Yield Guild Games Investment Thesis

Author: Marc Weinstein

July 26, 2021

Yield Guild Games (YGG) is a decentralized autonomous organization (DAO) composed of tens of thousands of gamers (and rising) who utilize non-fungible tokens (NFTs) in play-to-earn games to generate real cash flow. The DAO aims to create the largest virtual world economy by investing in play-to-earn games plus their in-game assets, sponsoring millions of play-to-earn gamers, and building tools that will enhance the future of gaming in the Metaverse. YGG optimizes its community-owned assets for maximum utility and shares profits from those assets with its token holders. Participants in the DAO will be owners and managers of the entire ecosystem of the YGG Network.

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

It’s All About the Team

I first met Gabby Dizon, the CEO of YGG, on the road in Asia during the ‘17-18 ICO boom. Gabby is a veteran of the gaming industry, with nearly 18 years of experience working at and founding mobile game development studios like Altitude Games. Altitude is focused on bridging the gaming and blockchain worlds through games like Battle Racers.

Gabby became my go-to-contact for all blockchain-based gaming-related investments, and was extremely helpful as I developed my thesis on NFTs in the Metaverse.¹

While many founders lacked the fortitude to persist through the multi-year bear market, Gabby remained committed to the same mission of building and exploring blockchain-based games.

Gabby decided to start YGG after he realized the potential that play-to-earn games have to change the lives of those around him (more on this later).

It was through our diligence on YGG that I began to understand the massive potential of the play-to-earn gaming model, and why I believe it will be the future of gaming and work (the two are almost interchangeable) in the Metaverse.

So what is Play-to-Earn and why is YGG positioned to benefit most from this phenomenon? To understand play-to-earn, we need to first understand NFTs, and the future of gaming in the Metaverse.

NFTS: Digital Property Rights in the Metaverse

Much has been written about the Metaverse, and if you haven’t already, I suggest you check out Matthew Ball’s and Piers Kicks’ work on the subject (I borrow many of their ideas here).

Most of our waking lives are already spent in digital worlds. Whether it be chat apps like Telegram or Discord channels; YouTube or Twitch live streams; Zoom Calls; or games like Fortnite and Roblox; it’s undeniable that our attention is flowing from physical to virtual. Although it doesn’t look and feel entirely like the Ready Player One future that many of us are expecting, we’re well on the way.

The average person spends nearly 7 hours per day online and money tends to flow where attention goes. This is why the market for virtual goods has grown to roughly $50 Billion in 2021, and is expected to continue this trajectory and grow to $190B by 2025.

As many of you know, crypto introduced open standards for digital property rights called NFTs. By introducing provable scarcity and provenance for digital goods, NFTs power the engine of digital property that is reshaping the internet as we know it. NFT sales for the first half of 2021 have already exceeded $2.5B.

Today, most attention paid to NFTs is focused on digital collectibles like NBA Top Shots, digital art like Beeple’s The First 5,000 Days, and even ownership of music like 3LAU’s $11.5 million NFT drop. These represent sizable markets, but are only the tip of the iceberg.

I believe that the killer use case for NFTs will be cash-flow generating in-game assets for virtual worlds; these items have real utility and earnings potential that will be easily transportable throughout the Metaverse. While owning and trading in-game items already exists without NFTs, most trading is either restricted to the game developers’ siloed marketplace or pushed to gray markets. The key differentiator for NFTs is their interoperability across many virtual worlds and their ability to introduce novel gameplay features. For example, in the game Axie Infinity, owners can buy and breed Axies (Pokemon-like loveable characters) to battle for rewards that can be used in-game or exchanged for value outside.In Zed Run, you can buy and breed virtual horses, then race them to earn. The list goes on and continues to grow.

The ownership of cash-flowing digital property within virtual worlds is an empowering use case that is beginning to redefine “work,” and democratize access to high paying “jobs” in virtual worlds; jobs that increasingly look like play. In a world where capital moves freely across borders, but labor cannot, capital has significantly more earnings potential. However, the returns to labor are greater in virtual worlds since “work” there is fluid and the barriers to entry are much lower.

The Rise of Gaming as Work

The number of global gamers is rapidly increasing both in absolute terms and as a percentage of the global population, with nearly 5 billion gamers worldwide. If you use the Internet, the odds are that you are also a gamer.

This has led to the professionalization of gaming through the world of esports, an industry that has also exploded over the last few years. esports revenue neared $1 billion in 2020 (in spite of Covid shutting down major tournaments), and is expected to grow to $1.6 billion over the next 5 years. The most valuable eSports team in the world, TSM, is worth nearly $410 million. Not bad for a group of gamers.

