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Earlier this year Naavik covered the rise and success of Yield Guild Games (YGG), noting a few key themes:

1. Structure, tokenomics, and business models
2. Performance to date
3. Considerations around P2E gaming guilds and YGG’s future

If you are not familiar with YGG or looking for an in-depth refresher on the inception and initial operating structure/focus, please reference the January 2022 Naavik blockchain games update.

In this update, we will explore key changes to YGG’s operating model, provide a performance update, and discuss the future outlook for YGG and gaming guilds in general.

YGG - An Abbreviated Overview

Over the last year, YGG has emerged as the clear leader among P2E gaming guilds. In 2020, the founders of YGG saw an opportunity to help workers in the Philippines who had lost their jobs after the COVID-19 pandemic by giving them access to Axies to play and earn in Axie Infinity. The basic proposal was that YGG would raise funds from investors, then use them to purchase Axies and lend them to “scholars'' to play. The resulting earnings would be shared among the scholars, YGG, and the investors.

In February 2022, Yield Guild Games opened up its second scholarship program with the cyborg-themed soccer game CyBall, enabling players to use YGG assets to earn rewards. During the first 2 months of the program, the 1,000 selected scholars earned a total of 2.8M CBT ($255k as of April 2022). These scholars used CyBloc NFTs acquired by YGG in October 2021 when the initial partnership was formed.

While YGG’s primary emphasis is on its scholarship program, the DAO also sees financial returns from investments in Web3 assets (NFTs, tokens) and P2E games (sometimes structured as partnerships where YGG gets discounts on NFTs or tokens). While YGG has seen some notable positive returns on NFT and token investments, this is not the competitive advantage of the DAO, nor is it the reason that YGG was able to raise money from tier 1 investors like a16z. YGG’s key distinguishing economic moat is the the ability to power a massive scholarship model powered by YGG’s ecosystem scale and geographic reach, paired with the ability to get into projects earlier than many competitors.

Overview of the SubDAO Model 

YGG’s success in ecosystem scale and geographic reach has been partially enabled by the subDAO model. For YGG, subDAOs are the means to unlock global scale without needing centralized global expertise. The subDAO organizational structure is characterized by an umbrella organization (YGG) that has distinct sub-units that operate under the parent (subDAO-like).

YGG first introduced the subDAO concept in July 2021 as a way to bring individual games into the YGG ecosystem. At that time, the proposal was that each P2E game would be a subDAO with its own community manager, token, and wallet.

This model served the purpose of catering to diverse audiences of both investors and scholars. In early 2022, YGG launched a new subDAO model - introducing regional subDAOs. The first official one was YGG SEA, which focuses exclusively on the Southeast Asian market (note that Ola GG was incepted in June 2021 with a focus on the LATAM market but was not officially the first regional subDAO). The introduction of regional subDAOs further complicated the model as there are now two such dimensions in the YGG ecosystem:

The benefit of the regional subDAO model is in its unique structure, incentives, and ability to design programs for a specific market, making guild activity more effective and efficient. Regional subDAOs use localized leadership teams that oversee the delivery of language-specific support services as well as the creation of tailored educational content. They also establish strategic partnerships with locally regulated service providers. Given that most P2E games are not built with all global audiences in mind, regional subDAOs can play a key role in onboarding players into titles that they may not have heard of, because they were built by teams in other regions.

Another benefit of regional subDAOs is that they create an opportunity for investors to deploy capital directly in a specific region. In total, YGG’s 4 regional subDAOs have raised $34M (although part of the funding did come from YGG in each case):

It’s difficult to pinpoint the exact number of scholars in each regional subDAO, but Ola GG and YGG SEA claim to have 3,500+ and 10,000+ scholars, respectively. While I’m skeptical of these numbers and how active these scholars are, if you do believe these figures, then in total, regional subDAOs have a footprint of ~32,000 scholars (using the average ratio of scholars to Discord members). This is an impressive playerbase that can be marketed to Web3 game developers.

Those developers seeking to create successful new titles must overcome the the classic “chicken and egg problem.” Players want to play polished games with proven core loops, but developers need users to play early versions of their game to help find bugs and validate core loops. YGG’s scholars are a key selling point for game developers as an emerging playerbase ready to try out new games and provide critical user data and feedback.

This “community value” that YGG has created through subDAOs brings financial arbitrage opportunities through partnerships with game companies that give YGG discounted assets and tokens in exchange for access to its playerbase.

