Invest Like the Best with Patrick O'Shaughnessy - Gabby Dizon - Mapping the Metaverse Economy - [Founder’s Field Guide, EP. 49]

Starting point is 00:00:00 This week's episode of Founders Field Guide is sponsored by Clavio. Want to deliver marketing moments that last a lifetime, Clavio is the ultimate marketing platform for e-commerce. With targeted segmentation, email automation, SMS marketing, and more. Clavio helps you create your ideal customer experience and keep your customers coming back. See why brands like Living Proof, Solo Stove, and Nomad trust Clavio to grow their business. Get a free trial at clavio.com slash founders. That's K-L-A-V-I-O.

Starting point is 00:00:30 dot com slash founders. If your startup doesn't have the right compliance certifications, you can't close major customers. It's that simple. Vanta is trusted by over 1,500 SaaS companies to automate the time-consuming and expensive process of preparing for a SOC2, HIPAA, or ISO-27001 audit. With Vanta's continuous monitoring solution, you avoid hosting auditors on site and taking hundreds of screenshots to prove that you're compliant.

Starting point is 00:00:56 Here's how it works. Integrate with your cloud provider and tools. check off items on the customized to-do list and let Vanta continuously monitor your security so you can focus on growing your business. Founders Field Guide listeners can redeem a $1,000 off coupon at Vanta.com forward slash Patrick. That's vanta.com forward slash Patrick. Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Founders Field Guide. Founders Field Guide is a series of conversations with founders, CEOs, and operators building great businesses. I believe we are all builders in our own way and this series is

Starting point is 00:01:30 dedicated to stories and lessons from builders of all types. Founders Field Guide is part of the Colossus family of podcasts, and you can access all of our podcasts, including edited transcripts, show notes, and resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunacy Asset Management.

Starting point is 00:01:59 This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. Clients of Oshonosia asset management may maintain positions and the securities discussed in this podcast. My guest today is Gabi Dizant, co-founder of Yield Games, or YGG. In 2020, Gabby and his co-founders built YG around the growing play-to-earn economy within blockchain-based games. Based in the Philippines, YG effectively backs players

Starting point is 00:02:28 who might not otherwise be able to afford to play in exchange for a share of their profits. Today, YGG is paying out over a million U.S. dollars a week to players within its community, largely concentrated in their home country of the Philippines. The play-to-earn model has seen its most rapid growth in the popular NFT-based game Axy Infinity. Players earn tokens within the game, which can be exchanged into local currencies or be used to purchase more digital assets. For a sense of how this market has expanded, Axi Infinity has already reported over $1.5 billion in sales over its history and nearly $900 million over the market.

Starting point is 00:03:03 the last 30 days. The speed at which these games and ecosystems around them are growing is remarkable. In our conversation, Gabby explains YG's decentralized structure, the unit economics of their business model, and how he deals with the volatility of crypto assets when trying to build a durable long-term business. We also discuss the broader metaverse landscape, how it might evolve, what might derail it, and the technicalities of building a token-based as opposed to equity-based business. I hope you enjoy this wild conversation with Gabby Dyson. We just met a few days. We just met a few days ago, but I've been so damn excited for this conversation because I think you're building one of the more interesting and different businesses in the world right now. You're in Manila,

Starting point is 00:03:44 I'm in New York. That's the nature of things these days. I absolutely love it. Maybe just since a lot of people won't be familiar with Yield Games, you could just give an overview of what the company does today before we retrace your steps and the company steps back in time. I think that's a good place to begin. Yield Games is what we call a play to earn Gaming Guild. In a way, I call it. In a way I call it similar to a world of Warcraft Guild with a balance sheet. So we're a group of gamers who are set up as a Dow or a decentralized autonomous organization. And we invest in assets in different blockchain games. So Axi Infinity is the main one that we are playing in. We buy these axes. These NFTs are used inside the games to earn some form of yield. So in this case, it's SLP tokens.

Starting point is 00:04:28 These are used by players to earn an income. I think we need to talk about play to earn in some detail up front. Because without that foundation, it's going to be hard for people to follow, you know, what the hell an SLP is and why anyone cares. I've heard you talk elsewhere about how there's sort of like a westward expansion happening in the digital world right now. Maybe it's a gold rush. Maybe it's a land grab. There's a lot of terms from like early physical exploration and settling that we could use in this discussion. But just talk us through what play to earn means, how it relates to this fun concept of the metaverse and digital assets. Give us a primer on this concept? I guess we have to start with blockchain games. With blockchain games, these games where

Starting point is 00:05:10 some of the assets are NFTs. And because these are NFTs that are in the blockchains such as Ethereum, then the players own these assets. It's not owned by the game anymore. And when you play these blockchain games, it reads your wallet to see what NFTs you own and then represents them in a game. So that's kind of a basic layer. And then play to earn is kind of a step beyond that where you you are using these assets that you own to earn some kind of token rewards. So, for example, in Axi, if I have three axes in my wallet, I play a match inside the game and I win. I earn an SLP token. And this SLP token is something that I can sink into my wallet as a token and then I can interact with the DFI world, turn it into Ether, for example, or turn it into Fiat money, into dollars or Philippine pesos, and I can go get spend up money.

