⛓ The Metaverse is here, and it has a Wendy's (Zuck tax: 47.5% per burger)
North Korea diversified it's crypto portfolio by stealing $620M in Ethereum and USDC from Axie sidechain Ronin, and the metaverse is nearly here (Wendy's and all).
Epic Games Raises $2B for Metaverse from LEGO and Sony
Game studio and software firm Epic Games announced it raised $2B from KIRKBI, LEGO's holding company, and Sony. KIRKBI and Sony each invested $1B at a $31.5B post-money equity valuation.
Epic Games owns the popular game Fortnite, which peaked a couple years ago but still had 80M users in January 2022, according to an article titled "Is Fortnite Dying?" Epic also makes game development suite Unreal Engine, which has ~15% market share.
Tim Sweeney, CEO of Epic Games, has long been a proponent of crypto. Epic allows crypto games to operate on their platform, while its main competitor, Steam, has banned them. Sweeney is also pro-metaverse. Sweeney's metaverse vision is closer to the general crypto vision than Meta's, but there's still no crypto tie-in necessary for Epic to profit.
Søren Thorup Sørensen, CEO of KIRKBI explained his firm's metaverse investment: "A proportion of our investments is focused on trends we believe will impact the future world that we and our children will live in." This investment announcement follows last week's announcement that Epic Games has partnered with LEGO to develop a metaverse for children.
Kenichiro Yoshida, Chairman, President, and CEO of Sony Group Corporation, said: "Epic’s expertise, including their powerful game engine, combined with Sony’s technologies, will accelerate our various efforts such as the development of new digital fan experiences in sports and our virtual production initiatives."
Launching a metaverse is expensive and risky. By partnering with Sony and LEGO, Epic Games gains access to valuable intellectual property to draw users into its metaverse. Sony and LEGO appear to desire access to Epic's gaming software expertise. We'll see if Sony and LEGO can stomach Sweeney's views on whether software payment processors deserve 3% or 30% of a transaction.
North Korea Diversifies Into Ethereum Via Record Crypto Hack
This week, the FBI released a statement assigning blame for the recent Ronin bridge hack – the largest known instance of cryptocurrency hacking – to the infamous North Korean associated hacking organization: ‘Lazarus Group.’ Lazarus Group is known for involvement in the WannaCry ransomware attacks and the Sony Pictures hack surrounding the movie “The Interview.”
The hack targeted Sky Mavis’ side chain, Ronin. Sky Mavis is the company behind the largest NFT-based crypto game, Axie Infinity. Ronin was made to support scaling of the Axie Infinity ecosystem, which had experienced scalability issues on Ethereum. The hack took place in March 2022 and resulted in over $620M of Ethereum and stablecoins being stolen. It took about a week after the funds were stolen before anyone noticed.
How Did the Hack Happen?
The security flaw that Lazarus took advantage of was simple: poor key management. The Ronin sidechain consists of 9 validators, requiring a consensus of 5 out of the 9 nodes to execute.
The hackers breached Sky Mavis’ centralized servers, which manage 4 of the 9 nodes. This alone is not enough to steal the funds, but according to Sky Mavis, the attack was possible because Sky Mavis and the Axie DAO used poor security practices to manage high player volume late last year: "Sky Mavis requested help from the Axie DAO to distribute free transactions due to an immense user load. The Axie DAO allowlisted Sky Mavis to sign various transactions on its behalf. This was discontinued in December 2021, but the allowlist access was not revoked. Once the attacker got access to Sky Mavis systems they were able to get the signature from the Axie DAO validator by using the gas-free RPC."
When the North Korean hackers breached Sky Mavis’s server, which normally housed 4 of the 9 keys, they found 5 multisig keys – enough to steal the funds.
A security audit likely would have identified an inherent problem in the majority of the multisig keys being stored on a single server. Best practice is for each multisig key to be secured by a separate entity. Maintaining a full consensus on a single server isn’t just bad practice, it was a $620M mistake.
Sky Mavis is expanding to 21 validator nodes and presumably changing their key management practices, though best practice would include neglecting to tell the public what changes they make.
The company also recently raised a $150M round led by Binance, including Animoca Brands, a16z, Dialectic, Paradigm, and Accel to make users whole, and reopen the bridge. The remainder of the money will be coming from the Axie balance sheet.
