The Wolf Den #736 - Ledger Is In Deep Sh*t
The Wolf Den #736 - Ledger Is In Deep Sh*t
Not great.
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In This Issue:
Ledger Is In Deep Sh*t
Bitcoin Thoughts And Analysis
Legacy Markets
The SEC Responds To Coinbase
Hong Kong Goes Live Soon
Lido V2 Successfully Released
Apple Goes Axie
Self Custody Wallets Will Play A Major Role In Digital Life | Pascal Gauthier, Ledger
Ledger Is In Deep Sh*t
Yesterday began just like any other day, with no hint of the tempest brewing within a specific group in the crypto community - the stalwarts of cold storage.
The proponents of cold storage are often seen as the 'traditionalists,' dedicated custodians of the highest safety norms, demanding unimpeachable security from the products they rely on. They stand as guardians of the foundational principles our community was built upon. Ledger, established in 2014, has consistently won their approval. However, today, Ledger's credibility has been challenged. Is Ledger now considered an outcast?
The dispute I'm about to delve into originated on the subreddit, r/Ledgerwallet. Here's a screenshot capturing the starting point of this controversy.
Before we dive into the heart of the issue, it's essential to clarify a few things. Firstly, BTChip is the alias of Nicolas Bacca, a co-founder of Ledger and its current Head of Innovation - his words, therefore, represent Ledger's standpoint. Secondly, ever since Ledger's inception, it has been universally accepted that keys cannot exit the device. Ledger has built its reputation on this simple assurance - the keys stay cold - and after almost a decade in business, this axiom has shifted.
Let's now review what Ledger presently states about keys. You can peruse the complete blog post HERE, but the 'key' takeaways are highlighted below.
See what I did there?
Ledger continues… “And unless you’ve been hiding under a rock, you’ll know that Ledger’s entire mission is protecting your private keys by keeping them offline and securely in your device. An offline key is the only key! Now that we’ve broken this process down into components, it seems pretty crazy that you’d do it any other way. Yes – the crypto ecosystem is expanding by the day – but that absolutely does not mean you need to compromise on your security. And Ledger makes sure you don’t need to.”
While Ledger's statements suggest a firm commitment to security, it's their actions that truly reveal their stance. So, let's examine their latest move. In response to the Subreddit post, Ledger rolled out a firmware update specifically for the Ledger Nano X, introducing a new feature dubbed "Ledger Recover." A screenshot from Ledger is provided below. If you're interested in a video explanation of this feature, you can find it HERE.
To the novice observer, Ledger Recover may seem like an excellent feature because it reduces the chances of losing access to funds if both the device and backup phrase are misplaced. However, the trade-off is that private keys now exit the device. While this feature might be suitable for casual Ledger users, it raises significant concerns for those storing substantial funds. It's not just the device's integrity that's at stake, but the whole ethos of Ledger is under scrutiny.
The feature was initially launched only for the Nano X, but does that indicate a company-wide rollout in the future? Moreover, if one opts out of the feature, does the firmware's existence still pose a risk by potentially allowing the seed to be taken off the device? How long has this backdoor been present before it was officially launched? Has Ledger unwittingly exposed itself to another data breach or hacking incident? If my identity is stolen, could a hacker then access my funds? Could law enforcement agencies force companies to relinquish keys? These are now plausible scenarios - which is quite unsettling.
For the original Ledger users and cold storage enthusiasts, it's irrelevant if the private address is cryptographically split and shared with institutions like Fort Knox, the Royal Bank of Canada, and the Terminator. The bottom line is that no keys should be leaving the device - that's the primary reason for purchasing Ledgers.
So, does this spell the end for Ledger?
My gut feeling says 'no,' but I'm not entirely convinced that this feature aligns well with Ledger's business model. That said, I believe in considering both sides of the argument. Hence, when I present the counterargument that follows, keep in mind that I'm neither downplaying the concerns raised above nor defending Ledger - I'm merely providing an unbiased perspective.