However, most revenue generated by eSports teams is related to tournament prizes, sponsorships, and ad-revenue from user generated content. The industry has suffered over the last year as big tournaments were cancelled due to COVID-19. For the big eSports teams, there is not much money to be made in the games themselves.

While existing free-to-play games drive substantial revenue, none of that revenue flows back to the players. If there is money to be made, most of that revenue is derived from gray / unsanctioned or closed marketplaces. Most revenue opportunities only exist for professionals.

In the future of the Metaverse, most work will look like playing a game. Play-to-earn built on the back of NFTs is the beginning of this transformation in which all gamers can earn a living in virtual worlds.

Enter Play-to-Earn

Play-to-earn flips the free-to-play dynamic on its head. Although players often need to spend money to start playing a play-to-earn game, they are rewarded for their in-game play with assets that can be sold for real-world value, including ownership and governance of the games themselves. Play-to-earn games won’t require large IRL tournaments for prize money, but instead will make substantial prizes attainable for all players in the virtual worlds.

Play-to-earn gaming is different from existing gaming models. Previously, in-game assets were siloed and gaming companies did their best to minimize the sale of the assets through unofficial “gray market” channels. Examples of this, like farming gold in World of Warcraft was a precursor to the play-to-earn movement, but this type of activity was not beneficial to the gamer or the game—it was antisocial. Play-to-earn game mechanics are designed to make this type of arbitrage pro-social, and the gameplay even better.

Even the crypto market has been sleeping on the play-to-earn phenomena. This month most began to wake up to the power of play-to-earn, as Axie Infinity just crossed 600,000 Daily Average Users (DAUs), surpassing even World of Warcraft’s peak DAU numbers. Average revenue per user, or ARPU, has exceeded $100, orders of magnitude higher than even the leading free-to-play ARPU.

This ARPU is valued in today’s token prices for Smooth Love Potion (SLP) and Axie Infinity Shards (AXS). The beauty of play-to-earn is that the value of these rewards can continue to increase as the game’s performance improves. This creates a virtuous cycle where players are rewarded for the growth of the games they play.

Play-to-Earn Can Change Lives

I see play to earn as an alternative to universal basic income: there is a future in which individuals from all walks of life are able to earn a living by simply having fun playing video games.

Gabby is the one who opened my eyes to this possibility. He started YGG after he realized the power that it could have to change the lives of those around him. When COVID ravaged the world, the Philippines were hit hard, with over 40% unemployment. Gabby taught many of his friends and family how to play Axie Infinity from home. As a result, they were able to earn meaningful income simply by playing the game. This is all highlighted in a recent documentary commissioned by YGG that explains the play-to-earn phenomena including hot takes from the team at Delphi Digital.

Why Yield Guild Will Benefit from Play-To-Earn

Now, imagine a DAO consisting of hundreds of thousands of play-to-earn gamers who are earning 10x more per user per game than the average play-to-earn user. As the number of play-to-earn games expands, this “guild” could drive tens of millions in revenue from in-game earnings alone.

When I first started learning about Yield Guild there were around 500 players in the guild. In less than half a year, Guild membership has grown to over 30,000 players. More importantly, over 10% of those players, around 3,600, are Axie Infinity scholars, a 20x increase over the last 6 months.

Every YGG scholar is loaned an NFT by YGG and trained by a Community Manager. In exchange for the loan and training, YGG receives 10% of that player’s future revenue from playing the game (the Community Manager earns 20% of the revenue and the player keeps 70%). YGG’s scholars can earn between 150 – 200 SLP daily (or around $45 per day at current prices). Assuming scholars take weekends off, that’s $11,700 earnings potential per scholar per year or $1,170 revenue per scholar to YGG’s treasury. At this rate, assuming no price increase in SLP and no increase in the number of scholars, that represents a $3.8M annual revenue opportunity in 2020 alone.

Assuming YGG continues this rapid rate of scholar growth, the Guild could generate multiples of its existing revenue from its Axie scholar program alone in the next 2-3 years.

Platform Risk – Is this Just a Levered Axie Bet?

At the moment, the growth of YGG’s talent pool and scholars is highly correlated with the growth of Axie Infinity DAUs. So what happens if Axie loses momentum? Therein lies one of the most valuable elements of YGG, and one of the most fundamental reasons why we are so excited to be supporting the project.

Gaming is a hit-driven industry and power laws apply, so picking winners is a daunting task. By investing in YGG, we are able to gain early exposure to a diverse basket of games with an above average probability of success. YGG is effectively building a dense social network of early adopters of play-to-earn games. Over time and with proper incentivization, YGG can begin to direct those players to new games in the Metaverse.

We are already beginning to see this thesis play out as Yield Guild Games has partnered with and invested in ten play-to-earn games.

