"Play to Earn": A Detailed Explanation of the Operation Mechanism and Economic Model of the Gaming Guild Yield Guild Games

This article is from Mechanism Capital, authored by Marc Weinstein, and translated by Chain News.

Yield Guild Games (YGG) is a decentralized autonomous organization (DAO) composed of tens of thousands of gamers, with numbers continuously increasing, who utilize non-fungible tokens (NFTs) to generate real cash flow in "Play-to-Earn" games.

The DAO aims to create the world's largest virtual economy by investing in "Play-to-Earn" games to earn from the games and their in-game assets, sponsoring millions of "Play-to-Earn" gamers, and building tools that will enhance the future of Metaverse gaming. YGG optimizes the assets owned by its community for maximum utility and shares the profits from these assets with its token holders. Participants in the DAO will be the owners and managers of the entire YGG Network ecosystem.

The DAO was co-founded in 2020 by Gabby Dizon (CEO), Beryl Li (CFO), and "anon, Owl of Moistness" (CTO).

A Good Team is Key!

During the ICO boom from 2017 to 2018, I first met YGG's current CEO, Gabby Dizon, during a trip to Asia.

Gabby is a veteran in the gaming industry with nearly 18 years of experience working in mobile game development studios and has founded the mobile game development studio Altitude Games, which focuses on bridging the gaming industry and the blockchain world through games like Battle Racers.

Gabby became my go-to contact for all blockchain gaming-related investments and provided significant help while I was researching and writing about NFTs in the Metaverse.

While many founders faltered during the long bear market, Gabby remained committed to building and exploring the mission of blockchain-based gaming.

Realizing the potential of "Play-to-Earn" games to change the lives of those around him, Gabby decided to establish YGG (which will be detailed later).

It was through our due diligence on YGG that I began to understand the immense potential of the "Play-to-Earn" gaming model and why I believe it will be the future of gaming and work (which can almost be interchangeable) in the Metaverse.

So what is "Play-to-Earn"? Why will YGG be able to benefit the most from this phenomenal opportunity?

To understand "Play-to-Earn," we first need to grasp NFTs and the future of the gaming industry in the Metaverse.

NFTs: Digital Ownership in the Metaverse

There have been countless articles about the Metaverse, and if you haven't read them, I recommend checking out the works of Matthew Ball and Piers Kicks on this topic (I have borrowed many of their ideas here).

Most of our waking hours are now spent in the digital world—whether it's chat applications like Telegram or Discord, video streaming on YouTube or Twitch, Zoom video calls, or games on platforms like Fortnite and Roblox. It is undeniable that our attention is shifting from the physical world to the virtual world. Although it may not look and feel exactly like the future world many expect from the movie "Ready Player One," we are already on that path.

Ordinary people spend nearly 7 hours online every day, and money often flows to where people's attention is. This is why the virtual goods market grew to about $50 billion in 2021 and is expected to continue this momentum, reaching $190 billion by 2025.

It is well known that cryptocurrencies have introduced a digital ownership open standard called NFTs. By introducing provable scarcity and provenance for digital goods, NFTs power the digital property engine that is reshaping the internet. NFT sales in the first half of 2021 exceeded $2.5 billion.

Today, most attention on NFTs is focused on digital collectibles like NBA Top Shots, digital art like Beeple's The First 5,000 Days, and even the sale of the world's first NFT music album by American DJ 3LAU for $11.5 million. These represent a significant market but are just the tip of the iceberg.

I personally believe that the killer use case for NFTs will be generating cash flow from in-game assets for the virtual world; these virtual goods have real utility and profit potential that can be easily transferred throughout the Metaverse.

While the phenomenon of owning and trading in-game items existed before NFTs, most transactions were either limited to isolated markets controlled by game developers or conducted in gray markets. The key distinction of NFTs is their interoperability across many virtual worlds and their ability to introduce novel gaming features.