Starting point is 00:06:00 So in effect, I am using these games to play and then earn money that I can then cash out in the real world. I think we need to talk about this concept of assets because, again, for some people that don't play these games or are not spending all their time thinking about crypto or blockchain, it's really important to understand the categories that these things might be in. What are the major ones? People probably have heard of like cosmetic purchases, cool skin and Fortnite or something. How would you categorize the major kinds of assets that exist today and may exist? in the near-term future? NFTs can be generally unique assets that are inside the games that you're playing. So they can be skins, they can be items, for example, like armor or swords.

Starting point is 00:06:42 It can be unique characters inside the game. In the case of Axeter, like unique digital pets similar to a Pokemon. So the idea is the game generates unique kinds of assets that can then own by the player as NFTs on a blockchain, which they can then own and trade with. one another for value in the real world. So if you think about, let's just stick with the example of an Axis. So you said it's a little character, it's almost like a Pokemon or something. And the game itself, is it like Pokemon again, where you have your stable of these little

Starting point is 00:07:14 characters and you're playing against others in some sort of game? Yeah, roughly that's it. You have a team of three Pokemon that have different skills and abilities. And there is a turn-based game. I would say somewhat similar to a Heartstone. You're using the abilities of your axes and your opponent. and your opponent is using the ability of their axes, and you try to battle and win against one another.

Starting point is 00:07:35 So we know that gaming, I think it's $200 billion a year, is spent a lot of it on in-app type purchases, and a lot of that is in captive Waldgarten ecosystems. Like you mentioned World of Warcraft, which was a famous one, I guess still, but many years ago, too, where people spend a lot of actual Fiat dollars on the game, but there's nothing you can take out of the game. So I think your first key point is,

Starting point is 00:07:57 yield guild your business is owning assets and lending them out in items that can be owned outside of games. So maybe potentially moved between games or moved into fiat. Is that kind of a fair concept summary? Yeah, that's correct. If we think about the example of, let's just stick with AXE, why does anyone need you? Why is someone that's, let's say, in the Philippines that wants to play this game and somehow earn money? First of all, like, earn money from who? Like, they're the supply.

Starting point is 00:08:25 What's the demand? and what's the work they're doing that's valuable to someone else that's worth something? And why can't they just start on their own? What do they need to interact with you? The game economy of Axi Infinity is player-owned, which means the developer themselves, the SkyMavis, the developer of Axi, they don't own any of the assets themselves. This game economy is owned by the player base. If I have to come in and play Axe Infinity, I need to have three axes in my wallet.

Starting point is 00:08:54 So I have to go to the marketplace at buy three axes, and the people who are selling them are the breeders in the game. So there are different class of players called breeders who are breeding axes, basically, and selling them to players coming in, usually selling them for Ethereum. And for these breeders to create and breathe the axes, they actually have to use the SLP token as an ingredient. And the SLP is produced when you're winning games inside Axi Infinity. So you're seeing this crypto economic model where I'm a player who has three axes, I'm winning the games and creating SLP. I'm selling this SLP. The breeders are buying them because they're using them as an ingredient to breed new axes.

Starting point is 00:09:38 And they have a stable of axes that they're selling to new players who are coming in, want to buy axes because they want to play the game and start earning SLP as well. So there's this crypto economic loop that is working as an in-game economy, but it also touches the real world because people are buying and selling in crypto or in ether via the marketplace. I'm going to keep doing this with you because this is such a unique new way of thinking about human behavior, but I'm going to play it back to you and just make sure I have it right. So in this game, which is fundamentally owned by the people playing it, there are two currencies or two assets that matter. One is fungible. Think of that as LPs is almost like dollars or something.

Starting point is 00:10:18 It's a currency that you could exchange and key. You can take that out of the game, sell it for Ethereum, and then sell Ethereum for pesos or dollars or whatever. That's very cool. And then the non-fungible asset is the axes themselves. So these characters in the game, should we think of them like Cryptopunks or something, where some of them are more rare than others and they have unique attributes. They're not exchangeable for one another. Is that kind of a fair summary of the two kinds of value that exists in the game,

Starting point is 00:10:45 the fungible and the non-fungible? Yeah, that's correct. If we extrapolate this forward a little bit, you need sort of a stake to get into the game. And you now, as a centralized tool, like you said, a guild with a balance sheet, you're lending these things out. Just talk us through the core motion of the business. Do you think yourselves as investors? So you're just going and figuring out what are going to be valuable assets across these various games and buying them and lending them out at, how do you determine the rate at which you lend them out? What's the payback like?

Starting point is 00:11:15 I'm just curious about like the unit economic of an AXE or something. The way to think about it is the GILD is investing in assets that are producing cash flow. So the assets in this case in AXE are the AXE themselves. And the cash flow that's being produced is basically SLP. So it's no different from investing in a business that somehow produces cash flow. And what the GILD does is we're the largest breather of axes. We probably have close to 25,000 axes at this point. And then we provide these axes out to what we call scholars, people who are coming in who want to play the game but cannot afford the cost.

