Source: BreederDAO

As blockchain gaming matures, new types of tools and business models will emerge that tackle the unique opportunities and challenges of this growing sector. One such example is BreederDAO, which describes itself as a factory for NFTs. The group’s vision is “to be the go-to asset manufacturer by providing a solution to the supply-side constraint in the play-to-earn economy. Philippines-based BreederDAO aims to outfit 5,000 guilds and over 10 million players with in-game assets optimized to maximize value within the next few years.

Let’s take a look at why this function exists, how it works, and where it may go from here.

The Need to Breed

Many of you have likely noticed that several early blockchain games use breeding as a core in-game mechanic and growth tactic. For example, players in Axie Infinity can breed two axies to create a new one (with its own specific characteristics); there’s a cost to breeding, but new axies can then be sold on the open market (with higher utility axies trading at premiums). Given that players need three axies to start playing, breeding and selling new axies is the primary means by which user growth occurs, and it’s an important revenue source for Sky Mavis. This, of course, may change as Axie Infinity: Origin rolls out and the economy further evolves (such as adding axie sinks), but it’s also not unique to Axie. Crabada, Pegaxy, and many other more traditional P2E games leverage breeding in core ways.

Similarly, breeding has become increasingly important for guilds who need growing numbers of NFTs to loan out to scholars. These organizations all want scholars equipped with high quality assets that have specific features that fit the current meta. After all, giving better NFTs to more scholars means more players can generate higher yields — everyone wins. Getting access to tons of specific NFTs, however, is easier said than done. According to BreederDAO, scholar utilization rates across guilds is only 9.61%.

Source: BreederDAO

This is an obvious underestimation; counting all Discord members as potential scholars is hyperbolic, but the point still stands. Breeding isn’t (and shouldn’t be) the core competence of most guilds, but they still require lots of specifically bred assets to pursue their investment / scholar strategies. The same goes for crafting, which is a similar mechanic.

How BreederDAO Works

Enter BreederDAO. As mentioned above, BreederDAO — which positions itself as game and guild agnostic — aims to serve this demand for high utility assets. As the whitepaper says, “BreederDAO has created and will continue to create proprietary tools that will allow it to execute breeding and crafting at scale.” After all, effective breeding is more complicated than simply combining two assets to make a third one; it takes deep understanding of the meta, the game economies, and marketplace dynamics to supply in-demand assets at optimized prices at scale.

So how is this actually managed?

First, BreederDAO — which already boasts 30+ teammates — has created what is calls its “Breeding & Crafting Optimization Engine.” This is a tech stack that includes a range of components: 1) Market Analytics, 2) Live Financial Analytics, 3) Tokenomics and In-game Data Lake, 4) Trait Optimization Engine, 5) Facilitated Asset Propagation, and 6) Asset Pricing Model. You can learn a bit more about each component here, but long story short this so-called engine exists to better improve the process of breeding and to better conduct it at scale.

Paired with the team’s automated dashboard to track existing and up-and-coming games, plus the Hedge Engine, which helps automate capital allocation decisions across assets and games, it’s clear that BreederDAO is building tools that ultimately come across as part NFT factory, part insights library, and part hedge fund. For now, the DAO’s tools are kept mostly internal as they’re being developed, but as we’ll explore below, the goal is to open much of it up over time. The team has also partnered with 10 leading guilds (see below) — providing in-game assets and supporting in-house breeding programs — but the goal is to increasingly automate the processes and open it up to thousands of guilds and millions of players. The team also currently sells bred NFTs via game-specific marketplaces in order to target the retail market.

Source: BreederDAO

It’s also worth emphasizing that this is a DAO with its own (upcoming) ERC-20 token, $BREED. Like most DAOs, the core team is bootstrapping the initial strategies and decision-making, but the goal is to hand off governance to $BREED holders over time.

Core to the DAO is the concept of BreederDAO Production Lines. Essentially, holders will be able to suggest and then to vote on (via staking) which assets (the various production lines) should be bred/crafted with the DAO’s resources. In other words, over time the DAO members will decide which games to participate in and which assets to manufacture.

Staking will play other roles, too. In the BreederDAO Chute Program, guilds or individuals who want to be first in line for limited drops of newly manufactured assets can stake $BREED. If, for example, your guild’s staked $BREED represents 15% of the staking pool, then you will receive 15% of the breeding round.

