Can you explain to me, as a bar owner, what happened? I was like, you buy liquor from a distributor, right? When you buy a foreign liquor, you can't really buy it direct from the manufacturer because, like, US rules don't let you. So imagine North Korea bought the liquor distributor and then just, like, poisoned every bottle you got. That's like basically what this attack is.
Not a dividend. It's a tale of two. Now your losses are on someone else's balance sheet. Generally speaking, airdrops are kind of pointless anyways. Unnamed trading firms who are very involved. ETH is the ultimate. DeFi protocols are the antidote to this problem.
Hello everybody. Welcome to The Chopping Block. Every couple weeks the four of us get together and give the industry insiders' perspective on the crypto topics of the day. Quick intros. First, you got Tom, the DeFi maven and master of memes.
Next we got Tarun, the gigabrain and grand poobah at Gauntlet.
Thanks. We got Robert, crypto connoisseur and Czar of Superstate.
And I am Haseeb, the head hype man at Dragonfly. We are early stage investors in crypto, but I want to caveat that nothing we say here is investment advice, legal advice, or even life advice. Chopping Block. For more disclosures...
Boys, we are at—well, it's a late night recording. I think we're all a little bit tired, but we'll try to get you the sweet, sweet alpha that you're looking for. It is just about the wrap-up of Token2049, which is the biggest crypto conference in the world at this point. Over 25,000 attendees in Singapore from over 160 countries. It was a little bit of a different tone than previous Token2049s. I think it was Arthur Hayes who talked about this when we were doing our last episode on stage at Token, is that the number one index of the quality of Token is Marquee, which is the biggest nightclub in Singapore, which is, you know, at the bottom of the Marina Bay Sands, and normally it's booked out every single night by some or other shitcoin. This year Marquee was a normal nightclub during all of Token, which is a sign of the times. And then there were a lot more suits and institutional talking points, and, you know, you had Jenny Johnson from Franklin Templeton and you had Adena Friedman from NASDAQ being on stage making announcements to what was once a very crypto DJ crowd. So a very different event. I don't know, Tom and Tarun, you guys were out there. What were your takeaways from Token week?
I mean, I feel like this is what the industry has kind of become over the past two years, and this feels like the year where people, like, realized it. Like last year felt very LARP-y in some ways. Not even just this conference, but just the industry overall, where people, like, didn't want to open their eyes to the fact that this was happening. And then sometimes you meet these people who are like the last Japanese soldier trying to tell you about their new layer 1 blockchain. It's like, what the fuck are you talking about? So I don't know, this felt, if anything, more like a realization of the thing that was already happening.
Yeah, last year Token was right before 10/10. So like last year's Token still felt like a party. This Token did not feel like a party. I mean, there were obviously some events, but they were so low-key compared to what I think of Token events as, where it's like, 'Okay, yeah, come meet us at a bar or like we'll do dinner and like someone will be talking the entire dinner with a mic in their face like that.' It was a very different character of events than what previous years felt like.
Tarun, what was your experience?
I think succinctly the number one way I would describe it is I saw zero Lambos. I think that was sort of my—but the no-Lambos feeling was sort of very apparent. I think the other thing that...
Is that good or is that bad? How do you feel about the lack of Lambos?
I personally prefer it, but I would say that also means there's not this type of, like, general ambience in the air, you know, like the animal spirit stuff. There's instead the, like, bean counter vibe, you know, like everyone's like...
I don't know. I just—the one place that's not...
I'm just saying it does not have bean counter vibes.
Dude, this is like Dreamforce of the country, you know?
No, no, no. I mean Token. No, no, no. I mean, compare Token to like Consensus or compare it to like ETHGlobal or one of these.
But do you remember how Consensus got, dude? Do you remember Consensus 2017, 2018 was like what Token is now, and then it became institutional and never came back, right?
So I think the thing Alex, who runs Token, has done a good job of is like making sure there's still some amount of, like, degen bossery around. But even with the efforts, I think it was like a little bit sad kind of in that sense. Like there was just a lot of people trying to tell me about their institutional product. And I'm not saying it's a bad thing. I'm just saying like the pitches are boring too, right? It's like there was a time when crypto was considered frontier tech and people who are pitching you are like, 'I'm going to make a robot that catches fish for you' in the same sentence. Do you remember the shrimp farming ICOs of 2017?
That was just a 4chan meme, Tarun. That wasn't...
No, no, no, no. There was an L2 that was a shrimp farming—robotic shrimp farming company that pivoted.