Starting point is 00:11:52 So the cost is market driven. The cost is however much the breeders want to sell the axes for plus their profit margin. And right now a team of three axes may cost somewhere between $500 to $1,000. A lot of people who want to play this game and earn money, they can't afford the upfront cost of these axes. So the guild comes in and basically lends them the AXE accounts that goes. contain the axes, they can start playing the game and earning SLP, and then we do a revenue share for the SLP that produced. So 70% of the SLP that is produced goes to the scholar or the player, 20% to the community managers. The community manager is someone who is leading a local community that is recruiting people, training them how to play the game, and kind of acting as like, I would say, the local community manager of YGG on the ground.

Starting point is 00:12:38 And 10% goes back to the Gild's treasury balance sheet. One of the most interesting things that's happening in your ecosystem and as a result of your business specifically is people in the Philippines, I think in Venezuela and some other places like this, all of a sudden earning a lot more money by doing something that there's demand for, which is whether that's breeding these things in the game, which are valuable to people and value is value. If people want them and are willing to pay, that's value. Obviously, that can fluctuate. you know, the Axis could tanked at $5 from $500, which is something we should talk about. But talk through how this is changing people's behavior. Let's just say in your native, the Philippines. What kind of change in earnings does it represent for people that are doing this?

Starting point is 00:13:19 How many people are doing this? I'm just fascinated by how this is a new kind of job. Right now, there are over one million daily active users in Axe Infinity. Probably somewhere between 40 to 50% of this is in the Philippines. So that represents hundreds of thousands of people who are now basically working in the Metaverse. They're working in AXI Infinity. And the interesting thing about this is that AXI doesn't care whether you live in the Philippines or in America or in Venezuela. It basically pays you a flat wage depending on how much S-LP you can produce.

Starting point is 00:13:52 Now you're earning based on how good you are in the crypto economy of Axy Infinity, not based on what location you're in. And what's happened with the in-game economy so far is that it has produced, I would say, like revenue or income opportunity for these players that are multiples of what a typical minimum wage job is in the Philippines. So, for example, here in the Philippines, a minimum wage job might be $200. It's actually a lot lower in Venezuela. I think it's like $50. And people are earning maybe somewhere between $500 to $1,000 a month playing Axe Infinity. and that's just really change a lot of lives

Starting point is 00:14:31 wherein people have had this skill that they didn't think was worth any money, this gaming skill. I mean, a lot of us have gaming skill, and we've become pretty good at it growing up. We never really thought it was a scale that could be monetized, and now they're finding out that the scale

Starting point is 00:14:47 that they've honed in their teenage years that their moms have yelled at them for is actually a skill that can be monetized by playing these play to earn games. And the result is astounding, people who are jobless or have held down minimum wage chains are earning like three, four, five times the amount that they used to. I think that this is a topic in our conversation that we need to linger on because I want

Starting point is 00:15:09 to understand how this might look five years from now in good and bad ways. So, first of all, I mean, who can argue with the fact that people that were making $200 are not making $1,000 and at scale, like you mentioned, maybe 100,000 or more people in the Philippines whose lives have changed as a result of this? I want to understand what drives the durability of that opportunity. So in crypto, as everyone knows that's listening, there's a lot of volatility. Assets go very high, then they can crash very low. This happens over and over again. If, let's just say, an Axy goes from being worth, a team of axes goes from being worth $1,000 to being worth $10. What happens? Do other games spring up? What are the risks to the

Starting point is 00:15:49 pool of demand that creates these jobs and the flow of capital that creates these jobs? What are the opportunities. What do you think this looks like in five years? The way to think of each played the earn game is that in a way, it's its own self-contained economy. We even call them like digital nations, which means that people go there to play, to work. There must be people who are investing something inside the game economy for people to do some kind of work unit and take something out. So in AXIE, it's breeding that creates these, because you need these axes to come in and create SLP. But long term, there needs to be many different reasons why people would put money in the game.

Starting point is 00:16:28 For example, are their sponsorships, are brands willing to put money in the game and maybe sponsor prizes for people to do tournaments? Right now, the economy of Axi Infinity is based on new user growth because every new user that comes in has to buy three axes, which means that the breeders are making money, selling axes to these users coming in. Of course, at some point, we don't know whether it's one year, two years, five years. The new user growth will slow down, and there needs to be spending by current users inside the game or external parties such as maybe brands, for example, who would want to advertise or give prizes to the population of the people in that game. So in a way, I even think of each game economy as having its own GDP.

Starting point is 00:17:12 So that's why we talk about settling the metaverse or settling this digital donations. In a way, these people are, I may be in the Philippines, and then I go to this online game to start working, and I'm not in my local economy anymore. I'm now in the economy of this game or virtual world, and I perform actions there that I earn value, and then I take that money home, be it SLP or whatever kind of game currency, and then I take it out back as Philippine pesos.

Starting point is 00:17:40 So it's actually not that different from a migrant worker from the Philippines that has to go to America, or to Europe to earn a higher living wage and then take that money back home, except I'm going to these different video game worlds instead. So many interesting concepts. It's hard to know where to begin. But one thing that pops immediately to mind is then if each game is its own nation, has its own GDP, one of the great things about, say, a country like the U.S. is like, you're pretty

Starting point is 00:18:07 confident that the U.S. is going to be around. It's going to have a GDP. Maybe it'll shrink a little bit. Maybe it'll grow. But it's a thing that you can go build and invest in. And you're doing the same thing. Like, you're not just an Axy company. You're investing in items in other games as well.

