Integrity
Write
Loading...
Nicolas Tresegnie

Nicolas Tresegnie

3 years ago

Launching 10 SaaS applications in 100 days

More on Technology

Dmitrii Eliuseev

Dmitrii Eliuseev

2 years ago

Creating Images on Your Local PC Using Stable Diffusion AI

Deep learning-based generative art is being researched. As usual, self-learning is better. Some models, like OpenAI's DALL-E 2, require registration and can only be used online, but others can be used locally, which is usually more enjoyable for curious users. I'll demonstrate the Stable Diffusion model's operation on a standard PC.

Image generated by Stable Diffusion 2.1

Let’s get started.

What It Does

Stable Diffusion uses numerous components:

  • A generative model trained to produce images is called a diffusion model. The model is incrementally improving the starting data, which is only random noise. The model has an image, and while it is being trained, the reversed process is being used to add noise to the image. Being able to reverse this procedure and create images from noise is where the true magic is (more details and samples can be found in the paper).

  • An internal compressed representation of a latent diffusion model, which may be altered to produce the desired images, is used (more details can be found in the paper). The capacity to fine-tune the generation process is essential because producing pictures at random is not very attractive (as we can see, for instance, in Generative Adversarial Networks).

  • A neural network model called CLIP (Contrastive Language-Image Pre-training) is used to translate natural language prompts into vector representations. This model, which was trained on 400,000,000 image-text pairs, enables the transformation of a text prompt into a latent space for the diffusion model in the scenario of stable diffusion (more details in that paper).

This figure shows all data flow:

Model architecture, Source © https://arxiv.org/pdf/2112.10752.pdf

The weights file size for Stable Diffusion model v1 is 4 GB and v2 is 5 GB, making the model quite huge. The v1 model was trained on 256x256 and 512x512 LAION-5B pictures on a 4,000 GPU cluster using over 150.000 NVIDIA A100 GPU hours. The open-source pre-trained model is helpful for us. And we will.

Install

Before utilizing the Python sources for Stable Diffusion v1 on GitHub, we must install Miniconda (assuming Git and Python are already installed):

wget https://repo.anaconda.com/miniconda/Miniconda3-py39_4.12.0-Linux-x86_64.sh
chmod +x Miniconda3-py39_4.12.0-Linux-x86_64.sh
./Miniconda3-py39_4.12.0-Linux-x86_64.sh
conda update -n base -c defaults conda

Install the source and prepare the environment:

git clone https://github.com/CompVis/stable-diffusion
cd stable-diffusion
conda env create -f environment.yaml
conda activate ldm
pip3 install transformers --upgrade

Download the pre-trained model weights next. HiggingFace has the newest checkpoint sd-v14.ckpt (a download is free but registration is required). Put the file in the project folder and have fun:

python3 scripts/txt2img.py --prompt "hello world" --plms --ckpt sd-v1-4.ckpt --skip_grid --n_samples 1

Almost. The installation is complete for happy users of current GPUs with 12 GB or more VRAM. RuntimeError: CUDA out of memory will occur otherwise. Two solutions exist.

Running the optimized version

Try optimizing first. After cloning the repository and enabling the environment (as previously), we can run the command:

python3 optimizedSD/optimized_txt2img.py --prompt "hello world" --ckpt sd-v1-4.ckpt --skip_grid --n_samples 1

Stable Diffusion worked on my visual card with 8 GB RAM (alas, I did not behave well enough to get NVIDIA A100 for Christmas, so 8 GB GPU is the maximum I have;).

Running Stable Diffusion without GPU

If the GPU does not have enough RAM or is not CUDA-compatible, running the code on a CPU will be 20x slower but better than nothing. This unauthorized CPU-only branch from GitHub is easiest to obtain. We may easily edit the source code to use the latest version. It's strange that a pull request for that was made six months ago and still hasn't been approved, as the changes are simple. Readers can finish in 5 minutes:

  • Replace if attr.device!= torch.device(cuda) with if attr.device!= torch.device(cuda) and torch.cuda.is available at line 20 of ldm/models/diffusion/ddim.py ().

  • Replace if attr.device!= torch.device(cuda) with if attr.device!= torch.device(cuda) and torch.cuda.is available in line 20 of ldm/models/diffusion/plms.py ().

  • Replace device=cuda in lines 38, 55, 83, and 142 of ldm/modules/encoders/modules.py with device=cuda if torch.cuda.is available(), otherwise cpu.

  • Replace model.cuda() in scripts/txt2img.py line 28 and scripts/img2img.py line 43 with if torch.cuda.is available(): model.cuda ().

Run the script again.

Testing

Test the model. Text-to-image is the first choice. Test the command line example again:

python3 scripts/txt2img.py --prompt "hello world" --plms --ckpt sd-v1-4.ckpt --skip_grid --n_samples 1

The slow generation takes 10 seconds on a GPU and 10 minutes on a CPU. Final image:

The SD V1.4 first example, Image by the author

Hello world is dull and abstract. Try a brush-wielding hamster. Why? Because we can, and it's not as insane as Napoleon's cat. Another image:

The SD V1.4 second example, Image by the author

Generating an image from a text prompt and another image is interesting. I made this picture in two minutes using the image editor (sorry, drawing wasn't my strong suit):

An image sketch, Image by the author

I can create an image from this drawing:

python3 scripts/img2img.py --prompt "A bird is sitting on a tree branch" --ckpt sd-v1-4.ckpt --init-img bird.png --strength 0.8

It was far better than my initial drawing:

The SD V1.4 third example, Image by the author

I hope readers understand and experiment.