YGGs selection criteria requires the following elements of a play-to-earn game to make it suitable for selection by the DAO:

1. A virtual land-based economy which can be acquired;

2. A virtual economy with a native token;

3. Play-to-earn functionality where players are rewarded native tokens for in-game activity

The DAO was able to identify these games early based on the traction and feedback from its guild of players, and as a result are investing at ground floor network valuations. Let’s assume an average investment of $50,000 per game at an average valuation of $15M: even if 9 out of 10 of these games fail completely, but one reaches Axie’s level of success, that represents another 8-9 figure revenue opportunity for the Guild both via returns on its investment, and holding early play-to-earn rewards in the game’s subDAO.

Not only is YGG able to discover games early, but once it does, the DAO becomes a highly targeted marketing engine for this new game by directing its players there and offering them $YGG incentives to play. This “gamer liquidity” helps to bootstrap gameplay in these virtual worlds which will make the games more entertaining and increase likelihood of success.

In this way, YGG has become one of the first strategic investors in the play-to-earn gaming industry. While gaming is a hits driven industry, we expect YGG’s investment performance to outpace that of any outside fund because the DAO is able to find winners early and then leverage its players to “king make” future winners.

Other Revenue Opportunities

Since YGG owns the direct relationship with thousands of play-to-earn gamers, there is no shortage of incremental revenue possibilities that can be tested and turned on.

For example, YGG already has elite-tier sports teams for two games: Axie Infinity and F1 Delta Time, with more on the horizon, as the Guild is in the market for an esports program manager.

These teams are already generating content that can drive advertising revenue to the Guild. Team sponsorships won’t be far behind (somebody call SBF!) nor will subscription-based information products that explain how to level up your play-to-earn skills (with free access for different tiers of $YGG holders).

We can also foresee a future where YGG becomes the core social layer built on top of the play-to-earn gaming ecosystem or builds other value-add products that enhance gameplay.

As YGG continues to grow its core business across multiple games new revenue streams and opportunities will undoubtedly emerge and through governance using the YGG token, that revenue will surely find its way back to the players.

The $YGG Token

The YGG token is the glue that holds the Yield Guild DAO together. It will offer players the right to not only participate in but also manage the direction of the Guild. Anyone holding even one YGG token will be able to participate in DAO governance pro rata to their share of the token supply.

In addition, YGG tokens can currently be used for the following:

Stake YGG for token rewards related to its overall activities

Stake YGG for rewards related to specific activities

Stake YGG for exclusive content

Stake YGG to vote and participate in the DAO

Stake YGG to subscribe to exclusive merchandise

Use YGG tokens to pay for services in its network

New use cases will inevitably follow. Calling out #2 from the above, YGG token holders will have the ability to stake into different vaults related to specific DAO activities. If a YGG token holder is bullish on Axie breeding, for example, they could stake most of their tokens into a vault whose revenue is entirely derived from this activity. There will also be a super vault that provides passive exposure to the entirety of DAO activities.

The YGG token will also act as a sort of index of in-game NFTs and their earnings. The DAO has created an innovative subDAO model to allow for scalability of DAO activities. Each game will have its own subDAO (for example, its existing YGGLOK subDAO). Each new game will be paired with a community lead from the main DAO who is excited about said game along with its own wallet and subDAO token. subDAO token holders can vote on issues specific to the game. They can plan quests or raids, vote on land purchases within that game, and be rewarded for ranking-up new levels.

Earnings from the subDAOs will flow up to the main YGG DAO. For YGG’s current YGGLOK subDAO, the overarching DAO holds 56% of the subDAO token supply. This will allow a degree of flexibility and scalability as YGG expands to dozens of games. subDAO creators will want to participate through a YGG subDAO because they will have access to the broader community resources and rewards that the main DAO has to offer.

The YGG token will represent the Ownership Economy at its finest. A community of play-to-earn gamers whose participation in new games is value accretive to everyone involved, subdivided into game-specific subDAOs that will allow for the expansion of the guild to new virtual worlds, and incentivizing prosocial behavior for all gamers.

Conclusion

We are excited to back an exceptional team building in one of the fastest growing segments of the crypto market: play-to-earn gaming and innovating on the frontlines of DAO governance. YGG is already bearing out our thesis through its lightspeed user growth, high player retention, and discovery of hot new games.

When we look back years from now, I expect we will see millions of Yield Guild scholars whose lives were changed through participation in play-to-earn gaming.

Some, but not all, of the inspiration for this post:

Special thanks to Ben Simon, Andrew Kang, and Alec Korman for their insights and feedback.

Nothing in this piece constitutes investment advice.

Specifically this blockchain-based gaming report I co-authored in 2018 for Wave Financial.