For example, in the game Axie Infinity, NFT holders can buy and breed Axies (cute characters similar to those in Pokémon) to compete for rewards that can be used in-game or exchanged for money outside the game. In Zed Run, you can buy and breed virtual horses and then race them to earn money. The list of such games continues to grow.

Ownership of cash flow digital assets in the virtual world is an empowering use case that begins to redefine "work" and democratizes the opportunity to earn high-paying "jobs" in the virtual world; these jobs increasingly resemble games. In a world where capital flows freely across borders but labor cannot, capital has greater profit potential. However, labor returns are higher in the virtual world because "work" there is fluid, and the barriers to entry are much lower.

"Making a Living by Playing Games" Becomes a Trend

The absolute number of gamers globally and the percentage of the global population that they represent are rapidly increasing, with nearly 5 billion gamers worldwide. If you use the internet, you are likely a gamer too.

This has led to specialization in the esports field, with explosive growth in the esports industry over the past few years. The esports industry generated nearly $1 billion in revenue in 2020 (despite the pandemic causing tournaments to be canceled) and is expected to grow to $1.6 billion over the next five years. The world's most valuable esports team, TSM, is valued at nearly $410 million. Not bad for a group of gamers.

However, most of the revenue for esports teams is tied to tournament prizes, sponsorships, and advertising revenue from user-generated content. The industry suffered significant losses last year due to the cancellation of tournaments caused by the pandemic. Large esports teams do not earn much revenue from the games themselves.

While existing free-to-play games generate substantial revenue, this revenue does not flow back to the players. Most players earn money primarily from gray/unapproved or closed markets. Most monetization opportunities in games are limited to professionals.

In the future of the Metaverse, most jobs will look like playing games. "Play-to-Earn" games built on NFTs are the beginning of this transformation, allowing all gamers to make a living in the virtual world.

The Emergence of "Play-to-Earn" Games

The "Play-to-Earn" model disrupts the free-to-play game ecosystem. Although players typically need to spend money upfront to start playing "Play-to-Earn" games, they earn rewards in the game that can be sold for real-world value, including ownership and governance of the game itself. "Play-to-Earn" games do not require large IRL tournaments to offer prizes; instead, they allow all players in the virtual world to earn substantial rewards.

Earning money in "Play-to-Earn" games is different from existing game models. Previously, in-game assets were isolated, and game companies did everything possible to minimize the sale of assets through unofficial "gray market" channels. A prime example is gold farming in World of Warcraft, which pioneered the monetization movement in gaming, but this type of activity benefits neither players nor the game—it is anti-social. The mechanics of "Play-to-Earn" games are designed to make this type of arbitrage activity pro-social and enhance gameplay.

Even the cryptocurrency market has been slow to react to the "Play-to-Earn" phenomenon. It was only this month that most people began to realize the power of earning money by playing games, as Axie Infinity just surpassed 600,000 daily active users (DAU), even exceeding World of Warcraft's peak DAU. The average revenue per user (ARPU) has exceeded $100, even several orders of magnitude higher than leading free games' ARPU.

This ARPU data is calculated based on the token prices of Smooth Love Potion (SLP) and Axie Infinity Shards (AXS) as of today (July 26, 2021). The beauty of "Play-to-Earn" is that the value of these rewards can continuously increase as game performance improves. This creates a virtuous cycle where players benefit from the growth of the games they play.

"Play-to-Earn" Can Change Lives

I personally believe that "Play-to-Earn" is an alternative way to earn a basic income: in the future, people from all walks of life can make a living by playing video games.

Gabby is the person who made me see this possibility. Realizing that this could change the lives of those around him, he founded the gaming guild YGG.

When the COVID-19 pandemic ravaged the world, the Philippines was hit hard, with unemployment rates exceeding 40%. Gabby taught many of his friends and family how to play Axie Infinity from home. As a result, they were able to earn substantial income just by playing the game.

All of this was highlighted in a recent documentary commissioned by YGG, which explains the "Play-to-Earn" phenomenon, including popular footage contributed by the Delphi Digital team.