The subDAO model is a solid strategy, and YGG is at a significant advantage, being a first mover in many markets. Long-term, these subDAOs will need to prove their value to both players and investors in order to retain activity. Additionally, YGG will also need to ensure that the parent organization can provide value to these subDAOs, as there is a risk of successful subDAOs trying to break free of YGG (why share economics if there is no benefit?).

YGG Assets: Token, Investments, and Partnerships

YGG launched its own token in July 2021. The token started at a price of $1.50 and rocketed to $10.30 in late August, but due to the decline of Axie Infinity (discussed below) and general market conditions, the token currently sits at ~$0.70. Despite the multitude of partnerships and investments, there has been significant erosion in token value (from peak to trough ~93%). This is partially indicative of the excitement and speculation in the early beginnings of defining web3 guilds, and it’s also reflective of the broader realization that scholarship programs are much less attractive with sustainable blockchain games.

The general partnership model can be described using CyBall as an example. YGG partnered with CyBall in late 2021, receiving discounted CyBloc NFTs in return for access to ecosystem, marketing, etc. YGG then used the CyBloc NFTs to start a scholarship program in February 2022, giving 1,000 players the opportunity to use, play, and breed new CyBlocs. As more players breed these CyBlocs, more scholarships will become available. To summarize the strategy, YGG uses partnerships to get discounted assets which they then turn around and use in scholarships.

YGG has been very effective in forming deals and partnerships, likely due to scale and brand recognition. The guild made 13 deals in Q1, reaching $2.6M in investment. In total (at least what we see so far), YGG has made 62 deals, with 76% falling in the “games” category, 13% in the “guild” category, and 11% in the “P2E infra” category.

In terms of value by partnerships, games still lead, with a total of $8.8M invested equally between tokens and NFTs. Guilds and P2E infra have a total of $6M and $1.7M invested, respectively. The total value of these investments stated in the Q1 community report (as of March 31, 2022) was $89M. However, looking at the table below, it seems that the value here may count as of December 31, 2021. This poses a serious issue with reporting, as community members may be being mislead on the current value of partnership investments. Furthermore, due to recent market conditions, the total value of $89M is likely 50%-80% less, given the broader market sell-off.

Aside from these recent financial woes with partnership values, the strategy of getting discounted assets very early is a clear indicator that YGG has ambitions to become an investment vehicle for Web3 games and ecosystems (almost like an ETF).

For game-specific partnerships, the strategy genre has seen the greatest ROI, followed by RPGs, and then MMOs. Note that most of the value in the strategy bucket likely consists of Axie Infinity tokens and NFTs. Also, please consider that the “Value (end of Q1)” may actually be the value at the end of Q4 2021. In either case, the current values are much lower than what is reported below.

In the first quarter of 2022, YGG spent $1.6M on game partnerships — $365k was spent on NFT assets (23%) and the remaining $1.3M (77%) was spent on governance tokens. This means that governance tokens are as important as NFTs, since they help to ensure the guild is able to influence the direction that games go in.

Unfortunately, YGG has not published a treasury report since September 2021 (likely due to underperformance of assets across the board). Looking back to NFT ownership at that time, Embersword, Axies, and Guild of Guardians Guilds were the largest holdings:

At that time, the biggest partnerships were with Illuvium, Thetan Arena, and Star Atlas.

While we wait for another treasury report, this data is the best one available when looking at specific project exposure and ownership.

In addition to partnerships, it’s important to add that YGG has generated substantial rewards from DeFi staking since its inception. The company staked governance tokens from a wide variety of investments, and in Q1 2022 it generated over $2.9M in rewards.

YGG’s Dangerous Coupling With Axie Infinity 

In the January report, we left off by noting:

“So far, YGG has overcome one of the toughest parts of any new venture: starting. It bet on the right game - Axie Infinity - out of the gate, used early momentum to raise significant capital, and is using that capital to build a more diverse and complex organization. With Axie Infinity’s economy now struggling and more blockchain games releasing, the challenge becomes picking the next winners and diversifying YGG’s revenues and AUM. Also, with the rise of other guilds, YGG is put in a position where it must think about building long-term competitive advantages over others.”