The team also optimizes for profitability, which means that it will be able to reward community token holders with its profits. Holders who stake tokens will be rewarded with extra $BREED tokens on an annual basis.

Additionally, the token allocation is pretty standard (although perhaps leaning more in favor of early investors, which include notable names like a16z and Delphi Digital, than we often see). All tokens will be out in the wild over the next five years:

Source: BreederDAO

What’s Next?

The whitepaper lays out a clear roadmap for the next three years:

Source: BreederDAO

There’s a lot of detail here — it is super early, after all — but a few points of note:

  • The $BREED token is scheduled to launch soon, which also means staking is right around the corner.
  • By the end of the year, the team is hoping to double the number of game integrations (50) and 10x the number of partner guilds (1,000).
  • The team aims to automate much more of the internal process (asset production, etc.) over the next year.
  • Building the OTC (retail) sales channel that creates a marketplace for individuals is going to be a primary undertaking and should help diversify the organization away from only serving guilds.

Priorities and timelines may shift as the launch nears and the team ramps up, but it’s exciting to see the big ambition and quick speed of scaling.

Key Questions

BreederDAO is a clever reaction to what is clearly a large, growing need in today’s blockchain game economy. The team has a clear first-mover advantage — both with the network its built plus its suite of analytics — but there’s still a lot to prove. The industry will also continue to rapidly evolve, which may provide its share of challenges. Here are three important questions to keep in mind as we watch BreederDAO develop.

For starters, will breeding as a blockchain game mechanic be big outside of ponzinomic-driven games, or is it forever going to be primarily connected to games like Axie Infinity, Crabada, and Pegaxy? This is an important question, because even though these games are helping define the beginning of this movement, their inherent unsustainability (without major changes) likely means they won’t define where it ultimately goes. We suspect that breeding / crafting / asset creation has a wide enough creative surface area to find more sustainable applications, but it also may not drive as much ROI-seeking demand. How BreederDAO adapts to the changing needs of evolving market participants will be important to watch.

Second, we do know that one of the DAO’s major undertakings is to build a unified multi-game storefront where anyone can buy newly bred assets, but it will take time to get there. So it’s worth asking if BreederDAO will become over-reliant on guilds in the near-term and if that reality may pose challenges alongside the obvious opportunities. After all, sure, guilds have a place; they inject capital into early stage projects and often provide many active users. However, at the end of the day, guilds chase ROI and look to take more out of game economies than they put into them. Creating exponentially more NFTs for guilds to chase returns will not always lead to exponentially higher returns; instead, it will lead to diminishing marginal returns and perhaps overrun certain games with ROI-seeking players. This risk can be reduced by continuing to sell assets to the open market alongside supporting guilds, but it’s worth watching how the role of guilds evolves and therefore how BreederDAO best serves them (and the overall ecosystem).

It’s also worth wondering whether some of BreederDAO’s relatively short-term data focus is healthy for all community participants. Building dashboards that track the real-time performance of certain breeding strategies is smart, especially if the DAO is looking to quickly breed and sell assets. And having a retail-facing marketplace that sells specific, high quality NFTs is brilliant — something many players should eventually love. However, I can’t help but feel that within the blockchain games ecosystem there’s too much focus on short-term yield and not enough focus on longer-term total returns (if the focus should be returns at all). As an imperfect comparison, in the stock market companies with the highest dividend yields are almost always the most unsustainable; by chasing yield, you usually put total returns in jeopardy. This isn’t specific to BreederDAO’s audience, but BreederDAO’s systems and data, especially when opened up to all DAO members, may catalyze more of this purely quantitative short-term, yield-chasing behavior. I’d like to see BreederDAO increasingly encourage healthy longer-term oriented behaviors among its participants, not just feed the chase for yield, which will ultimately be healthier for the entire blockchain gaming ecosystem.

This isn’t to say that the team isn’t aware of these questions. They very well may be thinking even bigger and have great answers. It also isn’t to say that designing an increasingly automated and decentralized “factory” for breeding/crafting tailor-made NFTs isn’t a bright idea - it is! I’m excited to see where BreederDAO goes from here, look forward to the $BREED launch, and am eager to see progress made on its public-facing marketplace. I just hope that the organization can side-step the pitfalls of over-relying on ponzinomic-oriented games and purely ROI-seeking guilds, and instead focus on building systems that lead to the longer-term health of the entire ecosystem.

Aaron Bush wrote this essay.

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