How Do Gaming Guilds Benefit from "Play-to-Earn"?

Now, imagine a DAO composed of hundreds of thousands of "Play-to-Earn" gamers, each earning 10 times the income of an average player per game. As the number of "Play-to-Earn" games increases, this guild could generate tens of millions of dollars in revenue solely from in-game earnings.

When I first started learning about YGG, the guild had about 500 players. In less than six months, the number of guild members has grown to over 30,000 players. More importantly, over 10% of these players (about 3,600) are Axie Infinity scholarship players, which has grown 20 times in the past six months.

Each YGG scholarship player receives an NFT loaned by YGG and is trained by a community manager. In exchange for the loan and training received, YGG takes 10% of the player's future gaming earnings (the community manager receives 20% of the income, and the player keeps 70%). YGG's scholarship players can earn 150 to 200 SLP daily (approximately $45 per day at current prices).

Assuming scholarship players take weekends off, each scholarship player has a potential annual income of $11,700, meaning each scholarship player contributes $1,170 to YGG's treasury annually. At this rate, assuming the price of SLP does not rise and the number of scholarship players does not increase, this would mean a $3.8 million annual revenue opportunity just for 2020.

If YGG continues to maintain this rapid growth rate of scholarship players, the guild could generate cash flow several times its current revenue from the Axie scholarship program within the next 2 to 3 years.

Platform Risk - Bundled with Axie's Rise and Fall?

Currently, the growth of YGG's talent pool and scholarship players is highly positively correlated with the growth of Axie Infinity's DAU. What happens if Axie loses its current momentum? This is one of the most valuable elements of YGG and one of the fundamental reasons we are so excited to invest in this project.

Gaming is a hit-driven industry, and the "power law" applies, making it a daunting task to pick winners. By investing in YGG, we can access a variety of games early with a higher-than-average probability of success.

YGG is effectively building a robust social network of early players in "Play-to-Earn" games. Over time, with the right incentives, YGG can begin to guide these players to new games in the Metaverse.

As YGG deeply engages with ten "Play-to-Earn" games through partnerships and investments, we are already seeing this logic put into practice.

YGG's selection criteria require "Play-to-Earn" games to have the following elements to be suitable for the DAO's selection:

1. Accessible virtual land economy;
2. A virtual economy with native tokens;
3. "Play-to-Earn" functionality, where players earn native token rewards through in-game activities.

The DAO can identify these games early based on the attractiveness and feedback from its player guild, allowing it to invest in the valuation of the underlying networks. Assuming YGG's average investment in each game is $50,000, with an average game valuation of $15 million: even if nine out of ten of these games completely fail, as long as one reaches the success level of Axie, it presents an 8-9 figure revenue opportunity for the guild, including investment returns and holding early "Play-to-Earn" game rewards in the game's subDAO.

YGG can not only discover games early, but once discovered, the DAO becomes a highly targeted marketing engine for the new game, directing players there and incentivizing them to play the game by offering $YGG token rewards. This "player liquidity" helps guide the deployment of new games in these virtual worlds, making games more entertaining and increasing the chances of success.

Through this approach, YGG has become one of the earliest strategic investors in the "Play-to-Earn" gaming industry. While gaming is a hit-driven industry, we expect YGG's investment performance to outperform any out-of-industry fund because the DAO can identify winners early and then leverage its player base to "create" future winners.

Other Revenue Streams

Since YGG maintains direct relationships with thousands of "Play-to-Earn" gamers, there are plenty of opportunities to test and unlock incremental revenue.

For example, YGG already has elite teams in two games: Axie Infinity and F1 Delta Time, and will showcase its skills in esports arenas for more games in the future. The guild is actively seeking esports project managers in the market.

These esports teams have already produced content that can generate advertising revenue for the guild. Sponsorships for the teams are also not lagging (some have already called out SBF!), and user subscriptions for information products explaining how to enhance your gaming earning skills (different tiers of $YGG holders can access for free) will also not fall behind.

