Who hurts most in $800 million Axie crypto heist? ‘Not the venture capitalists’

NEW YORK (BLOOMBERG) – After learning that hackers had made off with an eye-popping US$600 million (S$814 million) from a software system tied to their beloved Axie Infinity video game, players reacted with shock and disbelief – and for the most part, kept on playing.

In the Philippines and Vietnam, users took to Twitter and Facebook to air everything from complaints about cryptocurrencies frozen in their wallets to conspiracy theories.

“I feel sad this happened,” Axie player Joni Watanabe said on Twitter on March 30, the day after the hack was announced. He added an admonishment to Axie’s operator about using proper security protocols, joining a chorus of crypto gamers clamouring for an explanation of how this could happen – and demanding that it be fixed.

While players can still steer their blob-like Axie creatures around the game’s virtual world of Lunacia in search of Smooth Love Potion (SLP) and Axie (AXS) tokens, one crucial aspect is now missing: The ability to move some crypto earned in the game out of the virtual world and into other digital currencies or fiat, and vice versa.

That is because the hackers targeted software known as a “bridge”, penetrating its security protocols and making off with a huge haul of Ether as well as USDC stablecoins.

That software, called the Ronin Bridge, was designed to allow Axie Infinity users to swap their AXS and SLP into Ether or USDC, an intermediary step to converting them to cash. It is attached to the Ronin Network, the blockchain Axie Infinity runs on.

Activity on the Ronin Bridge has been paused while its operators investigate the incident and try to plug any security holes, though access to AXS and SLP withdrawals via crypto exchange Binance came back online Saturday.

Sky Mavis, Axie Infinity’s owner, says it plans to make whole those players who lost funds in the heist, but has yet to provide further details on how.

A recent exploit on the Wormhole bridge, which transfers tokens between Ethereum and Solana, was resolved when its sponsor Jump Trading replaced roughly US$300 million in stolen Ether.

“The easiest way to look at this is like the bridge is the bank for the Ronin Network,” Mr Aleksander Leonard Larsen, chief operating officer of Sky Mavis, said Thursday by text message. “The heist that happened took out all the ETH and USDC. So the ETH/USDC on Ronin Network is not currently backed by anything. But we are looking at other options.”

While Sky Mavis has not said whether the hack has caused an exodus of players from Axie Infinity, blockchain data compiled by DappRadar as of early evening Friday New York time showed a roughly 34 per cent plunge in the volume of trading on the Axie Marketplace in the previous 24 hours and a 24 per cent drop during the prior seven days.

However, that does not necessarily mean game playing is down, because you can still play Axie Infinity without registering transactions on the blockchain, which is what DappRadar monitors, said Mr Pedro Herrera, a senior data analyst at the firm.

Trapped money is a big deal in markets such as the Philippines and Vietnam, low-wage countries where gamers have come to rely on Axie Infinity to pad their incomes. In the Philippines, by far the largest market for Axie Infinity, its popularity has been such that the authorities last year saw fit to remind gamers that profits from playing are subject to tax, local media reported.

A Dec 10 post on Axie Infinity’s blog, “The Lunacian”, showed the number of daily active users had jumped to around 2.5 million, an increase of roughly 1 million from three months before. The Philippines accounts for about 40 per cent of active players, according to two different third-party websites that track gaming usage.

The carbon footprint from mining Bitcoin and many other – though not all – digital currencies means crypto as a whole typically is not associated with the “E” in ESG – short for environmental, social and governance. But proponents have argued that it easily meets the “S” in that it helps with cheap and instant cross-border transfers in developing countries, or in the case of Axie Infinity, offers the promise of financial gains to those in poverty.