An image from Axie Infinity
Image: Axie Infinity

The Axie Infinity hack was an attack on the DAO structure

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Thursday: why NFT write-offs are taxing, nearly triples its valuation and Robinhood’s head of Crypto is leaving.

Off the chain

Now that we’re in high tax season, I asked Lindsey Choo to dig into the questions around NFT taxes. What she found was fascinating, and should give people pause before donating that Bored Ape to charity. Her reporting also laid out for me another regulatory gap. The IRS issued guidance on virtual currencies in 2014, but hasn’t updated that guidance as the crypto sector has evolved in a massive way. If President Biden is serious about a “whole-of-government” approach to crypto, that should include clear tax rules.

— Owen Thomas (email | twitter)

We've got to Axie some questions

The $625 million hack of the Ronin blockchain, on which the Axie Infinity game runs, raises some big questions for the hot new area of NFT gaming. The attack also highlights the swirling uncertainty around who really runs DAOs, which are increasingly a key component of Web3 companies and protocols. The answers will prove crucial to determining whether Web3 lives up to its promise. And incidents like this may provide regulators an excuse to sweep in.

Sidechains deserve some side-eye. A key reason why bitcoin and ether are popular is because they’re popular. That’s not a tautology: The more participants in a blockchain network, the more secure it is.

  • Ronin is a sidechain of Ethereum. Sidechains are attached to a main blockchain, and these smaller chains can offer lower costs and faster transactions. But they can sacrifice the security that comes with a larger network of transaction validators that provide more checks on transactions.
  • In its original description of security for Ronin, Axie Infinity said, “To help secure Ronin, we have recruited an all-star cast of partners from the traditional gaming, crypto, and nonfungible token space to serve as validators of our network.”
  • That didn’t work out in practice. The hacker got control of four Ronin validators being run by Sky Mavis and a third-party validator run by Axie DAO. Five of nine validator nodes are all that’s required to deposit or withdraw funds from the network.
  • As Axie Infinity’s popularity was exploding in November, Sky Mavis, the company behind Axie and Ronin, “requested help” from the Axie DAO due to “immense user load.” The DAO enabled Sky Mavis to verify a large portion of transactions. From that point on, Ronin wasn’t really decentralized.

Speed and usability were prioritized over security. But who’s responsible for that? The DAO or the company? And is there a meaningful distinction?

  • Sky Mavis is taking responsibility, which seems like an implicit admission of its outsized role in Ronin’s operation. It tells Bloomberg it intends to refund those victimized in the attack.
  • It’s unclear if the funds will come from Sky Mavis selling equity or tokens, or from Axie’s community treasury, which has $1.6 billion in tokens. Sky Mavis said it generated $1.3 billion in sales in the 12 months ending in February. It’s also raised $161 million from investors like a16z.
  • Sky Mavis has stated its plan is for Axie Infinity to evolve into a DAO by September 2023. Community members will be able to vote on matters like: “Should Axie Infinity Limited continue to pay Sky Mavis to develop Axie Infinity?” Right now, though, Axie is not close to being decentralized.

Regulators are watching. And they may not like what they see. Is this what SEC Chairman Gary Gensler meant when he talked about “a spill on Aisle 3”?

  • Regulators in the Philippines warned play-to-earn gamers in September that they might lose money and not be able to recover it.
  • In 2019, the SEC issued a “no-action” letter to Pocketful of Quarters, which offered a play-to-earn game with crypto tokens. But under Gensler, the SEC has struck a more aggressive tone in crypto enforcement.

Who’s playing, who’s earning? There are also more general questions about the sustainability of the play-to-earn model of gaming. In order for people to make money in play-to-earn, the money has to come from somewhere. For many games, that means constantly bringing in new players, which makes some wonder about the model’s sustainability. Play-to-earn games that depend on people playing for income or price speculation may not last, said Justin Kan, co-founder of Twitch. (He was speaking generally about play-to-earn, not Axie specifically.) “To me, those are short-term and not long-term durable ways of existing for these [games]. I don't think it's a stable equilibrium.”