Starting point is 00:18:20 And I'm sure we'll talk about that in a few minutes. But if you think about as a player, as an investor, as whatever, you want this thing to stick around. Some games do. Like, Fortnite's been around forever now. World Warcraft's been around for 15 plus years. How do you figure out whether or not a game itself is worth investing in and will have that sort of durable ecosystem that will allow value to accrue over time?

Starting point is 00:18:43 First of all, I guess Play to Earn is still very new. a lot of this is still, I would say, being invented as we speak. That said, when we invest into a game, we try very hard to look into the tokenomics of the game. So we act pretty much like early stage investors as well, but we look into like how the game economy works, how people are thinking about what the play-to-earn rewards are, how is it generated, and definitely where the money is coming from. And these are part of the things that we consider when we are investing in assets in a play-to-earn game. And if you think about the analogy of kind of settling these digital nations, when America was being settled, there was none of the stability that America has now.

Starting point is 00:19:23 It was very much the Wild West. But at the time, that was when a lot of fortunes were made, a lot of people, fortunes were lost as well. And then some people became kind of the oligards of the country. So I think the same thing is happening where people are discovering the metaverse. It's still very new. A lot of new experiments in virtual world economies are being made. And yeah, a lot of people will make the right bets and invest in these digital assets that will endure over time.

Starting point is 00:19:51 And also a lot of people will lose money playing these games that may turn out to nothing over time. If we stick with this useful analogy of land grabs or expansion and risk and all these things, is there like a land equivalent? So if we think about U.S. expansion, let's say, in the early days, obviously land, certain kinds of land has more utility than others. You can grow food on certain land. You can have a beautiful view in others.

Starting point is 00:20:14 When you think about utility versus cosmetics versus like the jobs to be done by digital assets that you can buy in this metaverse, how do you think about that? Maybe domain names is a good digital example. Like obviously, they're valuable real estate, quote unquote, that if you had bought them early, they're a common word URL or something is super valuable. What's the equivalent in your mind in the metaverse? What are the kinds of things that will be the most valuable across games or across the entire ecosystem? So we're actually big fans of virtual land. So there are a lot of games that have a land system wherein there's a finite set of real estate that people can buy and then people can build things that can earn.

Starting point is 00:20:53 So it's very similar basically to real estate investing in the real world except these games where perhaps before playing a game like a clash of clans and there's this kind of concept of land but there's no concept of scarcity. With a lot of these new games that are coming out, there's actual scarcity so you can buy into land knowing that only a certain amount of them will ever. be produced and that the game developers are putting in some form of functionality that you can build on top of that land, maybe build a factory, build assets that produce some form of token rewards or cash flow in our analogy. So that exists a lot in a lot of these Metaverse games. Actually, Infinity has its land, which we own a lot of. We also own land in games like League of Kingdoms, sandbox, many others. What is your view on this difference between cosmetics and utilities? So famously, like in Fortnite, the stuff that people spend a lot of money on, like a lot of Fiat money doesn't change the game.

Starting point is 00:21:50 Like they don't become a stronger player because they bought a super weapon or something. They just look cooler. And a lot of, especially I think in the West, a lot of the money spent on games and items in games is cosmetic versus having some actual utility. Like some of the stuff you just described would actually have real utility. How do you think about that difference? There are different reasons why people like to spend money or even a lot of money inside the game. And cosmetics has a lot to do with, I would say, status and being cool, especially in a multiplayer environment. And you see this actually with crypto collectibles like Cryptopunks, which in a way is a kind of cosmetic skin that you own, that you can show off people that you own.

Starting point is 00:22:33 So cosmetics are there because you want people to know that you either affiliate with a certain tribe or, you're able to buy something that is from maybe a famous artist or something that is incredibly scarce and expensive and kind of you're flexing that you can afford it. Whereas utility is valued, I would say, very differently, wherein you're almost expected to make some kind of discounted cash flow and look like what the expected returns would be. So the way they're valued is like they're both very valuable, but the way that they are valued is very different. So if you think about the opportunities that you have in front of you as a business now,

Starting point is 00:23:09 So if I understand it in very simple terms, you're sort of an operating company, you're a guild, you're also like an investor because you're buying digital assets off a balance sheet that individuals just probably couldn't. And then you're lending them out. And my presumption is the payback right now is very fast. And you already talked about the economics, but where your take rate is like 10%. So as you think about the next year or two of the company's existence, what are the key things that you're focused on?

Starting point is 00:23:35 Is it helping build games to create this new? space? Is it just underwriting every new game that comes out somehow to make sure that you sort of have the lead position and buying the key important assets? Like, what are the functions as a business that you think are most important for you over the next year or two? Here's the mental model that we use. We think of ourselves as a combination of the Berkshire Hathaway and the Uber of the Metaverse. So let's unpack that a bit. We think ourselves similar to Berkshire Hathaway in that we invest in the best yield-producing assets in these games. in virtual worlds, but we don't just invest in them.