Yes. What was the name of it?
I'm trying to remember the name. The guy who founded it, his name was Matthew Campbell. That's like all I remember, because I met this guy and he was like doing the shrimp farming thing and I was like, what the fuck is happening?
Georgios from Paradigm was a contractor there at that time. That was like before he worked at Paradigm.
Which is also how I met—this is also kind of like how I ran into this, like, shrimp farming lore.
Wow. So anyway, the main point is like there was a sense in which there was a frontier—there's a frontierness of crypto, right? Like you're like, there's a new technology, new stuff. And realistically, outside of the Zcash conversations and like the quantum conversations, I kind of think there's nothing left in crypto where people are like talking about pushing the frontier. Instead, it's building products and monetizing, which is fine, right? Like, and good. It's just like it doesn't have the—whereas the interesting other thing about Token is I feel like there were a ton of other conferences at the same time, arguably like Milken and all these other stuff, and arguably maybe that there—someone must have had the degen kind of thing, it just wasn't crypto, you know. That's sort of my impression. Also it was kind of hard, like to be fair, the air quality in Singapore because of the fires was so bad. I feel like people were not in the, like, going and partying. I mean, I felt like I was sick the whole time I was there. As soon as I got back, my cough magically disappeared.
Yeah. Yeah. There's like very—in Singapore.
Yeah. There's like some fires in Indonesia. They're kind of wrecking the whole region over the last few weeks. So it is...
So there was like a little bit of a haze that I think could have also possibly explained the kind of like a little more.
But I mean, usually people book out these things in advance. So I think it was overdetermined. The haze—I don't think it helped the vibe, but I feel like it was going to land there anyway just because the character of the industry has really shifted.
Yeah. I mean, it's also funny that Arthur is the one who brought up the nightclub thing because I'm just kind of like, isn't he usually the one that people like, oh, threw the big party at Token?
He did. He did. He threw a huge party.
No, no, I know. I know. It's like funny because he's the one carrying it on his back.
DJ, I do think the nightclub index is definitely a good alpha for understanding how the industry is migrating.
Yeah. It's like normal people and inflation have the Big Mac index, but crypto people have the nightclub index.
Bitcoin. Well, you know, there was also—I think it was Consensus in Miami, right, where there was that scandal about some official event happening at a strip club.
You guys remember this? Yeah, it like when it went like...
Not long ago either, right?
No, that was this year. That was this year.
Yeah, I thought it was recent.
So there may be again like the industry just shifting in norms. I mean, maybe in Asia actually they care less about that. But at least I think like it's again a sign of the times is that in prior years... I do want to still give a shout out to Alex, who, you know, arguably he's like kept this conference alive through so many bear markets, ups and downs, and it's still just growing in attendance. So, you know, you like something like Consensus, I feel like had very high variance, and somehow these guys have been really good at like making sure the content changed to keep, you know. So like real props to them for doing it and also doing like three conferences now.
No, it's a top-notch event.
I feel like the production quality has also gone up like every time. So...
Yeah. Yeah. And tough to do. Well, so speaking of crypto no longer being frontier, one place where we are frontier is in the hacks. So we have some crazy news of hacks that took place over the—or were discovered, I should say, over the last couple weeks, specifically around hardware wallets. So Ledger is the largest hardware wallet. Their last valuation was over a billion dollars. So they're a very successful hardware manufacturer and vendor. However, they have licensed resellers or authorized resellers. So these are storefronts or online retailers that are authorized to resell Ledger and they have some official relationship with Ledger the company. One of these resellers was a company called CryptoBillis, which was based in Malaysia. And CryptoBillis—there was reports that I think on X and Reddit that some people were starting to get their Ledger cold wallets getting hacked. Normally there's always kind of news of, oh, some people are saying that they're getting hacked and nobody—you know, it's hard to really say, okay, there's some systematic thing going on. But there was enough money starting to get stolen, on the order of about $80 million worth of crypto that was stolen from Ledgers, and that eventually by triangulating where all the hacks were coming from, they realized that these were users who had bought their Ledgers from CryptoBillis. And so it turned out that after taking apart the Ledgers that were being sold by CryptoBillis, it was confirmed that these Ledgers inside of them had a hardware implanted device, and this device sat underneath the screen, had an eSIM, so it was able to phone home and basically allowed you to read the data that was shown on the screen and transmitted over LTE using the eSIM, presumably sending it back home so that people who were in some command and control center could see the secrets that were otherwise being transmitted over the Ledger. So to be clear, hardware devices have a trusted enclave, and this wasn't a compromise of the trusted enclave. The attackers did not know how to do that, but they were able to nevertheless read the entropy that was on the screen, which when you're generating your seed phrase is going to show your seed phrase on the screen when you're initializing your device. So that's how this attack was taking place. Absolutely crazy. There was no indication, you know, they were wrapped in the original case, you know, with the plastic over it. And when you open the—when you see the device, the device looks normal. It's only if you open it that you see that there is this tracking device inside of the hardware. So it was determined apparently that this was also happening at least one vendor in the UK—or somewhere in the EU, sorry, I should say. I don't know if—sorry, I think it was maybe in Austria or something. And so it's unclear what is the extent of these attacks. Interestingly, Mark Karpeles, who of course is a crypto OG in various ways due to Mt. Gox, he's been on this for a while covering the many ways in which if you buy your Ledgers not from Ledger directly but from resellers or even on like eBay or something or one of these secondhand markets, there's a whole industry of Ledgers that have tracking devices in them, Ledgers that have non-authentic hardware that have no secure enclave. So there's like a whole universe of these that we're just now learning about, seeing this attack isolated to this particular vendor.
