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HEALTH, WEALTH, AND HAPPINESS

March 30, 2022

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Axie Tokens Reeling After Hack (Decrypt): Everyone -- including Alexandre Lores in his column below -- is talking about the hack of the popular play-to-earn crypto game Axie Infinity.

Hackers broke into the Ronin sidechain, which is the bridge connecting the crypto game to the Ethereum network, and made off with a lot of money. The AXS token also dropped as a result.

Investor takeaway: If you're wondering whether it's a good time to buy AXS, our numbers show that the game has been on the decline for months. Check out the chart below.

Here's a chart of the AXS token price (blue line) with the daily revenue earned by the protocol (green bars):

Courtesy Token Terminal

After a flurry of excitement last summer, the protocol revenue has tapered off to comparatively low levels. This is hardly a surprise, given the volatile nature of the gaming industry: one day you're hot, the next day you're not.

Investor takeaway: If you're still thinking about investing in AXS (or the in-game Axies), think twice.

Hacked!

Yesterday, Axie Infinity creator Sky Mavis announced that its Ronin Network, an Ethereum sidechain, had suffered a hack. 

In total, the hacker (or hackers) ran away with Ether and USD Coin worth between roughly $590 million and $625 million, depending on when the value of the stolen Ether was calculated. 

Chainalysis, which has been tracking the funds associated with this hack, described this event as "the largest-ever DeFi exploit." 

What's even more interesting is that the hack actually occurred on March 23, and it only came to the attention of the project after a user withdrew 173,600 ETH on March 29.

Axie Infinity has been a very popular crypto game over the past two years, and according to CoinMarketCap, the Axie Infinity digital currency has one of the largest market capitalizations of the GameFi tokens. The digital asset had fallen around 6.5% in the past 24 hours at the time of this writing. 

The Ronin Network's official announcement also mentioned that:

• They are working with various entities, including Chainalysis, law enforcement organizations and their investors to address the matter so that affected parties either get their funds back or are compensated for their losses. 

• All Ronin, Axie Infinity and Smooth Love Potion tokens that are still on Ronin are not vulnerable. 

• The Ronin Bridge has been "paused" to ensure nefarious parties have no access to hack additional funds. 

• Katana DEX, which is tied to the Ronin Network, has been temporarily disabled.

• The majority of the hacked funds are still in the hacker’s wallet. 

How did it happen?

In addition to the report from Ronin Network, I found some helpful insights from an independent Ethereum researcher on Twitter known as smartcontracts.

Here are some key details that we know so far:

• Unlike other large hacks in crypto history, this particular incident was not a result of exploiting a smart contract fault or hacking an exchange. 

• The Ether and USD Coin were stolen from the Ronin bridge, an Ethereum sidechain.

• The Ronin bridge is known as a 5-of-9 validator bridge, meaning the funds are secured by a set of nine secret keys. Anyone who holds five of these has the ability to transfer the funds. 

• It appears that the hacker (or hackers) accessed five of these secret keys via a backdoor to the Ronin bridge node.

• Sky Mavis was running four out of the nine nodes. A fifth node, which was compromised, was being run by the Axie DAO.

• In other words, five of the private keys were hacked in a multikey security setup.

• The elephant in the room: the hacker (or hackers) simply hacked one or two centralized points of failure, including centralized company Sky Mavis, which controlled too much of the Ronin sidechain. From a security perspective, this is literally what a decentralized blockchain, like that of bitcoin, avoids. And the security protocols put in place by the Ronin Network were not enough.

• This also suggests that Ronin had minimal monitoring and alerting in place, since they failed to notice a significant drop in the bridge balance for six whole days.

So what does all this mean for the markets?

Investor's take

At best, the $625 million hack is a clear wake-up call that both the Ronin Network and the GameFi space as a whole have room to improve in the areas of security and decentralization. 

From a investment standpoint, a 6.5% drop isn't the end of the world. In fact, the Axie Infinity token was still up 19% over the past seven days at the time of this writing. The Smooth Love Potion token, which is also part of the Axie Infinity game, was down over 6% over the last 24 hours. The Ronin token, however, was down more than 25% as of this writing.

Depending on how well the Ronin Network handles its investigation and proposed security upgrades, this could either be a bump in the road or a disaster for the largest GameFi project by market cap, its affiliated blockchain, and Sky Mavis. 

While crypto hacks are not uncommon in this nascent space, if more hacks occur GameFi, it could signal danger.

Investors who are interested in decentralization and Web 3.0 should watch out for private companies that use the term "decentralized" for public relations purposes but do little besides creating an ERC-20 token and operating a centralized blockchain. 

This latest hack provides a stark reminder that risk and reward go hand and hand, and that doing your own research is crucial. I wrote a primer on this last year, which you can check out here. 

Sincerely,

Alexandre Lores

Market Analyst

Bitcoin Market Journal is a daily newsletter that makes you a better crypto investor. It is created by Evamarie Augustine, Charles Bovaird, Mati Greenspan, John Hargrave, and Alexandre Lores.

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