Stable Diffusion UI

Developers love the command line, but regular users may struggle. Stable Diffusion UI projects simplify image generation and installation. Simple usage:

  • Unpack the ZIP after downloading it from https://github.com/cmdr2/stable-diffusion-ui/releases. Linux and Windows are compatible with Stable Diffusion UI (sorry for Mac users, but those machines are not well-suitable for heavy machine learning tasks anyway;).

  • Start the script.

Done. The web browser UI makes configuring various Stable Diffusion features (upscaling, filtering, etc.) easy:

Stable Diffusion UI © Image by author

V2.1 of Stable Diffusion

I noticed the notification about releasing version 2.1 while writing this essay, and it was intriguing to test it. First, compare version 2 to version 1:

  • alternative text encoding. The Contrastive LanguageImage Pre-training (CLIP) deep learning model, which was trained on a significant number of text-image pairs, is used in Stable Diffusion 1. The open-source CLIP implementation used in Stable Diffusion 2 is called OpenCLIP. It is difficult to determine whether there have been any technical advancements or if legal concerns were the main focus. However, because the training datasets for the two text encoders were different, the output results from V1 and V2 will differ for the identical text prompts.

  • a new depth model that may be used to the output of image-to-image generation.

  • a revolutionary upscaling technique that can quadruple the resolution of an image.

  • Generally higher resolution Stable Diffusion 2 has the ability to produce both 512x512 and 768x768 pictures.

The Hugging Face website offers a free online demo of Stable Diffusion 2.1 for code testing. The process is the same as for version 1.4. Download a fresh version and activate the environment:

conda deactivate  
conda env remove -n ldm  # Use this if version 1 was previously installed
git clone https://github.com/Stability-AI/stablediffusion
cd stablediffusion
conda env create -f environment.yaml
conda activate ldm

Hugging Face offers a new weights ckpt file.

The Out of memory error prevented me from running this version on my 8 GB GPU. Version 2.1 fails on CPUs with the slow conv2d cpu not implemented for Half error (according to this GitHub issue, the CPU support for this algorithm and data type will not be added). The model can be modified from half to full precision (float16 instead of float32), however it doesn't make sense since v1 runs up to 10 minutes on the CPU and v2.1 should be much slower. The online demo results are visible. The same hamster painting with a brush prompt yielded this result:

A Stable Diffusion 2.1 example

It looks different from v1, but it functions and has a higher resolution.

The superresolution.py script can run the 4x Stable Diffusion upscaler locally (the x4-upscaler-ema.ckpt weights file should be in the same folder):

python3 scripts/gradio/superresolution.py configs/stable-diffusion/x4-upscaling.yaml x4-upscaler-ema.ckpt

This code allows the web browser UI to select the image to upscale:

The copy-paste strategy may explain why the upscaler needs a text prompt (and the Hugging Face code snippet does not have any text input as well). I got a GPU out of memory error again, although CUDA can be disabled like v1. However, processing an image for more than two hours is unlikely:

Stable Diffusion 4X upscaler running on CPU © Image by author

Stable Diffusion Limitations

When we use the model, it's fun to see what it can and can't do. Generative models produce abstract visuals but not photorealistic ones. This fundamentally limits The generative neural network was trained on text and image pairs, but humans have a lot of background knowledge about the world. The neural network model knows nothing. If someone asks me to draw a Chinese text, I can draw something that looks like Chinese but is actually gibberish because I never learnt it. Generative AI does too! Humans can learn new languages, but the Stable Diffusion AI model includes only language and image decoder brain components. For instance, the Stable Diffusion model will pull NO WAR banner-bearers like this:

V1:

V2.1:

The shot shows text, although the model never learned to read or write. The model's string tokenizer automatically converts letters to lowercase before generating the image, so typing NO WAR banner or no war banner is the same.

I can also ask the model to draw a gorgeous woman:

V1:

V2.1:

The first image is gorgeous but physically incorrect. A second one is better, although it has an Uncanny valley feel. BTW, v2 has a lifehack to add a negative prompt and define what we don't want on the image. Readers might try adding horrible anatomy to the gorgeous woman request.

If we ask for a cartoon attractive woman, the results are nice, but accuracy doesn't matter:

V1:

V2.1:

Another example: I ordered a model to sketch a mouse, which looks beautiful but has too many legs, ears, and fingers:

V1:

V2.1: improved but not perfect.

V1 produces a fun cartoon flying mouse if I want something more abstract:

I tried multiple times with V2.1 but only received this:

The image is OK, but the first version is closer to the request.

Stable Diffusion struggles to draw letters, fingers, etc. However, abstract images yield interesting outcomes. A rural landscape with a modern metropolis in the background turned out well:

V1:

V2.1:

Generative models help make paintings too (at least, abstract ones). I searched Google Image Search for modern art painting to see works by real artists, and this was the first image:

“Modern art painting” © Google’s Image search result

I typed "abstract oil painting of people dancing" and got this:

V1:

V2.1:

It's a different style, but I don't think the AI-generated graphics are worse than the human-drawn ones.

The AI model cannot think like humans. It thinks nothing. A stable diffusion model is a billion-parameter matrix trained on millions of text-image pairs. I input "robot is creating a picture with a pen" to create an image for this post. Humans understand requests immediately. I tried Stable Diffusion multiple times and got this:

This great artwork has a pen, robot, and sketch, however it was not asked. Maybe it was because the tokenizer deleted is and a words from a statement, but I tried other requests such robot painting picture with pen without success. It's harder to prompt a model than a person.

