Founder’s Field Guide: The Durability of Metaverse-driven Jobs and Economies with Gabby Dizon
In this podcast, YGG Co-Founder Gabby Dizon talks about the efficiency and long-term benefits of a decentralized game economy that rewards the community.
Founder’s Field Guide is a show on Colossus, an audio platform that interviews serial entrepreneurs and investors to analyze what makes a business stand out from the rest. Patrick O'Shaughnessy is the co-founder and Chairman at Colossus. He also hosts other investing podcasts, such as Invest Like the Best. Alongside this role, Patrick is also Managing Partner at Positive Sum, an early-stage investment firm, and the CEO of O’Shaughnessy Asset Management.
This episode of Founder’s Field Guide features Gabby Dizon, CEO and Co-founder of Yield Guild Games (YGG).
Patrick and Gabby have an insightful conversation about the sustainability of Axie Infinity and other play-to-earn economies in the midst of a volatile market. Gabby also explains what makes an in-game economy sustainable and attractive to not just players that provide value to it, but also brands and other external organizations, that want to help grow this new kind of economy.
The following is an excerpt from the discussion. Listen to the full podcast here.
Patrick (6:08): I think we need to talk about this concept of assets because for some people that don’t play these games, it's really important to understand the categories that these things might be in. People have probably heard about cosmetic purchases like a cool skin in Fortnite, so how would you categorize the major kinds of assets that exist today, and the ones that may exist in the future?
Gabby (6:32): NFTs can be generally unique assets that are inside the games that you play. They can be skins, or items, like armor or swords, or they can be unique characters inside a game. In the case of Axie Infinity, they are similar to unique digital pets like Pokémon. So the idea is that the game generates unique assets that can be owned by the player as an NFT on the blockchain, which can be traded for value in the real world.
Patrick (7:03): Let’s stick with the example of Axie Infinity. So you said Axies are little characters almost like Pokémon. And the game itself, is it like Pokémon again, where you have your stable of these little characters where you're playing against others in some sort of game?
Gabby (7:17): Yeah, roughly. You have a team of three Axies that have different skills and abilities. It’s a turn-based game, I would say similar to Hearthstone, where you are using the abilities of your Axies to battle against each other.
Patrick (7:35): You know that in gaming, $200-300 billion is spent a year on in-app purchases and a lot of that is in captive walled-garden ecosystems. You mentioned World of Warcraft, which is still famous where people spend a lot of fiat dollars on a game but there is nothing you can take out of the game. So I think your first key point is that your business, YGG, is owning assets and lending them out in items that can be owned outside of games and potentially moved between games or moved into fiat. Is that a fair concept summary?
Gabby (8:10): That’s correct.
Patrick (8:11): If we think about, let's say Axie, why does anyone need you? Why is someone that is in the Philippines that wants to play this game and earn money? First of all, earn money from who? They are the supply, what’s the demand? What is the work they are doing that is valuable to someone else that is worth something? And why can’t they start on their own, why do they need to interact with you?
Gabby (8:34): The game economy of Axie Infinity is player-owned which means the developers themselves, Sky Mavis don't own any of the assets themselves. The game economy is owned by the player base. If I have to come in and play Axie, I need to have three Axies in my wallet. So I have to go to the marketplace and buy three Axies, and the people who are selling them are the breeders. There is a different class of players called breeders in the game that breed Axies and sell them to players who come in and usually sell it for Ethereum (ETH). For these breeders to create Axies they need to use Smooth Love Potion (SLP) as an ingredient which is produced only when you win a game inside Axie Infinity. So you see this crypto-economic model where I am a player who has three Axies, “I am winning games and creating SLP, I sell this SLP bought by breeders because they use it as an ingredient to breed new Axies, and they have a stable of Axies that they sell to new players, coming in because they want to play the game and start earning SLP as well.” This crypto economic loop is working as an in-game economy, but it also touches the real world because people are buying and selling in crypto or in ETH via the marketplace.
Patrick (10:48): If we extrapolate this forward a little, you need a sort of stake to get into the game. And you now, as a centralized tool - like you said, a guild with a balance sheet - are lending these assets out. So talk us through the core motion of the business, do you think of yourselves as investors, going and figuring out what are going to be valuable assets across these various games and buying them out and lending them out? How do you determine the rate at which you lend them out, what is the payback like? I’m just curious about the unit economics of an Axie.