When Ledger shares keys using asymmetric encryption and sharding, it's not doing so recklessly. Moreover, did you know that your Ethereum public key is actually derived from the private key? You might be uncomfortable with the idea of your keys leaving your device, and that's entirely valid. However, Ledger maintains that it's taking this process very seriously.
Another aspect to consider is the functioning of multisig wallets. Those who have known me for a while are aware that I'm an advocate for multisig wallets. Here's a snippet from Casa, a highly respected key management company. “Our security protocol is designed to prevent you from losing funds from just one incident. Having multiple keys allows you to spread your risk across multiple locations. Proper key distribution is crucial to ensuring the integrity of your keyset. You defeat the purpose of a multisig wallet if you have most of your keys in the same location.” Casa's perspective does lend some understanding to Ledger's situation. Although they are distinct entities, they both aim to achieve the same goal - unassailable security, albeit through different methodologies.
This doesn't mean that keys should only ever exist offline and solely within our possession. Such an approach would hinder mainstream adoption. While I won't delve further into the counterargument, given my limited understanding of key philosophy, I intend to explore this topic more thoroughly with experts who are better informed. And let's be candid, will this topic still be a point of discussion in a week, or even in 48 hours? If Ledger does yield, the issue might resurface, but all it takes is a new meme coin or a bank crisis, and it will soon be forgotten.
My primary objective in this newsletter is to help ensure your safety. If I have knowledge or a belief about something, I will share it! If this news is of concern to you, the best advice I can give is to consider taking your business elsewhere. I don't want to be the person who insists everything will probably be fine, so please do your own research and weigh all options. Difficult decisions like these can impede mainstream adoption, but that's part of the challenge we accept when we decide to be our own bank. Meanwhile, I'll endeavor to gain a deeper understanding of this issue.
In other news, you will notice that the podcast released this week is a conversation with Pascal Gauthier, the CEO of Ledger. What timing! This is a pre-recorded episode, and it was scheduled for release before the controversy arose. It still offers quite a bit of perspective into the ethos of Ledger.
Also… I hosted a Twitter Space with Jeremy Kauffman, the CEO of LBRY which was intense. We talked all things SEC and regulation. Don’t miss out if you weren’t able to tune in.
Bitcoin Thoughts And Analysis
My general bias is still for a bit more downside before continuing on with the fresh bull trend that we have been in since the FTX bottom.
For now, it appears we have a bearish retest of the neckline of the head and shoulders pattern. Below that blue line means traders should be very cautious about short term longs.
$25,212 is still screaming for a retest - which usually means price drops through it before recapturing it as support.
That area is where I am still watching.
Mostly though - we remain choppy.
Legacy Markets
Financial markets are showing signs of recovery following a Wall Street selloff, driven by optimism around debt ceiling negotiations in Washington. The US dollar has strengthened and stock futures are rising, but there is concern about a potential default if no agreement is reached by the June 1 deadline. In Europe, the Stoxx 600 is trading in a narrow range due to fears of high interest rates and a looming recession. The performance of individual stocks has been mixed, with London Stock Exchange Group shares falling and Siemens AG shares rising. Current market stagnation is attributed to weaker Chinese data, US debt ceiling worries, and seasonal trends.
Key events this week:
Eurozone CPI, Wednesday
BOE Governor Andrew Bailey delivers keynote speech, Wednesday
US housing starts, Wednesday
US initial jobless claims, Conference Board leading index, existing home sales, Thursday
Japan CPI, Friday
ECB President Christine Lagarde participates in panel at Brazil central bank conference, Friday
New York Fed’s John Williams speaks at monetary policy research conference in Washington; Fed Chair Jerome Powell and former chair Ben Bernanke to take part in panel discussion, Friday
Some of the main moves in markets:
Stocks
S&P 500 futures rose 0.2% as of 5:10 a.m. New York time
Nasdaq 100 futures rose 0.1%
Futures on the Dow Jones Industrial Average rose 0.3%
The Stoxx Europe 600 fell 0.2%
The MSCI World index fell 0.2%
Currencies
The Bloomberg Dollar Spot Index rose 0.3%
The euro fell 0.3% to $1.0827
The British pound fell 0.5% to $1.2427
The Japanese yen fell 0.5% to 137.07 per dollar
Cryptocurrencies
Bitcoin fell 0.5% to $26,828.34
Ether fell 0.8% to $1,806.37
Bonds
The yield on 10-year Treasuries was little changed at 3.54%
Germany’s 10-year yield declined three basis points to 2.32%
Britain’s 10-year yield declined two basis points to 3.80%
Commodities
West Texas Intermediate crude was little changed
Gold futures fell 0.2% to $1,989.70 an ounce
The SEC Responds To Coinbase
Last month, Coinbase took the initiative to ask the SEC for clearer regulations in the crypto realm. However, the SEC's response was a straightforward 'no.' You can delve into the SEC's brief HERE, but in essence, it indicates that enforcement will carry on as usual.