Starting point is 00:24:12 We actively manage them. We have a very active player base that uses these assets, derives these value out of them, earns some reward and fees, and then we take a small part of that. So over time, as more games come up and we invest in more of these assets, you can see that our balance sheet of assets in different games is just growing, and then our player base will also grow, and they will have a kind of variety and choice of which world I can, and go into which game to play, what kind of roles I can play in the Metaverse.

Starting point is 00:24:43 We kind of become the gateway of people into the Metaverse. So you've got this interesting labor capital thing going on. I like the Berkshire thing. So I'm assuming that means you're not traitors, right? Like you're not trying to arbitrage. You're not trying to guess what's going to be worth more tomorrow. You're trying to make big, stable investments in digital assets in games that will have enduring lifespans or something.

Starting point is 00:25:06 And then the Uber analogy is you're providing the on-ramp into earning money for a lot of people that are in the guild and doing this new kind of work for which there's the man for all the reasons people like to play games. And I'm curious how you think about then labor and capital in the metaverse. People have talked a lot about this in the real world. What's different in your mind of the labor capital distinction based on what you're building? A lot of, I would say, web to businesses. I would say that capital takes precedence over labor. So that means that if I'm an investor or if I'm the founder, I have an outsized share of the upside of whatever I'm building.

Starting point is 00:25:45 And if I am, quote-unquote labor, so for example, an Uber driver, it means that I may be paid for the work that I do, but I don't get to capture any upside of the value that I'm creating. So a lot of Web3, and it's definitely true with what we're doing at Guild Guild, is that we want the people, the humans that are creating value for the network to also capture some of that upside value in themselves and basically reflected in the YGG token. So the YGGT token, think of it as like a share of the ownership of the entire guild. If you own a portion of a YGT token, that means you, I guess, have a proportional claim to all of the

Starting point is 00:26:25 assets that are in the balance sheet plus the fees that are being produced. One of the things we've done is that 45% of the supply of YGG token is not for sale. It is actually there to be earned by our player base. So we're setting up what we call a community mining program where if you play the games that we are partnered with, we're overlaying like a quest system in these games so that if you do these quest actions and complete them, you actually earn a bit of the YGG tokens for yourself. So think about it. The analogy that we have is that what if an Uber driver, for example, completes a ride,

Starting point is 00:27:03 and then they got a couple of shares of the company when they were starting out. And a lot of them would have had upside way past the time that they were driving. Yet again, there's another interesting distinction here of how your business legally and functionally is set up. So I know you have investors, so very well-known and great investors. There's equity somewhere or isn't there? Do you think about that the value that you're... There is no equity. So the value is just their investors in the token.

Starting point is 00:27:31 That's correct. So YGG is not a company where a Dow, and that means the entire value of the guild is in the token and what the investors like Andreessen have come into is for a portion of that token. Okay, so now we have to talk about how the token evolves. So let's say there's 100 tokens to start. You mentioned that 45% will be minable by the participants in the community, similar to Bitcoin, like there's an incentive to earn or create the tokens. What's the remaining 55? Like,

Starting point is 00:28:00 how does the rest of the cap table or the token table, I guess I'll call it, how does that work in a Dow? So, of course, some of the tokens are for the founders and the PM. A lot of it was sold to private investors because we had to have starting capital in which we invest in the assets. I guess what's different in a Dow is that you're actually starting by having a fixed set of tokens in equity, whenever you do around, you basically create more shares and then you dilute the existing participants. With the Dow, you start with a fixed supply of tokens, and you have to decide how that pie is a portion from day one. So we have to think about the tokenomics very carefully and ensure that we have network effects of people who can actually grow the network and earn the token. So the percentages that, for example, these investors or the founders on is a lot smaller than they would in a typical equity,

Starting point is 00:28:55 corporation because of the big part of the tokens are reserved for the player community who are giving value to the guilt. A lot of it is recognizable, let's say, right? There's a scarce pool of value, whether it's a share or a token, doesn't really matter. The claim on that value is either earned or bought. And so in many ways, it's similar to an equity cap table. What are the additional features that you think of as most valuable? If we're going to see a lot more of these decentralized autonomous organizations that are structured like yours instead of like a Delaware C-Corp or something, what else does it unlock for you as a company builder versus if it was just equity?

Starting point is 00:29:33 Like, why is it better? If there are ways that it's worse, why is it worse? Okay. So it unlocks its governance. So these tokens are called governance tokens. And it means that there is a process in which token holders can create proposals on things that can affect the direction of any protocol like our guild. and then there can be voting that may be weighted, for example, on how many tokens each holder has.

Starting point is 00:29:58 So these proposals, I guess they're roughly similar to proposals in public corporations. So there's governance that, like, the more of the token you own, for example, the more you can kind of shape the direction of the protocol itself. How should people interested in your, let's say, token specifically, think about yield? It's in the name of your business. Going back to Berkshire, like, be hard to find a company. that pays up 5% dividend yield today. They're few and far between.

