05 November 2021

Yield Guild Games (YGC)

Social Capital
The metaverse is pretty big news at the moment — so big that Facebook announced that it will rename itself Meta. Meta may have some grand vision encompassing a "new phase of interconnected virtual experiences using technologies like VR and AR," but in many ways, the metaverse is already here.

The economic and social impact of the COVID-19 pandemic, especially on emerging economies, drove a significant number of people to shift more aspects of their lives online. Entire digital economies developed inside these virtual worlds, enabling people to earn money. That dividing line between the digital world and the real world has already started to blur for many people.

Sky Mavis' Axie Infinity is the best-known example of a play-to-earn game, an ecosystem that really took off, especially in the Philippines, as people sought to escape the economic hardship wrought by Covid. People in remote areas of the Philippines found Axie was a perfect way to make money during lockdown.
Yield Guild Games (YGG) emerged from this period as an exciting new business model: a play-to-earn gaming guild, bringing together players to earn via blockchain-based economies. By raising capital, YGG was able to set up a scholarship program to scale the positive impact of the game and create as many scholarship opportunities as possible. YGG works with Community leaders to act as Managers, recruiting and training people on how to play-to-earn and use crypto. YGG is like a University, providing digital life-skills and training, or as founder Gabby Dizon calls it "a job board for the metaverse".
Investment Thesis
YGG offers investors exposure to multiple growth megatrends, including Play-to-earn, Decentralized Finance (DeFi), digital asset ownership (NFTs) and virtual worlds (metaverse). Rather than investing in a single game like Axie, an investment in YGG provides a diversified exposure to the metaverse. The value of YGG’s digital assets under management (AUM) will grow as virtual economies expand over time.

  • YGG’s business model is similar to alternative asset management companies like Blackstone (BX).
  • YGG’s model allows for multiple revenue streams that are geared towards growth in the metaverse.
  • YGG is attractive to Investors seeking uncorrelated sources of returns, namely NFT/p2e, where YGG has a leading position.
  • The AUM will be managed by the DAO giving investors a say in how the money is managed.
YGG is one of the world’s largest digital asset managers, principally investing in virtual worlds and blockchain-based games. YGG now manages over $ 800 million of AUM. As the metaverse expands, YGG’s capital will be deployed into a diversified opportunity set, providing a stable rental yield.

YGG creates value for investors: YGG will derive most of its income from a rental yield on its digital AUM. YGG will also benefit from Principal Investment Income from the unrealized returns on the DAO’s proprietary trading.

YGG creates value for its guild members: YGG is building a community of play-to-earn gamers who play competitively to collect in-game rewards. The guild members benefit from training and access to the NFT assets to use within the game, in return for a share of the in-game earnings. Between April and September this year, YGG scholars and Community managers earned a total US$ 11.1 million by playing Axie Infinity.

YGG creates value for game developers: YGG is a recruitment agency for the metaverse, matching people who have time with people who have money. If YGG invests into a particular project, the game is more likely to reach a critical mass in terms of the number of players.
Business Model
The value of all activities in YGG will be captured in the fully diluted market capitalisation of YGG governance tokens. YGG invests into games that offer a virtual land-based economy which can be acquired, a native token, and a play-to-earn functionality where players are rewarded in native tokens. The value of the YGG token will be underpinned by the following:

Rental Income: Revenue from leveraging the YGG-owned NFT assets. Guild members can utilize the assets to earn money in exchange for a portion of the in-game rewards paid back to the DAO. The In-game NFTs such as land may also generate revenue via third parties that conduct economic activities on that land.

Principal Investment gains: The unrealized gains on the DAO’s proprietary trading are likely to be a significant value driver. YGG has a unique opportunity to participate in early stage VC funding to new and upcoming p2p projects. This typically takes the form of Simple Agreements for Future Tokens (SAFTs), which may then be revalued significantly higher once the game developer lists tokens on an exchange.

