business model and its SubDAO in-depth study

This article takes Axie Infinity as an example to discuss the meaning of guilds and how they operate. From the stories of the participants, we can see the impact of low-threshold guilds on the lives of ordinary people. Secondly, it discusses how different guilds compete with each other, taking YGG as an example to discuss the operation mode of guilds, why a guild still needs a subDAO, and how the holding company obtains benefits from the subDAO.

After a few months of silence, the game guild began to liven up again. In the last quarter of 2021, I spent most of my time watching GameFi and the Game Guilds project, so I decided to dive into the game Guild space.

Therefore, this article seeks to explore in depth:

  • What is a game guild? How does it work?
  • Game Guild Competitive Landscape and Business Model Evaluation
  • Case Study: YGG and YGG SubDAO Ecosystem

business model and its SubDAO in-depth study

Participating in Web3 games requires players to hold in-game assets. For example, in Axie Infinity, players need to use 3 Axies to form a “team” to participate in daily tasks and get P2E rewards ($SLP). Considering that the target audience for Web3 games is mostly players in emerging markets, we found that these in-game assets are often out of reach for players who want to play Axie Infinity. At its most expensive, an Axie cost $200, and the entire team cost $600.

This is where Game Guilds come in. Before Web3, “gaming guilds” consisted of groups of players who regularly played computer games together—provided the games allowed players to form organized groups. In Web3, game guilds are also organized groups of players (i.e. “player members”; Annotation: YGG Chinese community translates them as “students” ) – they use the in-game assets owned by the guild to play and support the assets game. In exchange for leasing these in-game assets to the guild, play-assist members give the guild a share of the daily P2E rewards to help them pay for the initial purchase of these assets.

business model and its SubDAO in-depth study

Excerpted from YGG 2022 Q1 Community Update: Play-Assist members tell how YGG improves their lives 

This is also why the game guild has a typical set of marketing words, saying them: supplement the income of guild players through daily P2E rewards, and help them “live a better life on their own.” Emerging markets such as the Philippines saw high unemployment at the height of the Covid-19 pandemic in 2020. With this in mind, we are beginning to understand the importance of game guilds – games like Axie Infinity become the only source of income for players; with the help of guilds, they can lease in-game assets to participate in the game.

Fundamentally, we found that gaming guilds are a relatively asset-heavy business due to the necessity to purchase in-game assets; in order to cover operating expenses, they depend on future cash flow generated from revenue sharing from play-assist members. Interestingly, however, we found that unlike other cryptocurrency projects, gaming guilds have both intrinsic book value (the value of in-game assets) and cash flow (share of revenue from play-assist members), which allows them to be valued in a more traditional Web2 way. value.

Some operational metrics I personally use to evaluate game guilds:

  • Number of play-assist members:

    Play-assist members are the lifeblood of all gaming guilds, contributing community vitality and revenue share to the guild.

  • Number of Booster Programs:

    There is a difference between the number of play-aid members and the number of play-aid programs, as some guilds already provide play-aid members with asset leases for more than one game to supplement their daily income. ( Annotation: “Scholarship Program”, the original scholarship, the YGG Chinese community translates it as “Scholarship Program” )

  • Number of Discord members:

    Discord is the main channel for the guild community to communicate with each other. Some community members are not true play-assist members (ie, do not use the guild’s assets to play the game), but are active on Discord for social purposes. Therefore, a larger Discord community means a more vibrant guild community.

  • Revenue share ratio / cash flow:

    Revenue sharing defines how revenue is divided between guilds and play assistant members, and the current standard in the market seems to be 80% for play assistant members and 20% for the guild. While it may seem beneficial for guilds to get a higher revenue share, market dynamics must be taken into account, and if the revenue share of play-assist members is too low, they may choose to leave. The revenue share ratio is highly correlated with cash flow, and logically, higher cash flow is more beneficial to the vault.

  • Vault Value:

    Broadly speaking, a guild’s treasury assets can come from the value of its in-game assets, circulating tokens, venture capital, and stablecoins. A high vault value means a larger balance sheet—that is, a guild that can last longer before running out of cash, or have more ammo available to buy in-game assets or invest in new in-game items. By looking at a guild’s monthly or quarterly earnings report, it’s easy to decipher the value of its vaults. There are some sample examples to view in the “References” section at the end of the article.

business model and its SubDAO in-depth study

With the above understanding of the game guild model, it is theoretically possible to draw the conclusion that there is basically a lack of differentiation in this field, and the barriers to entry are low – because operators only need to purchase in-game assets to create their own guilds. We’ve seen, however, that guilds have found ways to differentiate themselves from one another — and build on certain niches and specialties. Below are some of the areas of focus that some gaming guilds have chosen.