I hope Stable Diffusion's general effects are evident. Despite its limitations, it can produce beautiful photographs in some settings. Readers who want to use Stable Diffusion results should be warned. Source code examination demonstrates that Stable Diffusion images feature a concealed watermark (text StableDiffusionV1 and SDV2) encoded using the invisible-watermark Python package. It's not a secret, because the official Stable Diffusion repository's test watermark.py file contains a decoding snippet. The put watermark line in the txt2img.py source code can be removed if desired. I didn't discover this watermark on photographs made by the online Hugging Face demo. Maybe I did something incorrectly (but maybe they are just not using the txt2img script on their backend at all).

Conclusion

The Stable Diffusion model was fascinating. As I mentioned before, trying something yourself is always better than taking someone else's word, so I encourage readers to do the same (including this article as well;).

Is Generative AI a game-changer? My humble experience tells me:

  • I think that place has a lot of potential. For designers and artists, generative AI can be a truly useful and innovative tool. Unfortunately, it can also pose a threat to some of them since if users can enter a text field to obtain a picture or a website logo in a matter of clicks, why would they pay more to a different party? Is it possible right now? unquestionably not yet. Images still have a very poor quality and are erroneous in minute details. And after viewing the image of the stunning woman above, models and fashion photographers may also unwind because it is highly unlikely that AI will replace them in the upcoming years.

  • Today, generative AI is still in its infancy. Even 768x768 images are considered to be of a high resolution when using neural networks, which are computationally highly expensive. There isn't an AI model that can generate high-resolution photographs natively without upscaling or other methods, at least not as of the time this article was written, but it will happen eventually.

  • It is still a challenge to accurately represent knowledge in neural networks (information like how many legs a cat has or the year Napoleon was born). Consequently, AI models struggle to create photorealistic photos, at least where little details are important (on the other side, when I searched Google for modern art paintings, the results are often even worse;).

  • When compared to the carefully chosen images from official web pages or YouTube reviews, the average output quality of a Stable Diffusion generation process is actually less attractive because to its high degree of randomness. When using the same technique on their own, consumers will theoretically only view those images as 1% of the results.

Anyway, it's exciting to witness this area's advancement, especially because the project is open source. Google's Imagen and DALL-E 2 can also produce remarkable findings. It will be interesting to see how they progress.

Asha Barbaschow

Asha Barbaschow

3 years ago

Apple WWDC 2022 Announcements

WWDC 2022 began early Tuesday morning. WWDC brought a ton of new features (which went for just shy of two hours).

With so many announcements, we thought we'd compile them. And now...

WWDC?

WWDC is Apple's developer conference. This includes iOS, macOS, watchOS, and iPadOS (all of its iPads). It's where Apple announces new features for developers to use. It's also where Apple previews new software.

Virtual WWDC runs June 6-10.  You can rewatch the stream on Apple's website.

WWDC 2022 news:

Completely everything. Really. iOS 16 first.

iOS 16.

iOS 16 is a major iPhone update. iOS 16 adds the ability to customize the Lock Screen's color/theme. And widgets. It also organizes notifications and pairs Lock Screen with Focus themes. Edit or recall recently sent messages, recover recently deleted messages, and mark conversations as unread. Apple gives us yet another reason to stay in its walled garden with iMessage.

New iOS includes family sharing. Parents can set up a child's account with parental controls to restrict apps, movies, books, and music. iOS 16 lets large families and friend pods share iCloud photos. Up to six people can contribute photos to a separate iCloud library.

Live Text is getting creepier. Users can interact with text in any video frame. Touch and hold an image's subject to remove it from its background and place it in apps like messages. Dictation offers a new on-device voice-and-touch experience. Siri can run app shortcuts without setup in iOS 16. Apple also unveiled a new iOS 16 feature to help people break up with abusive partners who track their locations or read their messages. Safety Check.

Apple Pay Later allows iPhone users to buy products and pay for them later. iOS 16 pushes Mail. Users can schedule emails and cancel delivery before it reaches a recipient's inbox (be quick!). Mail now detects if you forgot an attachment, as Gmail has for years. iOS 16's Maps app gets "Multi-Stop Routing," .

Apple News also gets an iOS 16 update. Apple News adds My Sports. With iOS 16, the Apple Watch's Fitness app is also coming to iOS and the iPhone, using motion-sensing tech to track metrics and performance (as long as an athlete is wearing or carrying the device on their person). 

iOS 16 includes accessibility updates like Door Detection.

watchOS9

Many of Apple's software updates are designed to take advantage of the larger screens in recent models, but they also improve health and fitness tracking.

The most obvious reason to upgrade watchOS every year is to get new watch faces from Apple. WatchOS 9 will add four new faces.

Runners' workout metrics improve.
Apple quickly realized that fitness tracking would be the Apple Watch's main feature, even though it's been the killer app for wearables since their debut. For watchOS 9, the Apple Watch will use its accelerometer and gyroscope to track a runner's form, stride length, and ground contact time. It also introduces the ability to specify heart rate zones, distance, and time intervals, with vibrating haptic feedback and voice alerts.

The Apple Watch's Fitness app is coming to iOS and the iPhone, using the smartphone's motion-sensing tech to track metrics and performance (as long as an athlete is wearing or carrying the device on their person).