In the brief, the SEC argues that, “agencies routinely enforce existing rules while considering further amendments to regulatory requirements” and that, “Coinbase’s argument is largely premised on the erroneous view that recent Commission enforcement actions indicate a Commission decision not to engage in rulemaking.”
While this argument might seem insubstantial, the SEC intends to persist with its enforcement actions until it finally reaches a decision, which could potentially take years. This situation is likely to remain unchanged unless there's court intervention or a lawsuit is filed. Until then, all we can do is wait.
Hong Kong Goes Live Soon
Hong Kong is poised to become the next significant global crypto hub. Currently, trading restrictions in the region are confined to affluent investors, but this will change next month when guidelines are provided to exchanges and retail investors. These rules, set to be disclosed on June 1st, will address aspects like ETFs, trading, and CBDCs. Reports from the region suggest that over 80 companies have already expressed interest in setting up businesses once the rules are in place. If Hong Kong's initiative proves successful, it could potentially prompt mainland China to reassess its stringent stance on crypto adoption.
Lido V2 Successfully Released
With the green light for the V2 Lido upgrade, staked ETH can now be securely withdrawn straight from the platform. For those unfamiliar, Lido is the largest ETH staking platform, holding about 30% of all staked ETH, estimated to be worth around $11.3 billion. Now that withdrawals have been enabled, there's speculation that Celsius might be planning to withdraw its substantial stETH reserves following the upgrade. However, this wouldn't have a significant impact overall. Apart from potentially slowing down the exit queue, Lido's liquidity should be more than capable of managing any withdrawals that might occur.
Apple Goes Axie
Sky Mavis, the company behind the NFT project Axie Infinity, is launching its card game, Axie Infinity: Origins, on the Apple App Store in key markets in Latin America and Asia. Previously, the game was available only in select regions on Google Play and the company's Mavis Hub. Sky Mavis is also launching Mavis Market, an NFT marketplace powered by its Ronin blockchain, where collectibles from third-party developers will be available. The company is expanding its reach following a $625 million hack last year, revamping its systems to increase decentralization and security. It has also partnered with various game development studios to further develop the Axie Infinity universe.
Is this the big catalyst for Web3 gaming?
Self Custody Wallets Will Play A Major Role In Digital Life | Pascal Gauthier, Ledger
In this episode of The Wolf Of All Streets podcast, Pascal Gauthier, CEO of Ledger, provides valuable insights into the role of custody wallets in digital life. From discussing the collapse of FTX to the correlation between Bitcoin and traditional banking collapses, Pascal dives into a range of topics related to the crypto industry. He also shares his thoughts on Ledger's innovative platform, Ledger Stax, and the importance of hardware-first approach to security. Don't miss out on this informative conversation!
In this episode with Pascal, we discussed:
FTX collapse was our best day
Bitcoin correlation
Banking collapses
Liquidity problem
Working on regulation
Crypto is a real industry for the future
Ledger and self custody
Ledger Stax
Security of ledger
How Ledger saved Trust Wallet
Hardware first
CBDCs
Ledger is an open platform
Where to buy Stax?
The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.
Bought a ledger recently..thanks for the info..love the newsletter