Starting point is 00:30:26 Is it hundreds of percent? Like, is it that early that the payback on an annual base, you're making back the asset and yield that you've lent out in a month and two months? What is kind of the state of the economics of these things today? Generally, it's still pretty early on where, actually last year, if we had an AXY team, we bought investment in an Axy team and led it out to a scholar. We're probably earning it back within like a month. now that the economy is bigger and of course costs have gone up as well, the average payback time

Starting point is 00:30:56 is maybe three to six months and the kind of average cost of an Axis gone up as well. So if you think about it as a game item, I'm paying $800,000 for a game item. That sounds incredibly expensive. If you think about it as I have a franchise business that costs me $1,000 that's paid back in four to six months, it's actually still a pretty good business. And if you think about the way that this will roll out through, time and you grow as a business. There's obviously new games that create bigger economy. There's more scholars that want to earn this way. How do you think about keeping scholars in your ecosystem

Starting point is 00:31:31 because if they're able to pay back their loan, so to speak, in a couple of months, and then they've got the capital that they need, they move from labor to capital and they don't, quote-unquote, need you anymore. How do you think about that? Like, do you want people to graduate outside of your system? Do you want them to keep coming back? And if so, how do you keep them coming back? First of all, we do have this concept of graduation where people earn enough money where they don't need our Axy teams anymore and then they buy their own and keep 100% instead of 70%.

Starting point is 00:32:02 We actively encourage that. And what happens is that they stay within the structure of the guild because they're part of a community that help them become financially sustainable on their own. And the community itself is helping one another. and then they're helping the next batch of players who can't afford it to come in. So that's where the community aspect is very strong and we're strengthened this in some ways.

Starting point is 00:32:26 For example, we think of YGG as like a gaming brand, as a lifestyle brand even. We're actually coming up with an e-sports team where you can start as a scholar coming in. I have skills, but I don't have money. I come in as a scholar, then eventually I can end up as a world champion representing YGG and Axi Infinity.

Starting point is 00:32:45 So this very strong community, layer of people doing things together that will keep them in the guild, even if they technically can afford to play with their own assets. And from a competitive standpoint, what are the barriers to entry for someone else to build another YGG? Obviously, there's an advantage that grows. As your balance sheet grows, you're going to be in a unique position to spend the most or have the most scale in new games or whatever.

Starting point is 00:33:11 It might be in a bigger community that's a scale advantage too. How much do you think about competitors, or is it just too crazy? early to even contemplate that. So there's dozens or probably hundreds of guilds right now. What differentiates Yield Guild Guild is that we are a MetaGild or a Guild of Guild. We're actually incubating dozens of different communities within WheelGil. So for example, we have 19 scholarship managers around the world, a lot of them in the Philippines, in India, in Indonesia, in Venezuela, in Brazil.

Starting point is 00:33:41 So a local guild may be competing with kind of a subunit of Yield Guild, but for For us, we're actually a collection of these different communities that are united with, like, the technology that we have, the balance sheet that we have, the token that we can give out as a reward. So we think about it very differently from, for example, a group of five guys that want to play AXI Infinity together. We think about it as providing a platform for people around the world to create their own little communities and have it under YGG, use our assets, and then take it with them to the Metaverse. If we go back in time now, I want to make sure that we've talked a lot about your company specifically and these games and why there's money to be earned and why people might earn them and the unique structure. We haven't talked much about the history and the rest of the ecosystem that matters. And I think now's the time for a history lesson. So we've barely said Ethereum. We haven't said

Starting point is 00:34:35 much about broader crypto and the antecedents of the things that came before what you're building now. What do you think is the earliest most important? a couple of things that got you personally, because I know your background's in gaming, but that got you personally interested here. Is it CryptoKitties? Is it something else? What were the early historical timeline steps that you think matter to understand where we've gotten to today? I actually got into crypto because of Ethereum. And I've heard about Bitcoin and some of my friends were dabbling with it with their startups. But the main use case of Bitcoin back then for the Philippines was remittances. And I just wasn't interested in remittances. Like I was

Starting point is 00:35:15 game developer. But when we heard about Ethereum and the concept of smart contracts, and back then we thought of it as programmable money, money that you could send to someone with maybe an if-then statement, like certain losses that would trigger the value being sent from one party to another, I thought it was just really amazing and something that could change the game industry. So that was how I started going down the rabbit hole in blockchain, and we just started taking a look at Ethereum and trying to see how it could possibly fit inside games. And while we were doing that experimentation, Cryptokitties came out in late 2017.

Starting point is 00:35:53 It brought down the Ethereum network and popularized the notion of a non-fundable token, which as opposed to a currency, which are fungible, you could store like unique assets on chain, which were these cats, for example, that had their own unique attributes. So that was kind of the aha moment for me. It was like, wow, now I can store unique game items and assets on chain. And those assets lived outside of the game itself. So that was what really got me into NFTs. And what happened after that?

Starting point is 00:36:27 So you've got two key things. You've got programmable money. And then you've got the ability to have distinct scarce digital assets. And CryptoKitties was the first example of that. And people should go look that up. It's such a crazy episode. What literally were the next steps for you personally? Like, what did you do from there?

Starting point is 00:36:43 Did you build games? Were you always thinking about something like what you're doing now? What was your personal journey from there? Okay, so I actually started building a game with my team. We created a game called Battle Racers, which was an arcade racing game where the car parts were NFTs. And shortly after, I also joined Axi Infinity as a kind of part of the community as a player and breeder. I joined Axe in late 2018, so almost three years ago. And since then, I was really curious on the different applications of NFTs and how they meet with Defi, trying different things like, for example, NFT fractionalization or putting an NFT and then creating some shares out of it where you have like fractional share of that NFT.