We'll get sleep tracking, medication reminders, and drug interaction alerts. Your watch can create calendar events. A new Week view shows what meetings or responsibilities stand between you and the weekend.

iPadOS16

WWDC 2022 introduced iPad updates. iPadOS 16 is similar to iOS for the iPhone, but has features for larger screens and tablet accessories. The software update gives it many iPhone-like features.

iPadOS 16's Home app, like iOS 16, will have a new design language. iPad users who want to blame it on the rain finally have a Weather app. iPadOS 16 will have iCloud's Shared Photo Library, Live Text and Visual Look Up upgrades, and FaceTime Handoff, so you can switch between devices during a call.

Apple highlighted iPadOS 16's multitasking at WWDC 2022. iPad's Stage Manager sounds like a community theater app. It's a powerful multitasking tool for tablets and brings them closer to emulating laptops. Apple's iPadOS 16 supports multi-user collaboration. You can share content from Files, Keynote, Numbers, Pages, Notes, Reminders, Safari, and other third-party apps in Apple Messages.

M2-chip

WWDC 2022 revealed Apple's M2 chip. Apple has started the next generation of Apple Silicon for the Mac with M2. Apple says this device improves M1's performance.

M2's second-generation 5nm chip has 25% more transistors than M1's. 100GB/s memory bandwidth (50 per cent more than M1). M2 has 24GB of unified memory, up from 16GB but less than some ultraportable PCs' 32GB. The M2 chip has 10% better multi-core CPU performance than the M2, and it's nearly twice as fast as the latest 10-core PC laptop chip at the same power level (CPU performance is 18 per cent greater than M1).

New MacBooks

Apple introduced the M2-powered MacBook Air. Apple's entry-level laptop has a larger display, a new processor, new colors, and a notch.

M2 also powers the 13-inch MacBook Pro. The 13-inch MacBook Pro has 24GB of unified memory and 50% more memory bandwidth. New MacBook Pro batteries last 20 hours. As I type on the 2021 MacBook Pro, I can only imagine how much power the M2 will add.

macOS 13.0 (or, macOS Ventura)

macOS Ventura will take full advantage of M2 with new features like Stage Manager and Continuity Camera and Handoff for FaceTime. Safari, Mail, Messages, Spotlight, and more get updates in macOS Ventura.

Apple hasn't run out of California landmarks to name its OS after yet. macOS 13 will be called Ventura when it's released in a few months, but it's more than a name change and new wallpapers. 

Stage Manager organizes windows

Stage Manager is a new macOS tool that organizes open windows and applications so they're still visible while focusing on a specific task. The main app sits in the middle of the desktop, while other apps and documents are organized and piled up to the side.

Improved Searching

Spotlight is one of macOS's least appreciated features, but with Ventura, it's becoming even more useful. Live Text lets you extract text from Spotlight results without leaving the window, including images from the photo library and the web.

Mail lets you schedule or unsend emails.

We've all sent an email we regret, whether it contained regrettable words or was sent at the wrong time. In macOS Ventura, Mail users can cancel or reschedule a message after sending it. Mail will now intelligently determine if a person was forgotten from a CC list or if a promised attachment wasn't included. Procrastinators can set a reminder to read a message later.

Safari adds tab sharing and password passkeys

Apple is updating Safari to make it more user-friendly... mostly. Users can share a group of tabs with friends or family, a useful feature when researching a topic with too many tabs. Passkeys will replace passwords in Safari's next version. Instead of entering random gibberish when creating a new account, macOS users can use TouchID to create an on-device passkey. Using an iPhone's camera and a QR system, Passkey syncs and works across all Apple devices and Windows computers.

Continuity adds Facetime device switching and iPhone webcam.

With macOS Ventura, iPhone users can transfer a FaceTime call from their phone to their desktop or laptop using Handoff, or vice versa if they started a call at their desk and need to continue it elsewhere. Apple finally admits its laptop and monitor webcams aren't the best. Continuity makes the iPhone a webcam. Apple demonstrated a feature where the wide-angle lens could provide a live stream of the desk below, while the standard zoom lens could focus on the speaker's face. New iPhone laptop mounts are coming.

System Preferences

System Preferences is Now System Settings and Looks Like iOS
Ventura's System Preferences has been renamed System Settings and is much more similar in appearance to iOS and iPadOS. As the iPhone and iPad are gateway devices into Apple's hardware ecosystem, new Mac users should find it easier to adjust.


This post is a summary. Read full article here

Thomas Smith

2 years ago

ChatGPT Is Experiencing a Lightbulb Moment

Why breakthrough technologies must be accessible

ChatGPT has exploded. Over 1 million people have used the app, and coding sites like Stack Overflow have banned its answers. It's huge.

I wouldn't have called that as an AI researcher. ChatGPT uses the same GPT-3 technology that's been around for over two years.

More than impressive technology, ChatGPT 3 shows how access makes breakthroughs usable. OpenAI has finally made people realize the power of AI by packaging GPT-3 for normal users.

We think of Thomas Edison as the inventor of the lightbulb, not because he invented it, but because he popularized it.

Going forward, AI companies that make using AI easy will thrive.

Use-case importance

Most modern AI systems use massive language models. These language models are trained on 6,000+ years of human text.

GPT-3 ate 8 billion pages, almost every book, and Wikipedia. It created an AI that can write sea shanties and solve coding problems.

Nothing new. I began beta testing GPT-3 in 2020, but the system's basics date back further.

Tools like GPT-3 are hidden in many apps. Many of the AI writing assistants on this platform are just wrappers around GPT-3.

Lots of online utilitarian text, like restaurant menu summaries or city guides, is written by AI systems like GPT-3. You've probably read GPT-3 without knowing it.

Accessibility

Why is ChatGPT so popular if the technology is old?