We can also foresee that in the future, YGG will become a core social layer built on the "Play-to-Earn" gaming ecosystem or create other value-added products that enhance gameplay.

As YGG continues to grow its core business across multiple games, new revenue sources and opportunities will undoubtedly emerge, and through the governance mechanism using YGG tokens, this revenue will certainly flow back to the players.

$YGG Token

The YGG token is the glue that binds the YGG DAO together. It provides players with the right to participate in and manage the direction of the guild. Anyone holding a YGG token can participate in DAO governance in proportion to their share of the token supply.

Additionally, the YGG token can currently be used for the following purposes:

• Stake YGG to earn token rewards related to the overall activities of the guild
• Stake YGG to earn rewards related to specific activities
• Stake YGG to access exclusive content
• Stake YGG to participate in DAO voting and other activities
• Stake YGG to order exclusive merchandise
• Use YGG tokens to pay for services within the network

New use cases will inevitably arise. For example, as mentioned above, YGG token holders will be able to stake in different treasuries related to specific DAO activities. For instance, if YGG token holders are optimistic about Axie breeding, they can allocate most of their tokens to a treasury that derives its income entirely from that activity. There will also be a super treasury accepting liquidity, holding passive positions in the activities of the entire DAO.

The YGG token will also serve as some form of index for in-game NFTs and their earnings. The DAO has created an innovative subDAO model to provide scalability for DAO activities. Each game will have its own subDAO (for example, its existing YGGLOK subDAO). Each new game will be equipped with a community leader from the main DAO, who is highly optimistic about the game and the tokens they hold, as well as the subDAO tokens. SubDAO token holders can vote on specific issues related to the game. They can plan development needs or raids, vote on land purchases within the game, and receive rewards for leveling up.

The revenues from subDAOs will flow into the YGG main DAO. For YGG's current YGGLOK subDAO, the main DAO holds 56% of the subDAO token supply. As YGG expands to dozens of games, this structure will provide a degree of flexibility and scalability. SubDAO creators will want to participate through a YGG subDAO because they will gain access to the broader community resources and rewards that the main DAO must offer.

The YGG token will represent the best state of ownership economy. A community of players in a "Play-to-Earn" game will have value for every participant in the new game if they engage in it, and by segmenting into game-specific subDAOs, the guild can expand into new virtual worlds and incentivize pro-social behavior among all gamers.

Conclusion

We are excited to support an exceptional team building in one of the fastest-growing areas of the crypto market: "Play-to-Earn" and innovating at the forefront of DAO governance. YGG has already validated our thesis through its lightning-fast user growth, extremely high player retention, and discovery of popular new games.

Looking back in a few years, I expect to see millions of Yield Guild scholarship players' lives significantly changed through their participation in "Play-to-Earn" games.

Thanks to the following articles for inspiring this piece:

• Matthew Ball, The Metaverse
• Piers Kicks, Into the Void: Where Crypto Meets the Metaverse
• Ryan Gill, Founder & CEO of Crucible, on my podcast, Look Up!
• Ryan Mullins, Founder & CEO of Aglet, on my podcast, Look Up!
• Gabby Dizon, Founder of YGG, on my podcast, Look Up!
• Jake Brukhman on Digital IP
• Crypto Adoption Games, Tony Sheng
• The Ownership Economy, Jesse Walden
• My first deep dive on blockchain-based games for Wave Financial
• Introducing Yield Guild Games, Gabby Dizon
• Why I spent $159k on digital battle pets, Medio Demarco, Delphi Digital
• Yield Guild Explains Play-to-Earn
• Yield Guild Explains YGG Token Utility
• Esports underperforms in 2020, Forbes
• Snow Crash, Neal Stephenson

Special thanks to Ben Simon, Andrew Kang, and Alec Korman for their insights and feedback. Nothing in this article constitutes investment advice.