The investment bank of the future: Yield Guild Games

The last few days in the cryptosphere have been crazier than ever: the NFTs explosion has achieved absolutely unprecedented levels that even the most optimist practitioners could not have predicted.

OpenSea, the biggest NFT marketplace in circulation, generated over $ 3B of volume in August, generating over $ 200m in fees with approximately 300k users (Dune Analytics dashboard).

Anyway, in these euphoric times, my attention has been caught by a protocol that builds a financial service on top of NFTs, and that I think represents a new model of doing banking: Yield Guild Games, the investment bank of the future. 

P2E Phenomenon

Yield Guild Games is a Philippine DAO, born less than a year ago which has been recently funded by A16Z.

This DAO controls an NFTs fund specialised on gaming items: they acquire NFTs that can be used in games and they rent them out to players who then use these assets to play. Through this activity YGG generates a generous return.

How is this possible? 

YGG essentially owns and rents items that are used in a few play-to-earn games.  Last week, for the Fintech Nerds collective, I wrote something on this:

“Some forms of competitive gaming have been present for decades now, with e-sports and other major platforms getting a lot of traction. The new wave of games is however unique, featuring built in crypto-economics, with Axie Infinity being the epitome of this category. These p2e games have achieved a level of traction and engagement that is totally unprecedented. These games reward players who perform tasks with crypto tokens that, besides being usable in-game to perform other actions or to buy gaming assets, have a financial value outside of the game. 

This value is usually given by the fact that, in order to play, people need to use the in-game currency. If you don't want to spend time accumulating it, you just buy it. Very simply, players in some parts of the world don't see significant reward in farming the in-game currency, so they will buy it to complete more engaging/ value-adding activities e.g., breeding. On the contrary, other players (usually in developing countries) see significant economic value (in terms of input time / output earnings) in farming the currency.”

The most famous P2E world in circulation is Axie Infinity, a pokemon-like game created in 2018 by Sky Marvis which has been a tremendous success: the game’s creators claims to have over 1M DAU, and the game has seen an enormous adoption in the Philippines where over $40M have been paid out to players in July only (source: Cryptoday). 

An extensive analysis of the Axie world has been put together by Packy and Luca, and I really suggest you read their posts if you want to know more about the space.

The investment bank of the future

As mentioned above, YGG is a fund specialised in gaming items: they invest in NFTs and then identify people that can use these assets to deliver a return.

Analysing their balance sheet it emerges that they have interests in multiple virtual worlds and in each of these worlds they run multiple business types: buying lands, buying NFTs and staking players.

If we consider specifically their staking business line, as appeared in their latest treasury report, in July they had approximately 4K players in their portfolio, who generated over 11M of SLPs (which makes approximately $2M), most of which have been distributed to their managers and scholars (70% and 20% respectively).

Looking at the wider picture, the business so far is doing pretty well: they made $8.9M between April and July, which makes over $25M annualized, with a projected IRR of over 300%. Not too bad for a “toy”.

Why did I call YGG the investment bank of the future? 

The ultimate activity of a bank is lending which, in its essence, is a business of entropy reduction in a perimetered system, in exchange for a fee.

Lenders essentially are companies that are able to treat special types of uncertainties, what they call risk, and they are remunerated for this activity (I recommend this piece of art by Luca on this topic).

As investment banks are able to understand uncertainties in specific domains characteristic of Traditional Finance, YGG understands uncertainties in some digital worlds and, after providing upfront liquidity to some agents in these worlds (Axies players), is able to generate a return out of it.

Conclusions

YGG is definitely an interesting product, but it’s not the only one in the space. Other companies are leveraging the traction of NFTs to build and sell wrapped financial products around non fungible tokens.

I believe that the NFT space can represent the first major non-speculative crypto use case and it will eventually become an inflection point in the adoption of this technology by the masses. 

“Toys” like Axie Infinity, will probably turn into something very very big.

After almost 2 years I’m back travelling. I’ll be in London from the 16th to the 20th of September and I’d love to meet people in the fintech/defi/vc space face2face.

If you wanna have a coffee or a beer, just DM me.