ChatGPT makes the technology accessible. Free to use, people can sign up and text with the chatbot daily. ChatGPT isn't revolutionary. It does it in a way normal people can access and be amazed by.

Accessibility isn't easy. OpenAI's Sam Altman tweeted that opening ChatGPT to the public increased computing costs.

Each chat costs "low-digit cents" to process. OpenAI probably spends several hundred thousand dollars a day to keep ChatGPT running, with no immediate business case.

Academic researchers and others who developed GPT-3 couldn't afford it. Without resources to make technology accessible, it can't be used.

Retrospective

This dynamic is old. In the history of science, a researcher with a breakthrough idea was often overshadowed by an entrepreneur or visionary who made it accessible to the public.

We think of Thomas Edison as the inventor of the lightbulb. But really, Vasilij Petrov, Thomas Wright, and Joseph Swan invented the lightbulb. Edison made technology visible and accessible by electrifying public buildings, building power plants, and wiring.

Edison probably lost a ton of money on stunts like building a power plant to light JP Morgan's home, the NYSE, and several newspaper headquarters.

People wanted electric lights once they saw their benefits. By making the technology accessible and visible, Edison unlocked a hugely profitable market.

Similar things are happening in AI. ChatGPT shows that developing breakthrough technology in the lab or on B2B servers won't change the culture.

AI must engage people's imaginations to become mainstream. Before the tech impacts the world, people must play with it and see its revolutionary power.

As the field evolves, companies that make the technology widely available, even at great cost, will succeed.

OpenAI's compute fees are eye-watering. Revolutions are costly.

You might also like

Emils Uztics

Emils Uztics

3 years ago

This billionaire created a side business that brings around $90,000 per month.

Dharmesh Shah, the co-founder of Hubspot. Photo credit: The Hustle.

Dharmesh Shah co-founded HubSpot. WordPlay reached $90,000 per month in revenue without utilizing any of his wealth.

His method:

Take Advantage Of An Established Trend

Remember Wordle? Dharmesh was instantly hooked. As was the tech world.

Wordle took the world by the storm. Photo credit: Rock Paper Shotgun

HubSpot's co-founder noted inefficiencies in a recent My First Million episode. He wanted to play daily. Dharmesh, a tinkerer and software engineer, decided to design a word game.

He's a billionaire. How could he?

  1. Wordle had limitations in his opinion;

  2. Dharmesh is fundamentally a developer. He desired to start something new and increase his programming knowledge;

  3. This project may serve as an excellent illustration for his son, who had begun learning about software development.

Better It Up

Building a new Wordle wasn't successful.

WordPlay lets you play with friends and family. You could challenge them and compare the results. It is a built-in growth tool.

WordPlay features:

  • the capacity to follow sophisticated statistics after creating an account;

  • continuous feedback on your performance;

  • Outstanding domain name (wordplay.com).

Project Development

WordPlay has 9.5 million visitors and 45 million games played since February.

HubSpot co-founder credits tremendous growth to flywheel marketing, pushing the game through his own following.

With Flywheel marketing, each action provides a steady stream of inertia.

Choosing an exploding specialty and making sharing easy also helped.

Shah enabled Google Ads on the website to test earning potential. Monthly revenue was $90,000.

That's just Google Ads. If monetization was the goal, a specialized ad network like Ezoic could double or triple the amount.

Wordle was a great buy for The New York Times at $1 million.

Liam Vaughan

Liam Vaughan

3 years ago

Investors can bet big on almost anything on a new prediction market.

Kalshi allows five-figure bets on the Grammys, the next Covid wave, and future SEC commissioners. Worst-case scenario

On Election Day 2020, two young entrepreneurs received a call from the CFTC chairman. Luana Lopes Lara and Tarek Mansour spent 18 months trying to start a new type of financial exchange. Instead of betting on stock prices or commodity futures, people could trade instruments tied to real-world events, such as legislation, the weather, or the Oscar winner.

Heath Tarbert, a Trump appointee, shouted "Congratulations." "You're competing with 1840s-era markets. I'm sure you'll become a powerhouse too."

Companies had tried to introduce similar event markets in the US for years, but Tarbert's agency, the CFTC, said no, arguing they were gambling and prone to cheating. Now the agency has reversed course, approving two 24-year-olds who will have first-mover advantage in what could become a huge new asset class. Kalshi Inc. raised $30 million from venture capitalists within weeks of Tarbert's call, his representative says. Mansour, 26, believes this will be bigger than crypto.

Anyone who's read The Wisdom of Crowds knows prediction markets' potential. Well-designed markets can help draw out knowledge from disparate groups, and research shows that when money is at stake, people make better predictions. Lopes Lara calls it a "bullshit tax." That's why Google, Microsoft, and even the US Department of Defense use prediction markets internally to guide decisions, and why university-linked political betting sites like PredictIt sometimes outperform polls.

Regulators feared Wall Street-scale trading would encourage investors to manipulate reality. If the stakes are high enough, traders could pressure congressional staffers to stall a bill or bet on whether Kanye West's new album will drop this week. When Lopes Lara and Mansour pitched the CFTC, senior regulators raised these issues. Politically appointed commissioners overruled their concerns, and one later joined Kalshi's board.

Will Kanye’s new album come out next week? Yes or no?

Kalshi's victory was due more to lobbying and legal wrangling than to Silicon Valley-style innovation. Lopes Lara and Mansour didn't invent anything; they changed a well-established concept's governance. The result could usher in a new era of market-based enlightenment or push Wall Street's destructive tendencies into the real world.

