Wormhole, Inflation, and Social Inequality
Happy Monday, everyone!
Last week I touched upon the importance of keeping your calm amid sliding markets and single-handedly restored global confidence in cryptocurrencies. Over the last week, Bitcoin +14%, Ethereum +20%, Binance Coin +14%, Solana +28%, and Cardano +15%. Looks like we all had a great weekend, you’re welcome!
Want to know who had a shitty weekend? Wormhole, the cryptocurrency platform that had been robbed of $325m on Wednesday, February 2nd. Following a sloppy update to Wormhole’s GitHub repository, an attacker was able to hack the platform, forge a valid signature, and freely mint 120k wETH (a wrapped Ethereum equivalent on the Solana blockchain, used to trade ETH for other ERC-20 tokens on decentralised platforms; don’t worry about the technicalities). The hacker then exchanged these tokens for ETH and bagged $250m. The attack liquidated a big chunk of the platform’s Ethereum funds, which were being held as collateral for transactions on the Solana blockchain. In a pathetic attempt to mend the situation, the Wormhole team offered the hacker a $10 million bounty to return the stolen funds. What a joke.
Wormhole then had to “find” $325 million to plug this leak. Someone, please explain how one “finds” $325 million. Asking for a friend. Luckily, Jump Trading came to the rescue, restored over $320m on Wormhole’s platform, and fulfilled its paternal obligations: back in August, Jump Trading acquired Certus One, the developer behind Wormhole. This bail-out should certainly raise some eyebrows. Although Jump believes “in a multichain future and that Wormhole is essential infrastructure”, there must be something else going on. Wormhole’s community and operation probably are not operating at a scale that justifies pushing $320m into a platform whose reputation has just suffered significant damage.
The hack was not the first of this scale, nor will it be the last. In fact, the Wormhole fiasco only marks the fourth-biggest cryptocurrency theft so far. Previously, Mt. Gox was relieved of $450m in 2014, Coincheck of $534m in 2018, and Polynetwork of $610m in 2021. Funny enough, the hackers involved in the Polynetwork heist returned all the money — to them, the whole thing was apparently to amuse themselves and cause awareness around security threats. When hackers aren’t as friendly, the narrative becomes a completely different one: We tend to primarily consider the volatility of our crypto investments, not very often do we think about whether our investments are actually secure.
If you were to ask governments, they would not waste any time pointing out the lack of security of both cryptocurrencies and their platforms. Then again, why would you even ask governments and let them tell you what to do with your money? In fact — this should not come as a surprise — governments are already telling us what to do with our money (even besides paying taxes). You however might be surprised by the audacity of the following:
Last week, a certain member of the Bank of England (BoE) told workers to not “ask for big pay rises” in a bid to control inflation. By April, inflation is expected to hit 7.25%. Certain BoE member also currently earns close to half a million per year and is literally asking us to Ben Dover.
Admittedly, the logic makes sense. A large amount of inflation is due to increased energy costs, amid an energy squeeze caused by (i) particularly cold winters in 2020 and 2021, (ii) Russia decreasing its gas output to the rest of Europe amid its conflict with Ukraine, and (iii) broad infrastructure disruptions caused by the pandemic. These factors are essentially exogenous, i.e., completely out of BoE’s control. Meanwhile, higher wages increase purchasing power, which further drives up inflation—while not solving any of the energy-related issues that are mainly contributing to inflation in the first place.
But, there is also the main tool that central banks control: interest rates. One might tell central banks to give the people their raises, while increasing interest rates and therefore urging people to increase their savings. That way, increased cost of living can be somewhat tackled and discretionary spending reduced, putting downward pressure on inflation. The fact that the central banks are prepared to go to any length to not increase interest rates is absolutely shameless.
Then again, some might argue that central banks are not being completely unreasonable, as they can’t do anything about the above-mentioned exogenous factors that are largely driving inflation. The increase in wage raises need to be justified by an increase in productivity, or go hand in hand with and compensate for an inflationary increase caused by endogenous factors.
The conclusion then is that most people are screwed, and there’s not much anyone can do. Perhaps the sobering reality is that young people simply can no longer dream of being middle-class citizens, who can afford their own property, house, and car. Perhaps we simply need to rethink what it means to be a middle-class citizen. And perhaps, this is why so many young investors are drawn to crypto, despite understanding the slightest thing about crypto. In all fairness, I’m far from an expert on blockchain and crypto but have made the argument that from a technological perspective, there are currently no better alternatives. Today, I’m arguing that it’s (kind of) the same from an investment perspective. Young investors are being pushed up further and further the risk-reward curve because they are (a) realising their status and social immobility as middle-class citizens and (b) have found that cryptocurrencies might change their fate (WAGMI: We Are All Going to Make It).
According to research by London-based blockchain analytics company Elliptic, fraud on DeFi platforms surpassed $10 billion last year. However, as long as the common citizen keeps getting shafted by a system that is fundamentally flawed, they will continue to adapt a huck and pray approach — being exposed to both the volatility of cryptocurrencies and security issues of platforms. Truthfully, although aggravating, I would rather lose money on a platform to a hacker, who “earned” their loot through skill than to a system that is skewed towards the rich. Blockchain technology still needs to overcome major challenges such as acceptance, scalability, performance, resilience, regulatory issues, and security. Although we might still be far away from overcoming all these challenges, I am confident that we will. In the near future, I will outline how exactly blockchain technology and cryptocurrencies can address and ameliorate social inequality, but that’s it for today!
Thank you for reading.
Take care,
Team Lithium x Seb
