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I'm guessing the cable has an esp8266 on board which you can get cheaply and is only a few mm2. It has WiFi and WiFi direct support and is powerful enough to run a webserver. Probably there are plenty chips that do the job, but the esp8266 (and its successor esp32) is very popular for custom hardware due to being cheap and easy to program

https://theamphour.com/the-amp-hour-454-mike-grover/ goes into the tradeoffs and techniques required to get the board so thin

How would the board in the cable know what WiFi to connect to, and how would it run shell commands via USB?

If you know the wifi environment of your intended victim, you could pre-configure it with the network in question.

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