Starting point is 00:37:27 Concepts like, for example, lending and borrowing against NFTs where you would put a piece of NFT artwork, for example, as collateral. Then someone would lend you ETH or USDC. out of it. So I was really always curious about the intersection of NFTs and Defi, the broader crypto ecosystem. And that's really kind of what led to my putting up the guild when AFC and Playto-Earns started happening last year. How do you think about the kinds of jobs that may transfer from the real world to the metaverse and those that won't? So there's all these jobs that humans do that we just kind of need, but maybe they're sort of industrial-age jobs, right? You're working. working in a factory or doing something frankly mundane and repetitive.

Starting point is 00:38:12 What do you think? It seems like a lot of the stuff in gaming, if you just use gaming, not crypto as a history lesson, like in World of Warcraft or in other games, people would do like repetitive tasks to earn whatever the currency of the game was. So do you think that the digital world or the Metaverse ends up just basically looking like the real world in terms of the kind of work and the kind of jobs that we see in it? So I think it would be different. Of course, there are some things that are the same.

Starting point is 00:38:37 So, for example, a buddy of mine is the best real estate broker in Axi Infinity. Like, he's the guy that everyone goes to when someone wants to buy or sell an estate. So I think a lot of the repetitive jobs actually will be abstracted away by code. And that's the thing with virtual worlds. You don't have to maintain them. There's not a lot of manual upkeep that you do. They never degrade. Any of the repetitive action that you have to do in these virtual worlds,

Starting point is 00:39:04 they can basically be replaced by code. I think that's one of the key differences in that humans have to bring what makes them special and their creativity into these virtual worlds. So you can be the best real estate broker in the metaverse. I can be a YouTuber, a content creator. I may be a fashion designer creating these clothes for avatars in different virtual worlds. So it frees the humans to think about what are the creative things I can do that people are willing to me money for when I go into these virtual worlds.

Starting point is 00:39:36 Do you think that we'll start seeing companies or, I guess, people or teams that rather than design games, really instead focus on designing items and that in some funny way, like the items will start coming before the games. And games are built on top of NFT items that could be, let's say I've got a really cool shirt or something that I buy. And I want to wear it across games or like a sword that has an actual use that I get to transatlose. for that sword between games? Do you think that that whole relationship will invert from game first to item first? Oh, yeah, we're actually seeing it now. There are NFT studios, for example,

Starting point is 00:40:17 that you can contract to create your building in a virtual world, such as Decentraland or Cryptobops sales. There are teams that you can go to that can create unique NFTs for you. For example, if you're a marketing company, for example, that wants NFTs done in the Metaverse. And there are companies,

Starting point is 00:40:36 or Daos that also do intersection of virtual and physical fashion, wherein you can buy, for example, a shirt or a hoodie, and there's a matching version of that shirt or hoodie in a virtual world that you can own as an NFT. What is DeCentraland? So DeCentraland is a virtual world. It was one of the first ones that came out in 2017, and it's basically a virtual world where people own the land underneath it,

Starting point is 00:41:02 and then you can build structures on top of that land. So I actually own an estate of land in DeCentraland, and I put up an art gallery there. And when you go inside that art gallery, and I share it with a friend of mine, you can see that the NFT artwork that we bought is on display on that 3D art gallery. Let's talk about the core base cryptocurrency blockchains that matter in this future. So let's imagine in five years, there's not just Axy, there's 100 axes. and everything that we've talked about is sort of come true. More people are spending more time playing games and the assets and those games matter

Starting point is 00:41:40 and there's yield and all these great things, interesting things we've talked about. And it's lifting people out of poverty, like the best version of the future, right? We'll come back to the reasons why this might not work in a few minutes. But in that future, what are the base layers that matter and what's the functionality that companies like yours or games like Axi need out of an Ethereum or a Solana or one of these other core infrastructure chains. What do you think the future looks like there? Think about it in that each chain serves a different purpose.

Starting point is 00:42:09 And if you think of decentralization as a slider, wherein, for example, Bitcoin is the most decentralized. It's hard money, and it's very conservative in that the protocol is resistant to change just being made to it. Ethereum is still very decentralized. It's programmable. But it's also, I would say, it trades off decentralization for performance. So it's not very fast, but it's still very sound money, for example. And then there are

Starting point is 00:42:36 certain chains, maybe, for example, a flow that is built for performance, you're trading off some of that decentralization, wherein there might be a time when the FBI can say, hey, I have to freeze those assets because I'm afraid it might be used for something. And they have the ability to freeze your assets and do that. So think of decentralization as a slider and your assets, the more decentralized they are, I would say, the more they sit on a layer like an Ethereum. But if you're opting for performance, as a lot of these games, though, then you might be going to a polygon or a Solana or a flow. And of course, that slider goes from one end to the other. And each chain makes its different trade-offs. So you will also see, I would say, like different kinds of games

Starting point is 00:43:22 that are built for the unique aspects of each chain. I guess the idea is that all of these chains become interoperable. So it's actually today, it's already true. Like, if you have Ethereum, it's very easy to trade that for the base currency of some other blockchain. And the flow of value just becomes easier and easier and more and more seamless, maybe in the same way that like mature currency markets, you know, if you want to trade US dollar for yen, like it's incredibly easy. So it sounds like the answer for you specifically and for those that are thinking about play to earn, it doesn't really matter. The use of the underlying chain will be designed and there will be lots of them and they'll all fill all the functions we need.

