NFT gaming is a lot less fun than you think. Normally, a company losing over $600 million would be a big story. Yet when I looked into the Ronin Network attack to understand how all this happened, I uncovered something far bigger. I found out that NFT gaming isn’t the fun hobby you think it is. There are some dark secrets at the heart of this industry that take us on a trail from Vietnam to Venezuela, the Philippines, and beyond.
How bad can an industry be when losing $600 million isn’t a big deal? This hack showed me this industry has some real injustices. The same that we see in the real world. NFTs are non-fungible tokens and digital certificates of ownership. You might have seen stories about NFTs being sold for millions of dollars. Or maybe you’ve seen their creative uses in the gaming world, where you can theoretically play to earn a living.
When I saw the heading about an NFT hack worth $600 million, I realized this subject has to be investigated. I had questions. First of all, how exactly do you lose $600 million? Picture an evil genius sneaking their way into a server room, plugging in while fiercely typing away, and finally getting access and sneaking out. It turns out it wasn’t that hard.
The hack happened when millions of crypto tokens were taken out of the network on March 23rd. This added up to over $625 million but the fraud wasn’t spotted until six days later when a user tried to make a withdrawal. It’s the biggest crypto hack in history. Millions of people were impacted.
So how does this happen?
The answer is Bridges, but not the type that you drive over. Not even the type that a dentist shoves into your mouth. Instead, this is the type that lets hackers barge their way into an NFT network. The Ronin network acts as a bridge between Axie Infinity and the Ethereum network. It’s a road built to reduce transaction costs within Axie Infinity.
Axie Infinity is this Pokemon-type game where you breed these cute little digital monsters to love and trust you before ruthlessly leading them into battle to earn you money. Capitalism. These monsters can be worth a surprising amount of money as they grow up. Axie Infinity had revenue of $1.3 billion in the last twelve months and has seen sales as high as a million dollars for two mystic axies.
There’s a lot of money flowing through this game, but how do people get money in and out? This happens through Ethereum, which is a huge global network powered by the second-largest cryptocurrency, Ether. And this is where the bridge comes in.
Imagine you have cash on one side and Axie monsters jumping up and down on the other. A popular way to convert from cash to axies would be to go from cash to Ethereum, cross the Ronin Bridge before finally converting to axies. Sounds like a great solution. Porting over and saving a ton of transaction fees by taking the extra step, is wrong and you don’t have to take my word for it, Vitalik Buterin said the same thing, and he knows a little bit about Ethereum.
In a Reddit post, Vitalik said that bridges are insecure. And further, he stated that tokens should be kept on the same blockchain rather than being moved across chains the way the Ronin network does it. So bridges currently have vulnerabilities that need attention, but at least the network was as secure as possible, right? Wrong again.
Although the bridge has some weak points, the network could have avoided this massive fraud, and that’s because of something called validator nodes. A set of validator nodes is needed to confirm transactions on a blockchain. Think of them like a bouncer outside of a blockchain-based bar. They check credentials and decide if you get to transact with them inside or not.
This typically works, but the problem is, that the Ronin network only has nine of these bouncers to process millions of dollars in transactions. And to make that worse, a bad guy only needs to trick five of the bouncers to get in. So they did, snatched the five validator keys, got in the bar, grabbed the cash, and ran off with the GDP of Tonga plus stuff.
So who’s to blame for these errors?
The validators, the game founders, a little bit of everyone? See the same company. Sky Mavis is behind both Axie Infinity and the Ronin Network. Their farm has been ransacked, the stable door is swinging off its hinges, and the horse has had time to bolt to the other side of the world.
In response, Sky Mavis has decided to increase the number of validator nodes that they use. Nine obviously wasn’t enough. They’ve also launched a funding campaign where the Crypto Exchange Binance has helped them raise $150 million to reimburse affected players. But more than $600 million has disappeared, meaning the rest of the money will come directly from their balance sheet.
Compounding yet another problem, the game was losing players even before this hack, leading to worries that the massive expense will collapse the game’s economy if more new players aren’t found. This is bad, but the worst is still yet to come.
See, I began wondering who exactly was hurt most by this hack, except, of course, their balance sheet, which was so heavily invested in NFT gaming that they could suffer terrible financial losses due to weak bridges and lack of validators. I mean, all this money belongs to real people. Would it be crypto millionaires safely tucked away in their layers or fun-loving gamers who play mostly for fun and happen to earn some money on the side? It turned out to be a completely different set of people than I expected.
I discovered that many gamers don’t actually like the idea of NFT games, but that doesn’t make sense. You can get paid to play a game. And what’s not to like for gamers? Well, the story of a young Canadian gamer really opened my eyes. Here he was way into the S.T.A.L.K.E.R video game, used to battling and looking for hidden enemies around Chornobyl’s ghostly exclusion zone.
Christian decided to protest when the game developer said that they would include NFTs in S.T.A.L.K.E.R. 2, the sequel to his favorite game. And he wasn’t alone. Thousands of gamers rallied together online in the safety of their bedrooms but rallied together nevertheless to complain that the developer just wanted to make more money rather than improve the gaming experience.
