What the Binance bailout of Axie Infinity means for crypto’s future

The company behind Axie Infinity, a popular crypto play-to-earn game, raised $150 million in funding this week to help reimburse users who lost funds worth about $625 million in a hack last week. Axie Infinity’s creator, Vietnamese gaming studio Sky Mavis, had garnered wide acclaim for building the most-played NFT game of all time, with 2.2 million monthly active players, according to the company.

What’s interesting about this funding round is that it was led by crypto exchange Binance — the highest-volume exchange globally — although Binance hadn’t participated in Sky Mavis’ prior raises. More on that later, but first, some context.

Existing Sky Mavis investors, including Andreessen Horowitz, Paradigm and Accel, joined Binance in this round to help bail out Axie, but once news of the hack broke, their involvement was all but expected. Those investors already had a financial stake in the game’s success, particularly a16z, which led the company’s $152 million Series B round last October. Sky Mavis earned a nearly $3 billion valuation during that round, signifying quite a bit of fanfare for a company that had raised a total of just $7.5 million five months prior.

The hack, which took place on Axie’s Ethereum-based sidechain, Ronin, marks the largest known crypto heist to date. It was a bad look not only for Sky Mavis, but also for investors like a16z that had hyped Axie as the future of crypto. It begins to look even worse when you consider the demographics of Axie players overall — over 25% are unbanked, the company said, and many are low-income workers in developing countries who rely on Axie for a significant portion of their income.

It took six days before Sky Mavis or any of its investors discovered the hack had occurred, which infuriated a lot of people, and once the company found out, it immediately scrambled for solutions. While Sky Mavis announced it was working with law enforcement to investigate the situation, it’s very rare for funds to be recovered after a crypto hack, let alone returned to users. The search process is just too complex, given that there’s no information about the hacker readily available besides the wallet address they used to transfer funds out of Axie.

It’s worth noting that the majority of the funds are still sitting in the hacker’s wallet, although the hacker did appear to move some 2,000 ETH out of the wallet to privacy tool Tornado Cash, which allows users to mask their wallet address while withdrawing funds.

So if Sky Mavis couldn’t track down the hacker and recover the funds that way, it had to think of other ways to make up the shortfall or risk the reputational hit of letting its users take a huge financial loss that stemmed from the company’s own security weaknesses.

Fortunately, Sky Mavis seems to have enjoyed substantial revenue of late, at $1.3 billion in the 12 months ended February 2022, Bloomberg reported. And Axie Infinity itself has a “community treasury” worth $1.6 billion, another potential pool from which it could draw funds for reimbursement, though it opted against this option likely because it would have required a logistically onerous communitywide vote to get approved.

It makes sense, then, why the company’s investors had to step in to help. The $150 million bailout check, though, only covers a fraction of the approximately $625 million stolen, so the rest is coming out of Sky Mavis’ own cash reserves, it said. Sky Mavis plans to reimburse all the users who lost money in the attack, according to its announcement yesterday.

Binance leading the bailout is good news for Sky Mavis’ existing investors, who likely didn’t have to put up as much money as they otherwise would have to rescue their investment. So why did Binance step in to rescue a startup it hadn’t put any money into previously?

One obvious answer could lie in the fact that Axie’s success is seen as critical to the success of crypto overall — it’s one of the highest-profile companies in the space and has made some lofty promises about bringing opportunity to low-income folks in developing countries. Binance, in some ways, is helping save the reputation of the entire ecosystem by helping Sky Mavis make its users whole again. Valuation also may have played a role. After the staggering $3 billion valuation the company earned in its last round, it’s possible its valuation fell with this rescue financing, though it did not disclose any changes. Maybe Binance saw a rare opportunity to get into the company, which it believes has strong growth potential, at a cheap price.

Notably, though, Binance also had skin in the game — Axie, that is. It was the first major crypto exchange to directly integrate with the game to offer Axie’s AXS token to investors. Its Binance Launchpad platform helped Axie sell tokens and market its fundraise in October 2020, as Binance CEO Changpeng Zhao noted in his statement about the funding round. In comparison, Coinbase didn’t begin offering AXS on its platform until nearly a year later, and FTX did so as late as this January.

Because of their prior partnerships, Binance and Axie were already associated with one another in the public eye, and the investment today marks a more proactive effort from Binance to get ahead of any fallout — reputational or otherwise — from the hack.

In conjunction with the investment, the exchange also announced plans to deepen its strategic relationship with Sky Mavis going forward. Binance plans to work with the company on “exclusive land sales” and build a function that would allow users to log in to Binance directly through Sky Mavis’ game distribution platform, The Mavis Hub.

“We strongly believe Sky Mavis will bring a lot of value and growth for the larger industry and we believe it’s necessary to support them as they work hard to resolve the recent incident,” Zhao’s statement said.

Interestingly, the game has actually been losing users since last November, just after Sky Mavis’ Series B, according to Bloomberg. Axie’s daily active user count had fallen by 45% from its November peak as of March 28, the day before the hack was discovered (though more recent data is not available at this point).

Although Sky Mavis has now announced its plan to manage the aftermath of the hack, it will continue to face heightened scrutiny over its every move, as some public trust in the company has inevitably been eroded. The stakes are high for both the users who place their funds, and faith, in play-to-earn games, and for the crypto industry overall.

After all, Axie has been widely touted by crypto bulls (and VCs) as a case study of crypto’s potential to provide financial opportunity to underbanked or marginalized populations.

Today’s investment showcases, if anything, how important Axie’s precedent is to the development of the broader ecosystem — and how willing VCs and crypto incumbents are to bend over backward to make sure it succeeds.