Don't forget people stopped buying from Ledger.com because they leaked all people's information.
So there's like kind of this like irony.
Correct. That is ironic. And so this happened with Ledger, and with Trezor, Coldcard got hacked due to an entropy bug. So it's been a really shitty, no good, absolutely terrible year for hardware wallets. The story—going back to CryptoBillis—apparently the story is that the CryptoBillis founders, they got tagged because they were like, 'Yo, what the hell? Why is your company selling these?' And the CryptoBillis founders reported that they had sold their company a few months ago to a Chinese buyer and they were under a confidentiality agreement not to disclose this until October 20th, which of course is...
What timing indeed. Um, so...
Oh, I didn't realize it hadn't closed the transaction or sale.
No, it did. The transaction had closed. They were just under confidentiality. They were under confidentiality to not disclose that the sale had taken place. So, crazy story.
It looks like there's going to be just a total either re-underwriting. So, Trezor has already cut off all of their authorized resellers, has basically said, 'We cannot sell to anybody else anymore or allow any distribution of our products. You have to go directly to Trezor.' I'm assuming that Ledger will probably do the same. But it's a huge pockmark on the hardware wallet industry.
I think it's indicative of how risky supply chains are for sensitive keys and anything, right? You know, a few months ago we were talking about software npm supply chain risks, you know, people relying on a package that was, you know, a ticking time bomb that was a blah blah blah blah blah. Like this is the physical manifestation of that. I think that all types of supply chain attacks are going to get more sophisticated over time. You know, this one is really spooky in that somebody has essentially prototyped buying a vendor, you know, with an existing business and trust and deal flow in order to execute a supply chain attack. You know, in the same way that people historically have bought browser extensions with installed user bases and then flipped them into crypto, you know, attacks. You know, it just goes to show the level of creativity out there. You know, I could see someone saying, 'Oh, you know, just buy a vendor. What else is for sale, right?' Going into any industry, going into the AI hardware space, like going into anything, right? Like there's like so many supply chains out there that I think, you know, all of us should just constantly, you know, call into question, you know, how do you protect a supply chain? This is a glaring example of it. Back in the day, the how to steal crypto through supply chain attacks were a lot simpler. You know, I remember way back in the day, you know, people would try to make a paper wallet for their Bitcoin. They'd go to a website and like how could you trust the paper wallet generator? You just sort of knew.
I mean, this used to actually happen with like miners. Like you bought an old Bitmain, used Bitmain, and people would like mod it to basically send the reward to themselves. So like I think like this has been in crypto since the beginning. It's just like kind of been more niche and this is kind of way more like the distribution...
Hitting Ledger is hardcore.
In a way it's almost surprising that it took so long because I've never heard of anything like this for a big vendor like Ledger.
I mean this is probably an inspiration to like Lazarus.
My friend who owns a bar was like, 'Hey, can you like explain to me what this attack is because like I own three Ledgers that I've never used, but I only buy at the top of the XRP.'
But did he buy it from Ledger or buy it from a shady seller?