If Kalshi's founders lacked experience to bolster their CFTC application, they had comical youth success. Lopes Lara studied ballet at the Brazilian Bolshoi before coming to the US. Mansour won France's math Olympiad. They bonded over their work ethic in an MIT computer science class.

Lopes Lara had the idea for Kalshi while interning at a New York hedge fund. When the traders around her weren't working, she noticed they were betting on the news: Would Apple hit a trillion dollars? Kylie Jenner? "It was anything," she says.

Are mortgage rates going up? Yes or no?

Mansour saw the business potential when Lopes Lara suggested it. He interned at Goldman Sachs Group Inc., helping investors prepare for the UK leaving the EU. Goldman sold clients complex stock-and-derivative combinations. As he discussed it with Lopes Lara, they agreed that investors should hedge their risk by betting on Brexit itself rather than an imperfect proxy.

Lopes Lara and Mansour hypothesized how a marketplace might work. They settled on a "event contract," a binary-outcome instrument like "Will inflation hit 5% by the end of the month?" The contract would settle at $1 (if the event happened) or zero (if it didn't), but its price would fluctuate based on market sentiment. After a good debate, a politician's election odds may rise from 50 to 55. Kalshi would charge a commission on every trade and sell data to traders, political campaigns, businesses, and others.

In October 2018, five months after graduation, the pair flew to California to compete in a hackathon for wannabe tech founders organized by the Silicon Valley incubator Y Combinator. They built a website in a day and a night and presented it to entrepreneurs the next day. Their prototype barely worked, but they won a three-month mentorship program and $150,000. Michael Seibel, managing director of Y Combinator, said of their idea, "I had to take a chance!"

Will there be another moon landing by 2025?

Seibel's skepticism was rooted in America's historical wariness of gambling. Roulette, poker, and other online casino games are largely illegal, and sports betting was only legal in a few states until May 2018. Kalshi as a risk-hedging platform rather than a bookmaker seemed like a good idea, but convincing the CFTC wouldn't be easy. In 2012, the CFTC said trading on politics had no "economic purpose" and was "contrary to the public interest."

Lopes Lara and Mansour cold-called 60 Googled lawyers during their time at Y Combinator. Everyone advised quitting. Mansour recalls the pain. Jeff Bandman, a former CFTC official, helped them navigate the agency and its characters.

When they weren’t busy trying to recruit lawyers, Lopes Lara and Mansour were meeting early-stage investors. Alfred Lin of Sequoia Capital Operations LLC backed Airbnb, DoorDash, and Uber Technologies. Lin told the founders their idea could capitalize on retail trading and challenge how the financial world manages risk. "Come back with regulatory approval," he said.

In the US, even small bets on most events were once illegal. Under the Commodity Exchange Act, the CFTC can stop exchanges from listing contracts relating to "terrorism, assassination, war" and "gaming" if they are "contrary to the public interest," which was often the case.

Will subway ridership return to normal? Yes or no?

In 1988, as academic interest in the field grew, the agency allowed the University of Iowa to set up a prediction market for research purposes, as long as it didn't make a profit or advertise and limited bets to $500. PredictIt, the biggest and best-known political betting platform in the US, also got an exemption thanks to an association with Victoria University of Wellington in New Zealand. Today, it's a sprawling marketplace with its own subculture and lingo. PredictIt users call it "Rules Cuck Panther" when they lose on a technicality. Major news outlets cite PredictIt's odds on Discord and the Star Spangled Gamblers podcast.

CFTC limits PredictIt bets to $850. To keep traders happy, PredictIt will often run multiple variations of the same question, listing separate contracts for two dozen Democratic primary candidates, for example. A trader could have more than $10,000 riding on a single outcome. Some of the site's traders are current or former campaign staffers who can answer questions like "How many tweets will Donald Trump post from Nov. 20 to 27?" and "When will Anthony Scaramucci's role as White House communications director end?"

According to PredictIt co-founder John Phillips, politicians help explain the site's accuracy. "Prediction markets work well and are accurate because they attract people with superior information," he said in a 2016 podcast. “In the financial stock market, it’s called inside information.”

Will Build Back Better pass? Yes or no?

Trading on nonpublic information is illegal outside of academia, which presented a dilemma for Lopes Lara and Mansour. Kalshi's forecasts needed to be accurate. Kalshi must eliminate insider trading as a regulated entity. Lopes Lara and Mansour wanted to build a high-stakes PredictIt without the anarchy or blurred legal lines—a "New York Stock Exchange for Events." First, they had to convince regulators event trading was safe.

When Lopes Lara and Mansour approached the CFTC in the spring of 2019, some officials in the Division of Market Oversight were skeptical, according to interviews with people involved in the process. For all Kalshi's talk of revolutionizing finance, this was just a turbocharged version of something that had been rejected before.

The DMO couldn't see the big picture. The staff review was supposed to ensure Kalshi could complete a checklist, "23 Core Principles of a Designated Contract Market," which included keeping good records and having enough money. The five commissioners decide. With Trump as president, three of them were ideologically pro-market.

Lopes Lara, Mansour, and their lawyer Bandman, an ex-CFTC official, answered the DMO's questions while lobbying the commissioners on Zoom about the potential of event markets to mitigate risks and make better decisions. Before each meeting, they would write a script and memorize it word for word.

Will student debt be forgiven? Yes or no?