Investment Drivers

  • The DAO is built around a conviction and experience in developing play-to-earn business opportunities
  • The DAO controls a large pool of capital to access early stage funding opportunities
  • A growing network of guild membership as gamers, artists, and content creators shift online and populate the metaverse

Risks to Upside

  • Faster than expected launch of economically attractive games
  • Growing need for SAFT funding by developers
  • Successful partnerships with game developers to build long-term value

Risks to Downside

  • Slower onboarding of guild members
  • Changes to in-game economics leading to poor player retention
  • Inability to deploy sufficient Treasury capital
The Treasure (AUM)
The role of the YGG Treasury is to oversee the management of the YGG assets and to maximise the value of these assets to the YGG DAO over time.

YGG sold tokens to investors (seed, VC, and public), raising $ 19.8 million at an average price of $ 0.07 per token. Of the funds raised, 83.3% or $ 16.5 million, was placed in the treasury to fund the purchase of in-game assets. Out of the total one billion YGG tokens that were minted, investors hold 24.9%

Chart: YGG Token Issuance

The Treasury will hold 13.3% of the tokens, or 133.3 million tokens. As at the end of September, the AUM of the Treasury stood at $ 845 million. The incredible growth in Treasury AUM was largely driven by the revaluation of the YGG token, which rose from its ICO price of $ 0.29 to $ 6 as of end September.

In addition to the very substantial YGG token holdings (>95% of AUM), this figure was made up of other liquid tokens, locked DeFi tokens, and NFT assets.

Chart: Treasury liquid assets

The Treasury owns over 36,000 NFT assets, spread over 12 different games, that can be utilized by guild members to generate an income. We estimate that the value of NFT assets held has grown from around $ 10 million at the end of July to around $ 17 million by the end of September.

Chart: Treasury NFT Digital Assets

The Treasury holds a number of SAFTs. We calculate that the unrealised gains on the SAFTs amount to around $ 5 million since the end of July.
Returns on Assets
We believe that the best way to understand YGG is by comparing the DAO to an alternative asset manager like Blackstone, which specializes in real estate and private equity.

The big difference is that in addition to managing its own money, Blackstone also manages other people’s money, which accounts for a large proportion of the $ 730 billion in AUM, and fees. Notwithstanding the difference, the revenue streams are similar.

  • Blackstone earns management fees, which are a fixed percentage of AUM. This is very similar to the rental yield that YGG earns from scholars utilizing its digital NFT assets.
  • Blackstone earns principal investment income on its own funds These realized or unrealized gains on proprietary funds are a more volatile revenue stream. This is similar to the VC funding that YGG carries out. All of YGG’s funds are proprietary and the DAO should see substantial mark-to-market gains as investee companies move through funding rounds towards an eventual ICO.

Management fees: The returns on YGG’s investment into Axie has been incredible. On Axie NFT assets of $ 7.5m, the YGG community has generated over $ 12 million in the past six months. That equates to an annualized ROI of around 330%. Of course, the players and the community managers retain 90% of the in-game earnings, with YGG Treasury receiving 10%. As such, the ROI to the Treasury equates to an annualized ROI of 33% on its Axie assets. This compares favourably with the long-term performance of Blackstone funds that boast an IRR of around 16%.

Chart: Management fees from Axie scholarships

Principal Investment Gains: The returns on YGG’s proprietary investments would even make Blackstone jealous. In the past two months, YGGs portfolio of SAFTs has grown by 4.6x from $ 1.4m to $ 6.6m. The unrealized gains on Illuvium, Star Atlas, and Splinterlands particularly stand out.

Chart: Unrealized Gains on Principal SAFT Investments

The issue for investors in YGG at the moment is that the DAO has invested just 3% of its capital into earning assets. The total undrawn capital, or "Total Dry Powder" available for investment is around $ 820 million. If we calculate the ROI on total Treasury AUM, then that return drops to just 1.5%. Nevertheless, as the universe of investable assets grows, we see potential ROI of 30% as achievable on its NFT assets.


Disclosure: 3Commas Capital members may hold YGG and/or hold advisory roles. This statement is intended to disclose any conflict of interest and should not be misconstrued as a recommendation to purchase any token. This content is for informational purposes only, and you should not make decisions based solely on it. This is not investment advice.