North Korea’s Portfolio
Per a report from the South Korean news outlet Chosun last year, North Korean hacker syndicates are suspected of stealing $1.7B over the last five years. According to Koh Myung-hyunat at the Asan Institute for Policy Studies, "North Korea is using the stolen cryptocurrency from the perspective of long-term investment" and North Korea views crypto as "the only financial asset that can be gained while it is under tight economic sanctions."
Much of the hacked cryptocurrency came in the form of Bitcoin from crypto exchanges. Now North Korea has added some 175k Ethereum to its coffer.
The US State Department pledged up to $5M for information relating to the North Korean hacking operations.
BlackRock Will Manage USDC's $50B Reserves Following $400M Raise
Circle, the company behind the USDC stablecoin, announced a $400M funding round on April 12, 2022. The round was led by BlackRock, Fidelity, Marshall Wace, and Fin Capital. As part of the deal, BlackRock will become the primary asset manager of USDC's cash reserves. Currently, there is over $50B of USDC in circulation, so it's assumed that BlackRock is managing roughly $50B of Circle's reserves.
BlackRock is the world's largest asset manager, with over $10T under management in January 2022. BlackRock has historically been anti-crypto, but like many institutions, BlackRock has found a way to profit from crypto, so now it's pro-crypto.
Circle is valued at $9B and intends to go public. The company projects it will earn $400M in revenue from its stablecoin reserves this year and that it will earn $2.2B in revenue next year.
Somehow, this is bad for Maker DAO. Maker DAO's US Dollar-pegged stablecoin, DAI, is partially backed by USDC. Maker DAO has been trying to wean DAI investors off USDC by decreasing yields for staked USDC, but as of late 2021, USDC still made up over one-third of DAI's reserves.
DAI investors have long complained that DAI's reserves are too centralized, and now the world's largest institutional money manager is in charge of USDC's reserves.
It's hard to see how Maker DAO can fix this, seeing as how Tether is also centralized and considered much riskier to hold, due to all the Chinese commercial paper in its reserves. Maker DAO won't want more Tether in its DAI reserves, and it's unlikely to load up on Terra's UST, considering Do Kwon is trying to depeg DAI from the dollar.
Meta's Fees for Metaverse Sales Blow Away Apple's App Store
Platform fees have been a hot topic in the tech world over the past year, primarily because of Epic Games’ lawsuit against Apple. Apple’s app store charges a 30% fee to sellers, which many thought was exorbitantly high – including Mark Zuckerberg. In November 2021 post, Zuck said:
As we build for the metaverse, we're focused on unlocking opportunities for creators to make money from their work. The 30% fees that Apple takes on transactions make it harder to do that, so we're updating our Subscriptions product so now creators can earn more.
It turns out Zuck decided that fee was just right, because 30% is exactly how much the platform fee is for sales on Meta Quest, the VR system previously called the Oculus Quest. On top of the platform fee, Meta charges an additional 25% sales fee (on the remaining 70%) for every sale made in the virtual world, Horizon Worlds, which Meta operates. That means for each sale made on a Meta Quest machine, running in Horizon Worlds, the creator will be paying Meta 47.5% of the sale price.
Meta is quick to point out that they expect others to integrate their own VR machines with Horizon Worlds, in which case the platform fee would not be charged by Meta. Any platform fee would be determined by the other party making the VR headset.
The State of Meta’s VR
Meta has bet the company on the metaverse (see: name). The metaverse, as Meta imagines it, is “the next evolution of social connection.” A 3D virtual reality (VR) space that “will let you socialize, learn, collaborate and play in ways that go beyond what we can imagine.”
The company spent $10.3B on the metaverse in 2021, and Zuck has said this investment is not slowing down in 2022. The $10B expense slashed Meta’s quarterly profits by 8%, and resulted in the stock dropping some 26%. The investment hasn’t all gone to waste though; Meta has the most successful VR headset in the Meta Quest. Its virtual reality division, Reality Labs, brought in $2.2B in 2021, roughly doubling revenue from each of the previous two years.
Meta recently released a video of a virtual reality panel between Zuck and some of the creators on the Horizon Worlds platform. They highlighted playing games, having round table meetings, attending guided meditation classes, and (confusingly) going to a Wendy’s. Their choice to highlight eating, one of the few things that cannot translate to the Metaverse, is anyone’s guess.
How was today's email?