a. Replenish the number of play-assist members

Considering that the number of play-assistance schemes and the ratio of revenue share constitute the foundation of the game guild business, the 1.0 version of the guild model is bound to require the establishment of a large number of play-assist schemes to maximize revenue sharing and cash flow for the guild treasury. To facilitate this, game guilds that focus on the number of play-assist members acquire in-game assets through purchase or breeding, thus having to expose 100% of these assets in their vaults to risk. You know, each Axie used to trade for over $200, and the current reserve price is $5. We’re seeing guilds that used to take this approach now suffer, and the value of their in-game assets has shrunk dramatically. Most of the game guilds that have been in this category, while still having a large number of play-assist members, are now focusing on some other niche areas as follows.

b. Entering into a venture capital transaction

business model and its SubDAO in-depth study

Heroes of Mavia by Skrice Studios: Raised $2.5M from VCs and Top Guilds 

Most game guild managers see venture capital deals in Web3 games as a way to diversify their coffers and a way to generate returns on idle funds. We’ve also found that there are strategic and multiplier considerations for making these gaming VC deals – such VC deals sometimes come with structured terms that sell in-game assets to guilds at discounted prices for them to help with Play member participation games. In this way, on the first day of the game’s launch, the guild provides them with a steady flow of players.

c. Build infrastructure

Running a guild is inherently a complex operational task, and as the number of play-assist members increases, this task becomes more complicated. Certain aspects of guild management have historically been painful to execute, such as tracking in-game assets and individual performance leased to play-assist members, and making weekly payments to each play-assist member. Some guilds have begun to build infrastructure to solve these pain points, such as: asset kanban, automatic weekly settlement of play-assist members’ remuneration, intra-guild tasks, and access to educational content to improve play-assist members’ daily income.

Building the infrastructure has a dual effect: 1) higher play-assist member engagement and retention, and 2) higher profits due to fewer community managers who need to focus on these human tasks.

d. Focus on building SubDAO

This is probably one of the more interesting patterns that only YGG seems to focus on. Basically, it involves opening a geographically SubDAO to be able to better reach a geographically restricted audience. This will be further elaborated below.

business model and its SubDAO in-depth study

I decided to do a case study on YGG – based on their being the first gaming guild on the market, and also because I wanted to dig deeper into the SubDAO model. Other guilds may be explored with a different focus in future articles.

Disclaimer:

My employer, Crypto.com Capital, has opened positions in two of YGG’s SubDAOs: YGGSEA and Ola.gg.

business model and its SubDAO in-depth study

YGG Logo

a. History of YGG

Yield Guild Games (YGG) was founded in November 2020 – co-founded by Gabby Dizon, Beryl Li, and another anonymous third person under the pseudonym Owl of Moistness.

In its multiple funding rounds, YGG is backed by Delphi Digital, Blocktower Capital, Animoca Brands, Polygon, Sfermion, Bitkraft Ventures, Fabric Ventures, Mechanism, ParaFi, a16z, and Infinity Ventures Crypto.

Using the above framework, we see that YGG has chosen to focus on the following niche areas:

  • Number of play-assist members:

    In their heyday, YGG had more than 10,000 play-assist members—mainly in Southeast Asia (mostly in the Philippines and Indonesia) and Latin America (mostly in Colombia and Argentina), their core markets.

  • Venture capital deals:

    Notable VC deals announced include Iluvium, Cyball, Mavia, League of Kingdoms, Star Atlas and Genopets. Most of these deals usually result in official partnerships, whereby YGG buys some in-game assets and leases them to their fellow students.

  • SubDAO:

    To date, YGG has launched 3 geographic SubDAOs to cover key regions: Southeast Asia (YGGSEA), Latin America (Ola.gg) and India (Indi.gg).

business model and its SubDAO in-depth study

Overview of SubDAO in YGG’s Q1 2022 Community Update

b. Concise combing

March 2021:

YGG has raised a $1.3 million seed round led by Delphi Digital.

June 2021:

YGG has raised $4 million in Series A funding led by Bitkraft Ventures.

July 2021:

YGG builds Liquidity Bootstrapping Pool (LBP) on SushiSwap’s MISO platform – attracted $12.5 million in liquidity in 30 seconds.

August 2021:

Andreessen Horowitz has announced a $4.6 million lead in YGG.

January 2022: 

YGG’s India SubDAO Indi.gg has raised $6 million from Sequoia India and Lightspeed Ventures.

March 2022:

Indi.gg completes an IEO on the FTX platform – raising $6.8 million.

April 2022:

Southeast Asia SubDAO YGGSEA secures $15 million in funding from Crypto.com Capital, Animoca and others.