Several prediction markets that hadn't sought regulatory approval bolstered Kalshi's case. Polymarket let customers bet hundreds of thousands of dollars anonymously using cryptocurrencies, making it hard to track. Augur, which facilitates private wagers between parties using blockchain, couldn't regulate bets and hadn't stopped users from betting on assassinations. Kalshi, by comparison, argued it was doing everything right. (The CFTC fined Polymarket $1.4 million for operating an unlicensed exchange in January 2022. Polymarket says it's now compliant and excited to pioneer smart contract-based financial solutions with regulators.

Kalshi was approved unanimously despite some DMO members' concerns about event contracts' riskiness. "Once they check all the boxes, they're in," says a CFTC insider.

Three months after CFTC approval, Kalshi announced funding from Sequoia, Charles Schwab, and Henry Kravis. Sequoia's Lin, who joined the board, said Tarek, Luana, and team created a new way to invest and engage with the world.

The CFTC hadn't asked what markets the exchange planned to run since. After approval, Lopes Lara and Mansour had the momentum. Kalshi's March list of 30 proposed contracts caused chaos at the DMO. The division handles exchanges that create two or three new markets a year. Kalshi’s business model called for new ones practically every day.

Uncontroversial proposals included weather and GDP questions. Others, on the initial list and later, were concerning. DMO officials feared Covid-19 contracts amounted to gambling on human suffering, which is why war and terrorism markets are banned. (Similar logic doomed ex-admiral John Poindexter's Policy Analysis Market, a Bush-era plan to uncover intelligence by having security analysts bet on Middle East events.) Regulators didn't see how predicting the Grammy winners was different from betting on the Patriots to win the Super Bowl. Who, other than John Legend, would need to hedge the best R&B album winner?

Event contracts raised new questions for the DMO's product review team. Regulators could block gaming contracts that weren't in the public interest under the Commodity Exchange Act, but no one had defined gaming. It was unclear whether the CFTC had a right or an obligation to consider whether a contract was in the public interest. How was it to determine public interest? Another person familiar with the CFTC review says, "It was a mess." The agency didn't comment.

CFTC staff feared some event contracts could be cheated. Kalshi wanted to run a bee-endangerment market. The DMO pushed back, saying it saw two problems symptomatic of the asset class: traders could press government officials for information, and officials could delay adding the insects to the list to cash in.

The idea that traders might manipulate prediction markets wasn't paranoid. In 2013, academics David Rothschild and Rajiv Sethi found that an unidentified party lost $7 million buying Mitt Romney contracts on Intrade, a now-defunct, unlicensed Irish platform, in the runup to the 2012 election. The authors speculated that the trader, whom they dubbed the “Romney Whale,” may have been looking to boost morale and keep donations coming in.

Kalshi said manipulation and insider trading are risks for any market. It built a surveillance system and said it would hire a team to monitor it. "People trade on events all the time—they just use options and other instruments. This brings everything into the open, Mansour says. Kalshi didn't include election contracts, a red line for CFTC Democrats.

Lopes Lara and Mansour were ready to launch kalshi.com that summer, but the DMO blocked them. Product reviewers were frustrated by spending half their time on an exchange that represented a tiny portion of the derivatives market. Lopes Lara and Mansour pressed politically appointed commissioners during the impasse.

Tarbert, the chairman, had moved on, but Kalshi found a new supporter in Republican Brian Quintenz, a crypto-loving former hedge fund manager. He was unmoved by the DMO's concerns, arguing that speculation on Kalshi's proposed events was desirable and the agency had no legal standing to prevent it. He supported a failed bid to allow NFL futures earlier this year. Others on the commission were cautious but supportive. Given the law's ambiguity, they worried they'd be on shaky ground if Kalshi sued if they blocked a contract. Without a permanent chairman, the agency lacked leadership.

To block a contract, DMO staff needed a majority of commissioners' support, which they didn't have in all but a few cases. "We didn't have the votes," a reviewer says, paraphrasing Hamilton. By the second half of 2021, new contract requests were arriving almost daily at the DMO, and the demoralized and overrun division eventually accepted defeat and stopped fighting back. By the end of the year, three senior DMO officials had left the agency, making it easier for Kalshi to list its contracts unimpeded.

Today, Kalshi is growing. 32 employees work in a SoHo office with big windows and exposed brick. Quintenz, who left the CFTC 10 months after Kalshi was approved, is on its board. He joined because he was interested in the market's hedging and risk management opportunities.

Mid-May, the company's website had 75 markets, such as "Will Q4 GDP be negative?" Will NASA land on the moon by 2025? The exchange recently reached 2 million weekly contracts, a jump from where it started but still a small number compared to other futures exchanges. Early adopters are PredictIt and Polymarket fans. Bets on the site are currently capped at $25,000, but Kalshi hopes to increase that to $100,000 and beyond.

With the regulatory drawbridge down, Lopes Lara and Mansour must move quickly. Chicago's CME Group Inc. plans to offer index-linked event contracts. Kalshi will release a smartphone app to attract customers. After that, it hopes to partner with a big brokerage. Sequoia is a major investor in Robinhood Markets Inc. Robinhood users could have access to Kalshi so that after buying GameStop Corp. shares, they'd be prompted to bet on the Oscars or the next Fed commissioner.

Some, like Illinois Democrat Sean Casten, accuse Robinhood and its competitors of gamifying trading to encourage addiction, but Kalshi doesn't seem worried. Mansour says Kalshi's customers can't bet more than they've deposited, making debt difficult. Eventually, he may introduce leveraged bets.

Tension over event contracts recalls another CFTC episode. Brooksley Born proposed regulating the financial derivatives market in 1994. Alan Greenspan and others in the government opposed her, saying it would stifle innovation and push capital overseas. Unrestrained, derivatives grew into a trillion-dollar industry until 2008, when they sparked the financial crisis.