Well, don't do that. Yeah. Yeah. Yeah. I don't know. He hasn't opened it. He just was like, 'Can you explain to me as a bar owner what happened?' And I was like, you buy liquor from a distributor, right? When you buy a foreign liquor, you can't really buy it direct from the manufacturer because like US rules don't let you. So imagine North Korea bought the liquor distributor and then just like poisoned every bottle you got. That's like basically what this attack is.
Which worked as an explanation.
That's a very good explanation. Thank you.
Yeah, I think it's actually quite clever too. It's like basically like an inner side channel, right? It's like of course, you know, we can't actually break the thing that is hardened. So like, and of course like also like devices that have built-in LTE have gotten so cheap. It's just like the whole thing is actually quite clever. And it's also to your point, I feel like the rash of Ledger issues the past few years have been people buying Ledgers off of places like Amazon, and of course Amazon has this sort of constant third-party fraud quality problem that they're combating. But so the Ledger sort of solution is, well, we have an authorized reseller program, but now that is of course also poisoned. So yeah, I don't know. It's not a good look. It feels like they kind of just funneled people into like this thing.
I mean, the answer of course is, okay, buy direct. Don't have some third party sitting in between you and a hardware manufacturer, especially when it's like extremely critical hardware. And now that this attack has happened, I mean, it has woken people up. So nobody will probably make this mistake again who's custoding any serious amount of money. Well, hopefully. I mean, I don't know. People have short memories, so maybe not. But certainly on the professional side, you know, I have to imagine that everybody—I mean, you know, if you're an exchange or something and you bought your hardware devices from CryptoBillis, like you're probably beyond saving. But for anybody who's, you know, like a fund or anybody who's doing some kind of like serious heavy-duty self-custody, yeah, go audit your supply chain and make sure that you're buying directly from the manufacturers. PSA, like especially if you're in Southeast Asia, double, triple, quadruple check, or maybe just move your funds somewhere else just to be safe even if you're not sure where your hardware supply chain came from.
So, one of the things I saw people proposing as a solve is just to make the actual hardware casing transparent, so that like because most of the Ledgers are just—they're made of metal, so you just can't see what's inside. You have to literally crack it open and like unscrew stuff in order to come in and see, oh, is there a tracking device in here? Whereas if it's transparent, then you could just, you know, show it to your AI and be like, hey, is there anything in here? Should I—does this match what it's supposed to look like based on the specs? So, I see a look of skepticism.
Yeah, I don't know, it feels a little silly, I guess. Like I don't know.
Is it? I mean that's not—that's...
Yeah, I think the way, you know, other sort of critical hardware manufacturers get around this is like they have the case be sort of self-sealing, so if you open it, like it breaks some key part of electronics and so you can't, you know, open it. But I mean Ledger also just has this inherent honeypot problem, right, where it's like, you know, if you tried to infiltrate like the, you know, iPhone supply chain, maybe you could, but then how would you monetize it? Kind of unclear how valuable it is. Whatever, this is literally like this thing people are going to put millions of dollars in, tens of millions of dollars in. So if you can figure it out, there's very clearly a reward. And I think that's—I've also seen people proposing this alternative, just like buy like an air-gapped iPhone and use that for your hardware wallet, and like obviously much more expensive, but you know, not a bad idea.
Yeah. Yeah. I mean it also does put Ledger in a position of more importance going forward in that you have to verify the veracity of your—or the authenticity of your device because now I think with—it's sort of like once you see one, there's probably going to be copycats, especially seeing how much money was stolen. You know, 80 million is obviously a pretty big haul for any supply chain attack like this, so...
That could buy quite a few vendors. That's why I think this is so risky.
Yeah, yeah, that's right.
Wait, what if the Coldcard person used Coldcard funds to buy the vendor?
They could have. That would be like the ultimate murder mystery platform.
I love to read fanfic about cybersecurity. It's always...
It's RSI for scamming. We just keep rolling up these bigger...
Wait till we get to the RSI scams.
Yeah. Yeah. I was really tickled by this tweet where this one guy, this Chinese guy was like, 'Hey, I just disassembled a Ledger Nano S, compared to the original PCB, and it totally doesn't match. Is this a spy thing? Like, do I have some kind of spy motherboard?' And it's like, 'No, you just have a fake—this is a fake Ledger. You just bought some secondhand thing and it's just that none of this—it's not spying on you. It just has literally nothing. It's a knockoff.' So people discovering that they've been had in various ways.
Well, that wasn't the only people feeling like they got had.