Gabby (11:18): The way to think about it is the guild is investing in assets that produce cash flow. So the assets in this case are the Axies themselves, and the cash flow that is being produced is SLP. It's no different from investing in a business that somehow produces cash flow. The guild is the largest breeder of Axies, with close to 25,000 Axies at this point, and we provide these Axies out to scholars, people who want to play the game and cannot afford the costs. The cost is market driven and depends on the breeders and their profit margin. Right now, a team of Axies may cost between $500 to $1000 dollars. A lot of people who want to play this game and earn money, can't afford the upfront cost, so the guild comes in and lends them the Axie accounts with the Axies, they can start playing the game and earn SLP and then we can do a revenue share of the SLP, where 70% of the SLP that is produced goes to the scholar, 20% goes to the community manager, who is leading a local community, recruiting people and training them and act like a local committee member of YGG underground. And 10% goes back to the guild’s balance sheet.
Patrick (12:41): One of the interesting things that is happening in your ecosystem, and as a result of your business specifically, is that people in the Philippines and Venezuela and some other places all of a sudden are earning a lot more money by doing something there is demand for and valuable to people. Talk through how this is changing people’s behavior. Let's say in the Philippines, what kind of change in earnings does this represent? How many people are doing this? I am just fascinated with how this is a new kind of job.
Gabby (13:23): Right now, there are over 1 million daily active users in Axie Infinity, probably between 40-50% of this comes from the Philippines, so that represents hundreds of thousands of people that are now working in the Metaverse, in Axie Infinity. The interesting thing about this is that Axie doesn’t care about whether you live in the Philippines, the US or Venezuela, it pays you a flat wage depending on how much SLP you can produce. Now you are earning based on how good you are in the crypto economy of Axie Infinity and not based on your location. What has happened with the in-game economy so far is that it has produced income opportunities for these players that are multiples of a typical minimum wage job in the Philippines, which might be $200. This is a lot lower in Venezuela, somewhere around $50. This has really changed a lot of lives, wherein people have had this skill that they didn’t think was worth anything. A lot of us develop this skill growing up, but we never really thought it was a skill that could be monetized, but now they are finding out that this skill that they have honed for years, that their moms have yelled at them for, can be monetized by playing these play-to-earn games. And the result is astounding, as people who are jobless or have held down minimum wage games are earning 3-4 times the amount they used to.
Patrick (15:03): I think that this is a topic in our conversation that we need to linger on because I want to understand how this might look five years from now in good and bad ways. First of all, who can argue with the fact that people that were making $200, are now making $1000, and at scale, as you mentioned that maybe a hundred thousand or more people in the Philippines whose lives have changed because of this. I want to learn what drives the durability of that opportunity. In crypto as everyone knows, there's a lot of volatility, assets go very high and crash very low and this happens over and over again. Let's just say a team of Axies goes from being worth $1000 to $10, what happens, do other games spring up? What are the risks to the pool of demand and the flow of capital that creates these jobs? What will this look like in five years?
Gabby (15:56): The way to think of each play-to-earn game is that in a way, it is its own self-contained economy. We even call them digital nations, which means people go there to play, to work, there should be something inside the game economy for people to do some kind of work unit and take something out. For Axie Infinity it is breeding that creates this, because you need Axies to obtain SLP but in the long term there should be many reasons for people to put money in the game. For example, are there sponsorships? Are brands willing to put money in the game and sponsor prices for people to do tournaments? Right now, the economy of Axie Infinity is based on new user growth because every new user that comes in has to buy three Axies which means the breeders are making money selling Axies to these users. Of course, at some point in a few years the new user growth will slow down and there needs to be spending by current users inside the game or external parties like brands who would want to advertise or give prizes to the population of that game. In a way, I even think of each game economy as having its own GDP which is why we talk about settling in the metaverse or digital nations, these people maybe in the Philippines and go to this online game to start working, “I am not in my local economy anymore, I am now in the economy of this game, this virtual world, and I perform actions to earn value and take this money home, be it SLP or game currency and take it back as Philippine pesos.” So it is not actually different from a migrant worker from the Philippines that has to go to America or Europe to earn a higher living wage and then take that money back home except here, “I am going to video game worlds instead.”
You can check out the full podcast on Colossus.