One of the key insights from the report is that, while Axie Infinity was a great starting game for YGG to focus on, the economic challenges Axie faces also severely encumber YGG - given the exposure to the game and its economy. To illustrate this point, consider the token prices for the YGG token and SLP from Axie Infinity. As you can see below, YGG had an initial bump with its launch in July, but since early 2022, both tokens have been declining in a parallel fashion and have continued to do so throughout the first half of 2022.

Additionally, looking at a more qualitative metric — the interest level in YGG and Axie Infinity, measured by searches on Google — it is even more apparent how tightly coupled YGG is to Axie Infinity:

Those familiar with YGG might find the correlations above a bit puzzling because despite the strong association with Axie Infinity, YGG’s assets are actually fairly diversified across asset classes:

Regardless, there is still a strong correlation between YGG token performance and Axie’s economy. This is likely explained by one of YGG’s core economic moats — its massive and global scholarship program. As of March 2022, there were ~30k scholars across YGG and subDAOs. The majority of scholarships are in Axie Infinity (86% as of May 2022). This has led to a situation where scholarships are growing at an incredible rate (40% MoM on average in 2022), but that growth is not reflected in the YGG token price due to the decay in Axie Infinity’s economy.

YGG has maintained a somewhat steady total amount of SLP farmed per month over the past nine months — a result of adding more scholars while seeing lower SLP payouts per player on average.

However, because of the decline in the price of SLP, the actual earnings that YGG has realized from that farmed SLP are much, much lower. As you can see in the following graph, in the first 3 months of 2022, the total YGG earnings from scholars in SLP was ~$94k.

There is a very concerning trend that is apparent in this data: increases in scholars are not leading to increases in revenues, because the SLP per scholar is down, as well as the $USD for SLP.

This is also a bigger issue than one might think, because if “fixing” the game economy and making it more sustainable means lower payouts and lower yields, then that destroys a huge part of the scholar value proposition. And if most P2E games are going through similar realizations, then the scholar model (aka the yield-based model) gets put heavily into question as a means of creating significant value. Therefore, the competitive advantage of having a large and global scholarship model is probably not nearly as big of an advantage as many once thought. More on this below.

Outlook for YGG

So far, we have established a few fundamental tenants about the YGG story. To recap and connect some dots:

• YGG (and all Web3 guilds for that matter) exists because of Axie Infinity.
• Today, the fundamental value prop that guilds offer is scholarship programs, and YGG’s competitive advantage is the scale and geographic reach of its scholarship program.
• Scholars programs exist because the breeding mechanic in Axie Infinity caused high barriers to entry, and scholarships allowed for investors to speculate on NFTs without playing the game.
• Axie Infinity and most other Web3 games have flawed economic systems that rely on fast-paced user growth to sustain the economy.
• Axie Infinity’s decline precipitated a steep decline in YGG’s token value and has raised concerns over the core value prop - the scholarship program, which becomes less attractive in non-ponzinomic games.
• YGG does have some diversity in its business model, as scholars also provide a userbase that is willing to try new games, creating “community value” that YGG can trade with game developers for discounts on NFTs and tokens.
• The operating model of selecting games to partner with and invest in is essentially venture capital.
• There is a fundamental tension between being a prudent investor and being a top-tier scholarship organization; an investor’s success is defined by knowing not only what/when to buy but also what/when to sell; however, with scholars grinding in a game, a decision to sell would seem to undercut the platform underpinning of the scholarship model, which leads to holding in the face of obvious economic and value-destructing issues.

So what’s next for YGG? I think the collective Web3 conscience recognizes that “Guild 1.0” (i.e., the scalable scholarship model) is mostly unsustainable, given the reliance on games with ponzinomics. However, there is an opportunity for “Guild 2.0,” where the primary focus of the guild is investing (VC), and that function is supported by scholars who make money in the early stages of game release when economics are more forgiving. In the Guild 2.0 world, there are sustainable blockchain games that have a healthy flow of money in and out, and are supported by users who spend more than they earn. Here, scholars would likely fall into two categories: 1) beta-stage play-testers who provide valuable community feedback, and 2) highly skilled players who help other players win or “boost” (similar to the esports scene today and services like Legionfarm).

To summarize: YGG is making lots of steps to increasingly diversify its holdings across games and geographies, but it has not solved its significant exposure to unproven games with weak economies. As games continue to shift away from P2E for sustainability reasons, YGG may struggle with sticking to its scholar roots, and guilds around the industry will begin to more closely resemble venture investors than scholar platforms.