – as well as defensive capabilities against an EMP like hypersonic missiles – is so critically important.

Blockchain and Privacy Concerns

Hi there.

With all this new legislation coming out and the big push to put everything on-chain, are there not any worries about privacy and how the government would be able to see every transaction and control people’s assets if they don’t toe the line?

I have heard the term KYT – Know Your Transaction – which means the government will know every move you make when everything is on-chain.

Is that not a relinquishing of freedoms?

– Michael P.

Hi Michael,

What a good question.

For those unfamiliar with these verification measures, KYC – Know Your Customer – focuses on verifying the identity of the person or group transacting with a business or institution, while KYT – Know Your Transaction – focuses on the actual transactions and fund monitoring for any unusual or suspicious patterns of activity without necessarily tying those transaction patterns to a specific identity.

These are complementary compliance measures financial institutions use to verify the validity of transactions and the people behind the accounts that are transacting for security purposes.

But, as you point out, the public, permissionless, openly transparent nature of blockchains adds a level of complexity to enforcing those measures.

We actually wrote about privacy solutions on public blockchains in a recent issue of Permissionless Investor, our research advisory focused on blockchain projects in the strongest sectors of the crypto industry.

I’m happy to share a bit of that here…

For public blockchains, nearly everything you do is transparent by default.

If you send a token to a wallet, it’s broadcast on the public and global ledger for anybody to read.

There is some pseudo-anonymity, which is to say, the public address that’s 42 characters long is not directly attached to the owner.

Wallet Address | Source: etherscan.io, vitalik.eth

But if KYC information is on a public blockchain, that pseudo-anonymity disappears. Those 42 characters can be directly linked to an individual or entity. Those 42 characters in the image above, for instance, are tied to the founder of Ethereum, Vitalik Buterin.

So if our banks can’t keep our information secure, there’s minimal hope they can keep our 42 characters a secret.

This is where the technology mentioned [earlier] – zero-knowledge (proofs) – comes into the mix.

Zero-knowledge is a sophisticated form of cryptography that allows one party to prove something without handing over the information in question.

A classic example of how it works is imagining a game of “Where’s Waldo.”

You and your friend are looking at a picture, attempting to find Waldo in his iconic red and white sweater in a portrait with hundreds of other people on the page.

You’ve spotted Waldo before your friend, and they want you to prove that you’ve found him without revealing where he’s located on the page.

One method is to say, in general terms, where Waldo is on the page. But that ruins some of the fun.

Another method would be taking a posterboard that’s much bigger than the page and poking a hole in it just big enough to see the face of Waldo through.

We can position the posterboard in such a way that your friend will see Waldo’s face, but nothing else. And since the posterboard is much bigger than the image, your friend won’t know where on the page Waldo might be located.

You’ve successfully proved you know where Waldo is without revealing anything else to your friend.

(In case you’re curious, Waldo is just to the left of the red-striped hut.)

This is an overly simple explanation of how zero-knowledge proofs, or ZKPs, work. The entire process is done through mathematical hashes that prove something without revealing anything.

This is just a fun example to show that there are ways to protect the identity of the person conducting a transaction on a blockchain using blockchain technology.

It is also worth mentioning that in most circumstances, the pseudo-anonymity is maintained. Unless a centralized exchange has been hacked, there is basically no way to know which transaction is linked to which individual or corporation.

Zero-knowledge proofs are an incredible technology to preserve pseudo-anonymity, as identity can be verified for a transaction without sharing any identity-related information. It’s like being able to go to a bar and proving that you’re 21 years or older without having to show a driver’s license, which contains sensitive personal information (note: this problem can be solved with zero-knowledge proofs and a non-fungible token).

Editas

I was wondering, with the new genetic engineering, will the new AI models be able to get around Editas Medicine and its patents?

Thanks for your consideration.

– Edward H.

Are you as high on Editas EDIT as you used to [be]?

Does EDIT still have the most intellectual property assets? Why hasn’t it been gobbled up by a big fish? Why is Crisper CSPR at $56 and EDIT at $2.5?

Thanks for your time!!

– Richard T.

Hello Edward and Richard,

Yes, Editas Medicine (EDIT) still has what I consider to be the most foundational intellectual property in CRISPR genetic editing, a point that has held up in patent trials on multiple occasions.

As a reminder, Editas Medicine has the exclusive license to the original, foundational CRISPR patents that were developed at the Broad Institute. The Broad Institute of MIT and Harvard has consistently prevailed in the courts regarding these patents.

Unfortunately, the drama continues as the University of California, Berkeley engaged in yet another appeal.

UC Berkeley knows how much money is at stake, which is why it will try anything to win. But this latest appeal goes completely against patent law’s conception doctrine, which requires inventors to have a definite and permanent outline of their entire invention.

Berkeley argues that it is enough to just have the idea and hope that it will become a complete invention.

It’s ridiculous and stands against patent law, as well as the firm precedent already set by the courts that ruled in favor of the Broad Institute and, thus, Editas Medicine.

It’s worth noting that the only FDA-approved CRISPR therapies are already using Editas’ intellectual property. CRISPR Therapeutics (CRSP) licenses Editas’s IP through its partner Vertex (VRTX). Editas has already been signing other IP deals with others in the genetic editing industry in anticipation of further commercialization of the technology.

It’s an odd market dynamic right now because CRSP is currently valued at $4 billion, and EDIT is valued around $100 million. It makes no sense at all. After all, as CRSP revenues increase from its genetic therapies, so will EDIT revenues through IP licensing fees and royalties.

Right now, in this current biotech market, most companies that are being rewarded are those with FDA-approved drugs, which makes it easier for financial institutions to value future cash flows based on assumptions that they make about the use of the FDA-approved therapies.

EDIT isn’t in that boat yet, as it doesn’t have an FDA-approved therapy. It’s in an awkward position right now between developing a clinical pipeline and sitting on extremely valuable patents waiting for more FDA-approved CRISPR therapies, thus future licensing and royalty revenues.

And you’re right, EDIT should have been acquired by now. But the biotech bear market has resulted in depressed valuations that make no sense at all, which has resulted in the biotech M&A market standing still.

The valuations of hundreds of biotech companies right now are no reflection at all of the actual value of their businesses. Said another way, I’m sure EDIT has had some offers, but they were all ridiculously low, so the board rejected them.

I’m very anxious and excited to be bullish about biotech, and I’m seeing some positive signs, but interest rates need to come down and institutional capital needs to start rotating into biotech in order for valuations to be reasonable and M&A activity to return to the sector.

As for AI, we should view that as a tool that will accelerate the use of CRISPR technology. AI is already being used to analyze human genomes, discover unwanted mutations that cause human disease, and understand which proteins are most important for any given therapeutic approach.

AI is already being used not only to develop more effective therapies, but also to improve safety and reduce toxicity.

That’s all for this week’s AMA. You can send your questions and comments right here if you have something you’d like to hear more about in another AMA.

Have a great weekend.

Jeff