Today, with a midterm election looming, it seems reasonable to ask whether Kalshi plans to get involved. Elections have historically been the biggest draw in prediction markets, with 125 million shares traded on PredictIt for 2020. “We can’t discuss specifics,” Mansour says. “All I can say is, you know, we’re always working on expanding the universe of things that people can trade on.”

Any election contracts would need CFTC approval, which may be difficult with three Democratic commissioners. A Republican president would change the equation.

Antonio Neto

Antonio Neto

3 years ago

What's up with tech?

Massive Layoffs, record low VC investment, debate over crash... why is it happening and what’s the endgame?

This article generalizes a diverse industry. For objectivity, specific tech company challenges like growing competition within named segments won't be considered. Please comment on the posts.

According to Layoffs.fyi, nearly 120.000 people have been fired from startups since March 2020. More than 700 startups have fired 1% to 100% of their workforce. "The tech market is crashing"

Venture capital investment dropped 19% QoQ in the first four months of 2022, a 2018 low. Since January 2022, Nasdaq has dropped 27%. Some believe the tech market is collapsing.

It's bad, but nothing has crashed yet. We're about to get super technical, so buckle up!

I've written a follow-up article about what's next. For a more optimistic view of the crisis' aftermath, see: Tech Diaspora and Silicon Valley crisis

What happened?

Insanity reigned. Last decade, everyone became a unicorn. Seed investments can be made without a product or team. While the "real world" economy suffered from the pandemic for three years, tech companies enjoyed the "new normal."

COVID sped up technology adoption on several fronts, but this "new normal" wasn't so new after many restrictions were lifted. Worse, it lived with disrupted logistics chains, high oil prices, and WW3. The consumer market has felt the industry's boom for almost 3 years. Inflation, unemployment, mental distress...what looked like a fast economic recovery now looks like unfulfilled promises.

People rethink everything they eat. Paying a Netflix subscription instead of buying beef is moronic if you can watch it for free on your cousin’s account. No matter how great your real estate app's UI is, buying a house can wait until mortgage rates drop. PLGProduct Led Growth (PLG) isn't the go-to strategy when consumers have more basic expense priorities.

Exponential growth and investment

Until recently, tech companies believed that non-exponential revenue growth was fatal. Exponential growth entails doing more with less. From Salim Ismail words:

An Exponential Organization (ExO) has 10x the impact of its peers.

Many tech companies' theories are far from reality.

Investors have funded (sometimes non-exponential) growth. Scale-driven companies throw people at problems until they're solved. Need an entire closing team because you’ve just bought a TV prime time add? Sure. Want gold-weight engineers to colorize buttons? Why not?

Tech companies don't need cash flow to do it; they can just show revenue growth and get funding. Even though it's hard to get funding, this was the market's momentum until recently.

The graph at the beginning of this section shows how industry heavyweights burned money until 2020, despite being far from their market-share seed stage. Being big and being sturdy are different things, and a lot of the tech startups out there are paper tigers. Without investor money, they have no foundation.

A little bit about interest rates

Inflation-driven high interest rates are said to be causing tough times. Investors would rather leave money in the bank than spend it (I myself said it some days ago). It’s not wrong, but it’s also not that simple.

The USA central bank (FED) is a good proxy of global economics. Dollar treasury bonds are the safest investment in the world. Buying U.S. debt, the only country that can print dollars, guarantees payment.

The graph above shows that FED interest rates are low and 10+ year bond yields are near 2018 levels. Nobody was firing at 2018. What’s with that then?

Full explanation is too technical for this article, so I'll just summarize: Bond yields rise due to lack of demand or market expectations of longer-lasting inflation. Safe assets aren't a "easy money" tactic for investors. If that were true, we'd have seen the current scenario before.

Long-term investors are protecting their capital from inflation.

Not a crash, a landing

I bombarded you with info... Let's review:

  • Consumption is down, hurting revenue.

  • Tech companies of all ages have been hiring to grow revenue at the expense of profit.

  • Investors expect inflation to last longer, reducing future investment gains.

Inflation puts pressure on a wheel that was rolling full speed not long ago. Investment spurs hiring, growth, and more investment. Worried investors and consumers reduce the cycle, and hiring follows.

Long-term investors back startups. When the invested company goes public or is sold, it's ok to burn money. What happens when the payoff gets further away? What if all that money sinks? Investors want immediate returns.

Why isn't the market crashing? Technology is not losing capital. It’s expecting change. The market realizes it threw moderation out the window and is reversing course. Profitability is back on the menu.

People solve problems and make money, but they also cost money. Huge cost for the tech industry. Engineers, Product Managers, and Designers earn up to 100% more than similar roles. Businesses must be careful about who they keep and in what positions to avoid wasting money.

What the future holds

From here on, it's all speculation. I found many great articles while researching this piece. Some are cited, others aren't (like this and this). We're in an adjustment period that may or may not last long.

Big companies aren't laying off many workers. Netflix firing 100 people makes headlines, but it's only 1% of their workforce. The biggest seem to prefer not hiring over firing.

Smaller startups beyond the seeding stage may be hardest hit. Without structure or product maturity, many will die.

I expect layoffs to continue for some time, even at Meta or Amazon. I don't see any industry names falling like they did during the .com crisis, but the market will shrink.

If you are currently employed, think twice before moving out and where to.
If you've been fired, hurry, there are still many opportunities.
If you're considering a tech career, wait.
If you're starting a business, I respect you. Good luck.