Yes. Actually, so there was a story today that's going viral, which is that OpenAI discovered that there was an employee who is a Saudi national who implanted a listening device, a quote-unquote sophisticated recording device wrapped in toilet paper behind a TV in a conference room. He's since been apprehended by the FBI and apparently he had some kind of connection to a Saudi VC fund that also employed the son of somebody within Saudi intelligence. So unclear what the story is and obviously we're going to learn more as more information is revealed about what the intentions were behind this person, but apparently this employee's partner or significant other was making searches on ChatGPT asking about how to effectively construct and install a listening device. So just like incredibly stupid. At least that part seems just like, wow, you know, maybe send it to Gemini.
Should have used. Yeah. Or like Kimi.
Yeah, exactly. Like surely there would not be cooperation between those two. So I feel like you'd be fine.
I think this tells me more about the quality of the Saudi intelligence agencies than anything else.
Like there's no training for your operative.
Yeah. I mean, they probably—well, I don't know. It sounds quite likely that maybe he was tapped later on as opposed to like he was a spy from the beginning because he was like an engineer or something, right?
Yeah. He'd been there like a year.
Yeah. Yeah. Yeah. And he like had worked at other...
He went to school in the US and stuff, so it was like not...
Yeah. He definitely—I would guess that he was tapped later in life to be like, 'Hey, could you do this for us because OpenAI.'
But don't you think there's like a modicum of like training? Like not like, hey, use your wife's ChatGPT account to go search.
I don't know. It's like kind of weird.
Here's the additional information I saw on Twitter, which by the way could be completely inaccurate, fabricated, right? All this happening.
By the time this episode comes out, this will probably have been disproven. So take it with like five grains of salt. But one of the things I read was that he was essentially extorted by phone and threatened by what amounts to be a creepy phone call, okay? Saying that they had his family and that he had to install a listening device to free them.
Sources: trust me, bro. Yeah. How would anyone know this?
Some guy on Twitter discovered this. How is that possible?
Yeah, that's why I'm saying take this with five grains of salt.
Yeah. Yeah. This sounds like 4chan conspiracy back.
This is Chopping Block at night. Okay. This is like Chopping Block after dark.
Excellent. Yeah. Late night alpha coming from Robert.
Let me find corroborating information.
Yeah. Why don't you do that? You know, why don't you do that? Okay. Amazing stuff. But I think it is a sign of the times. I mean, I think both the conference rooms within OpenAI as well as the supply chains of Ledger, it looks like there's all these choke points that are really built on this assumption of a high-trust society that seem to be breaking down, or maybe are just like the difficulty of doing this is going down with AI, right? Like you might have been—I mean, I don't know that you have to be that sophisticated to figure out how to put a listening device in a conference room or to shove, you know, an LTE-capable sensor into a Ledger. But it does feel like these things are probably going to accelerate just because it's just much easier to come up with a scheme like this and to actually execute it without having technical proficiency coming out of the gate. So it feels like we're going to see more of this and we have to start assuming that we are in a world where these kinds of complex attacks are much easier to do and are going to be a lot more common. I mean, there's all this story about I think it was one of the OpenAI models that was trying to commit some kind of adversarial code to an open-source repo and like was trying to socially engineer the maintainers of this open-source project. And if models are doing this on their own, there's probably going to be more and more and more of this, whether it's from rogue models or from spy agencies or from just bad actors in general who are trying to compromise the core supply chains of the internet. We've talked about this before, but it feels like, okay, now we're starting to see it. And certainly, you know, we've never seen an attack like this with respect to Ledger. I think it was Jacob Steinhardt, the guy who famously quit Anthropic, who said he thought there was a very high probability that there are CCP spies within Anthropic. It's like almost certainly because the security protocols in there are so simplistic compared to what you'd expect from what at this point are the most important economic and national security assets in America basically, are the labs, and they're not treated like that.
Yeah. I assume most large tech companies have foreign spies, but I think on the AI lab specifically it is also interesting. I was kind of thinking about this, just like the process and the obstacles behind actually like guarding the weights of whatever like the most frontier model is. And I was kind of like digging and there is like some secrecy. There is some sort of like almost multi-sig type setup. But ultimately they have to be in clear text somewhere running on a GPU somewhere, and then they have like egress limits and stuff like that. But like I'm surprised there's not been more attempts or discussion of an attempt of like somebody to try to exfiltrate weights themselves, which is like ultimately what people want, right? And that's, you know, why would you even bother trying to distill, which is Anthropic's whole beef, when you can just like get the weights themselves.