— Tomio Geron (email | twitter)


The last two years have seen deep, significant changes to the world of work. The COVID-19 pandemic has shifted business leaders’ focus from maintaining their bottom line to the front line. Employee experience has become more important than ever to keep good workers happy – and to keep them within a business.

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On the money is worth $14 billion. The round was led by Lightspeed Venture Partners, and came just a year after investors valued the company at $5 billion. Protocol interviewed CEO Peter Smith in September.

Cross River Bank raised $620 million. The banking technology infrastructure company, whose clients include some of fintech’s big names, like Affirm, Coinbase and Wise, said the funding round was led by Eldridge and Andreessen Horowitz.

On Protocol: Apple reportedly plans to build its own payments processing and financial services technology, which would make it less reliant on fintech partners.

Fast is planning to cut hundreds of jobs. The checkout technology company’s CEO told potential investors that it plans to eliminate positions, according to The Information. Fast has raised $124 million from investors, including Stripe.

State securities regulators are cracking down on Voyager. Regulators in seven states issued orders to Voyager alleging that the crypto company was offering and selling securities in the form of unregistered “Earn Program” accounts.

The SEC is proposing new rules for SPACs. The new rules would heighten disclosure requirements that would bring standards closer to a traditional IPO, in an effort to offer more protections for investors. Many SPAC stocks have crashed after the acquired businesses didn’t meet optimistic projections outlined in investor documents.


The U.S. Treasury wants to reiterate its stance: Don’t try to help Russia. “What we want to make very clear to crypto exchanges, to financial institutions, to individuals, to anyone who may be in a position to help Russia take advantage and evade our sanctions: We will hold you accountable,” Deputy Secretary Wally Adeyemo said in an interview with CNBC.

Sen. Ted Cruz introduced companion legislation in the Senate for Rep. Tom Emmer’s bill prohibiting the Fed from issuing a CBDC. “This bill goes a long way in making sure big government doesn’t attempt to centralize and control cryptocurrency so that it can continue to thrive and prosper in the United States,” Cruz said in a press release.

Moves and hires

a16z hired Shari Doherty as a marketing partner on its crypto team. Doherty was formerly a director of Public Relations for Devices and Services at Amazon, a senior communications director at Uber and a global communications director at Google for Android and Google Play. The cool kids remember her from Danger Inc., though.

The SEC’s Division of Examinations is seeing some moves. Dan Kahl, acting director, is leaving the SEC after 21 years, and Richard Best will take his place. Best was formerly director of the New York Regional Office, which Lara Shalov Mehraban will take over.

Reddit is hiring a senior back end engineer for its NFT market. The engineer would be designing and delivering services for users to create, buy, sell and use NFT-backed digital goods.

Personal Capital promoted Vince Maniago to chief product officer. Maniago has been at the firm for over six and a half years, and was most recently vice president of Product Management.

DigitalBits appointed David Beckham as global brand ambassador. Beckham is the most-followed individual on social media in the U.K., and is set to partner with the blockchain firm to reach more consumers worldwide.

FTX hired Marcel Lötscher as its EU regulatory strategy lead. Lötscher was previously head of the Securities and Markets Division of Liechtenstein’s Financial Market Authority.

Vanessa Colella joined Visa as its head of Innovation and Digital Partnerships. Colella was previously chief innovation officer at Citi Ventures, and is currently a board member of the National Venture Capital Association.

Trust Wallet founder Viktor Radchenko is stepping down as CEO. Eowyn Chen will assume his previous responsibilities. Radchenko is reportedly taking “some time off to recharge” before jumping back into crypto.

Robinhood Crypto Chief Operating Officer Christine Brown is leaving. She is reportedly “staying in the crypto space” and starting her own venture.


Businesses are placing more priority on ensuring there are clear lines of communication for frontline workers to raise issues — something that’s vital given 43% of employees told McKinsey one of their fears about remote work was a reduction in collaboration with colleagues.

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Thanks for reading — see you tomorrow!

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