April 2022:

YGG Latin America SubDAO Ola.gg has raised $8M from Galaxy Interactive, Bitkraft and Arca.

c. Why is SubDAO needed?

The idea of ​​using SubDAO to accumulate value for $YGG tokens was first proposed in YGG’s June 2021 white paper, although the example in the white paper refers to the establishment of SubDAOs for different games, not the establishment of SubDAOs based on geographic location.

business model and its SubDAO in-depth study

Cover of the 2021 YGG White Paper

Given that the community is the focus of gaming guilds, these guilds are fundamentally destined to be very local. A similar example would be: guilds in the market have localized Discord channels for people who speak a particular language, and these channels are also managed by community managers who speak that language. This level of localization also helps build stronger communities, which drive play-assist member engagement and retention.

Taking a step back, we see that the idea of ​​having a SubDAO based on geography makes sense – because Southeast Asia is fundamentally different from Latin America and even India in terms of language and culture. The geographic location-based SubDAO model enables operators familiar with the region and its customs to effectively admit and retain play-assist members on their SubDAO platform.

The SubDAO model also creates network effects – SubDAO is able to use YGG’s strong reputation to recruit play-assist members and even implement fund allocations for VC deals. It is understood that YGG’s SubDAO has also jointly participated in the cooperation of some external projects.

d. How does YGG accumulate value with the help of SubDAO?

We know from TradFi that value accrues from the branch to the holding company due to the holding company (HoldCo)’s legal ownership of its branch. In terms of accounting, the balance sheets of the various branches will also be consolidated into the holding company – meaning that the accumulation of value comes naturally. The situation is slightly different for the YGG SubDAO, as each SubDAO is a separate legal entity and has no legal relationship with the YGG DAO itself.

The following excerpt from the YGG white paper explains this to a certain extent – the ownership of the SubDAO token by the YGG vault creates a “book value”, in which the holder of the YGG token holder owns the Governance.

business model and its SubDAO in-depth study

Excerpts from YGG White Paper on Value Accumulation

Taking YGGSEA as an example, we know that YGG and Infinity Ventures Crypto are both seed round investors – these two entities jointly finalized the launch of YGGSEA, and the follow-up investors shown in the following financing announcements are all investors in the private round. After the liquidity boot pool (LBP) is established, since the token value of YGGSEA can be calculated at the market price, the value of YGG’s vault may also increase.

business model and its SubDAO in-depth study

April 2022 YGGSEA Financing Announcement

e. Response from one of the YGG SubDAOs

business model and its SubDAO in-depth study

YGGSEA LBP Announcement

With the above in mind, YGGSEA launched an LBP at CopperLaunch from May 9th to 14th – just two weeks after BreederDAO ($BREED) raised $20.07 million through an LBP sale. Due to the severe market volatility caused by the LUNA/UST crash, the YGGSEA team had to withdraw liquidity from the CopperLaunch LBP pool on May 10 and postponed the IDO.

Although it was a difficult decision, I understand that the YGGSEA team would rather have better trading performance and a stronger treasury in the future than continue LBP under such market conditions, after all, the market was in a downturn at the time. At the very least, we see the YGGSEA team working hard to refund gas fees to users participating in the $SEA LBP.

Personally, I’m bullish on the SubDAO model – however, I’m also not sure if the performance of the $SEA LBP is indicative of the market’s perception of the model, or just an effect of extreme market volatility during the LBP.

business model and its SubDAO in-depth study

Through the understanding of the business model of game guilds, we can see that the business of game guilds lacks differentiation to a large extent, and the barriers to entry are also very low. In trying to create a competitive advantage and seek to differentiate from their peers – as mentioned above, guild leaders have found ways to specialize.

While the SubDAO model has recently come under heavy criticism, the reasons for intending to make this model one of the many pillars of YGG’s treasury growth in value and influence remain clear. Only time will tell if this model will be successful – but until it does, I believe that the management team of YGG and its SubDAO is still well-positioned to protect its business until it succeeds.

business model and its SubDAO in-depth study

YGG 2021 Whitepaper

2021 YGG White Paper

YGG Q12022 Community Update

Q1 2022 YGG Community Update

YGG Seed Round Announcement

YGG seed round announcement

YGG Series A Announcement

YGG Series A Announcement

YGGSEA Private Round Announcement

YGGSEA Private Round Announcement

YGGSEA IDO Sale Announcement

YGGSEA IDO Offering Announcement

YGGSEA CopperLaunch LBP Statistics

YGGSEA CopperLaunch Liquidity Bootstrap Pool Statistics

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/business-model-and-its-subdao-in-depth-study/
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