This is a common complaint from gamers, and a big reason why so many of them hate NFTs, and in this case, the developers listen. They eventually bowed to player pressure and said they wouldn’t be using NFTs in the sequel. Stories like this are becoming more and more frequent, and it has an interesting consequence.
The MetaWorms NFT project was also abandoned after similar protests, and players reacted furiously to Ghost Recon in response to developers wanting to use in-game NFTs. Again and again, we’re seeing this, but it wouldn’t be fair to say that all gamers hate NFTs with the same passion they reserved for bugs, spoilers, or cutaway scenes that can’t be skipped.
Yet the overwhelming feeling is that the majority of them don’t want to use these tokens. Hold on a minute though. If most gamers don’t want to use NFTs, how do we explain $600 million piling up and then being hacked from Axie Infinity players? Who plays the game anyway? The key, in this case, is that Axie Infinity is labeled as a play-to-earn game.
It’s not really aimed at hardcore gamers, rather people who want to make money online look at it more like a job than leisure. At one point, almost half of all Axie users were from the Philippines. Most players are from countries with a lower cost of living, and this does something interesting. It gives them a chance to actually cover their bills while playing a game, which sounds great, but there’s a problem with how the game’s economic model is built.
People have called it a pyramid scheme or a Ponzi scheme, or simply unsustainable. The problem is that new players need to pay for their first three monsters to start playing the game, and that price can be quite high anywhere between $150 to $1,000 just to get started. This isn’t the greatest business model, because the people who need to grind through a monster battling game to scrape together a living are exactly the same people who can’t afford to pay $1,000 to get started.
So what do they do? They work for someone else who can give them their first monsters. That person then gets a cut of up to 75% of their earnings. Some companies have hundreds of players on their teams. These entry-level players are known as scholars, and the Pay it Forward Guild model shows us exactly how this works.
They pay over 30 scholars to grind through Axie Infinity and other NFT games. The rewards are generally pretty small and the company has been called out in the past for firing people who don’t play enough hours. This is a bit conflicting. On the one hand, this could be seen as a cheaper way to get into an NFT game, see if it makes sense for you and you don’t have that big upfront investment.
On the other hand, this could be considered a new kind of digital surf dumb, where players need to spend hours building up their monsters and earning points every day, mainly for the benefit of their managers. The majority of people play the game to earn, not necessarily because it’s fun and it’s certainly not the worst job in the world. But having players in developing countries grinding away in a game probably isn’t most people’s idea of the perfect Metaverse.
Tim Morten is the CEO of Frost Giant Studios and he said that having people in third world countries grinding through games like this sounds a bit dystopian. Others feel that this is just the beginning of a very exciting space and needs time to develop. I was heartened by some of the stories from Argentina, where the chance to earn money has encouraged people who have been battered by 50% plus inflation.
However, those who have plans for making a great living from NFTs tend to be further up on the food chain. This is the case for Argentinian digital artist Barbi and NFT trader Pablo. Barbi sees the opportunity to monetize her original work rather than simply gaining likes on social media for it so she can reach a global audience with the chance of earning top dollar from her art.
Pablo spends about 10 hours a day trading NFTs, trying to buy and sell them for profit, all in a country where the unemployment rate has been sitting at over 11%. Barbi and Pablo are among those who have spotted NFTs as an alternative way to try and prosper using their skills. Yet the gamers who grind out a living on Axie Infinity don’t have the same opportunities, then compound this with the risk of hackers stealing the money they’ve spent countless hours patiently building up.
These are the people who are actually impacted by the Ronin hack. The people hurt most. NFTs have some exciting possibilities and could help us spring into a truly exciting Metaverse, one where people will have the opportunity to live and earn from home if they choose to. But let’s not make the Metaverse a virtual version of an unbalanced world.
The Ronin Network hack showed me a few things. It really struck me how new this technology is and when the risks are highlighted we must take them to heart and I don’t believe that we’ll see a day where every single game is play-to-earn. Economics just simply doesn’t work that way.
If a game is fun and earns you good money that opportunity will naturally decrease over time as more people learn about it and eventually do it. Supply and demand mean most jobs and gaming will be just that – jobs, unfortunately. But this isn’t to say that money can’t be made. In my research, I found a few ways you can truly profit. You can attempt to get in on a game before it gets big. This means getting in for a lower price and benefiting from massive increases in price later.
The biggest moneymakers on Axie Infinity were the first people to join. This, of course, is easier said than done, and not every small game will become popular so it’s tough. This is why we need to think outside the box. Really, is it super profitable for you to follow a system that’s prebuilt for you?
And here’s what I mean. If someone builds a system for you to follow step by step to make money, your income will always be limited because the system builder will take their cut and you have supply and demand. The system builder knows that they only need to pay so much to get people to do the job and that’s why you’ll never see Uber drivers making $2,000 an hour because someone else will obviously do it for $1,000 an hour or $100 an hour or $20 an hour or $15 whatever that balance might be.
People will do it for cheaper until they hit that balance. And because of this, you need to think outside of pre-built systems. How can you create something yourself to sell to the marketplace dictating your own prices? Maybe you become an expert in artwork or building guides or build developer tools or create content around the game. It’s not easy but through the nature of it not being easy. Fewer people are doing it and that’s where the opportunity is. So be creative and be safe.