Starting point is 00:44:03 So you're kind of agnostic is how I would summarize it. Does that make sense? Yeah, absolutely. So we go where the games are. And if a game is an Ethereum, we'll make an Ethereum wallet, put our assets there. If the game is on Solana, like Star Atlas, we'll go there to Solana and put our assets there. If it's on flow, it's an NBA top shot, for example, we'll do the same thing. So we're agnostic as long as we can store our assets there and preferably find a way to trustlessly lend them out to our player base. We're happy to go wherever the games are. I think obviously like games themselves, we can talk about games and set aside crypto for a minute, have gone through this interesting progression where originally you paid money for a game one time,

Starting point is 00:44:42 typically, or maybe in an arcade you paid based on how much you played. Then there was this free to play, there's pay to win, and now there's play to earn. So there's been this interesting progression. Everyone would agree on is people like to play games. People spend a crazy amount of money on games every year. They probably will spend as much or more in the future. It seems like everyone's kind of a gamer now. How do you think about what kinds of games could have durability? So when you see a new game like an Axy, it seems like since you're investing in the assets in these games, you want to invest in the games that are going to be around for decades, let's say. What's shared in common between games that last a long time versus games that like you play

Starting point is 00:45:19 once and you're kind of done with it or you get sick of it quickly? How do you think about that? There has to be a lot of thought put into a game economy. So pretty much every blockchain game tends to be like an MMO over time. And what I mean by that is that it must have an economy that will endure, must have sufficient inputs and outputs for people to take value in, invest in, and then take value out. So that means there's a complex economy that goes in pretty much every blockchain game. Apart from that, the next most important thing is seeing the community

Starting point is 00:45:52 that's formed around the game. So a lot of these crypto communities are very reflexive in the sense that once a game or an NFT project starts getting popular, then a community starts to pile around it, buys up the assets, a lot of times even bids up the prices, it grows the economy around that game. But the reverse is also true. Like if people don't like it, they may leave en masse,

Starting point is 00:46:16 and then something that an asset or a game economy that had so much value can also leave very quickly, because people can kind of just take their money and then go to another game, for example. So having a really well-designed community and then having a really good community support that, and often it's because you're giving away most of that value to that community and supporting that community as a developer. Those are the most important things that we look at. I like the idea of the self-contained like economy.

Starting point is 00:46:44 You described it with Axi where there's the core thing of playing the game, you know, fighting or whatever it is between them. There's also the breeding. And then there's this SLP token that's earned that's a byproduct of playing this thing that people like to play that's fun. So there's demand just for the thing itself, which drives the economy. What have you seen that's most interesting in unique like tokenomic setups or economic setups in games? And what's the other side of the coin? Like what are things that if you see them, you're like, oh, this isn't going to work.

Starting point is 00:47:09 This designer or this creator of the game just doesn't understand a sustainable economic model. Like what would be red flags? Oh, a red flag is when we see that a developer is this. subsidizing the token that is being rewarded to players. That means there's no input coming to game, and maybe that the developer is subsidizing that with some of their cash flow or balance sheet. So that is unsustainable. We'd like to see that there is kind of an input where the players themselves would want to put value in,

Starting point is 00:47:40 and some players can take value out. The game economy, the developers themselves may take a form of tax like take rate on that. So, for example, the Axis stake rate is 4.25%, which if you think about it, is a lot lower than what they're getting from free to play, where you're basically taking money directly from players. But now that the economy can grow so large, because players are always trading with one another, and you're going from a direct sales model to a marketplace model and just have taking a fee on that. We need to see that kind of economy and not just have a token that a player is basically subsidizing out of the money that they've raised. How do you think about the biggest risks to all of this? So if you have an estimate of what the play to earn economy across all games is like today, like what the, I don't know, if we could put it back into ether and to fiat or some general sense of the scope, there's two futures, one where it's 10 or 100 X that size in five or 10 years and one where it's gone, or it's one tenth of the size.

Starting point is 00:48:38 If it's one tenth of the size, what is the scope? And if it's one tenth of the size, why do you think that is? What could go wrong? The biggest risk to a plate-ter-run economy from taking off is if you cut off the rails where the value on-chain is being transferred into the real world, which means the on and off-ramps from US dollars or pesos to the crypto economy. So now this is facilitated pretty easily by exchanges such as Coinbase or Binance, where I can take my tokens and I can basically turn them to dollars pretty much any time I want. if you cut off that exchange of value between the virtual world and the real world, then everything breaks down. So that's maybe a regulatory issue or a technology. If something gets hacked or something like that, so it's kind of the same big issues that would affect all of crypto also flow through to what you're doing, I guess is the answer.

Starting point is 00:49:28 If we go to the other end of the spectrum, if this gets way bigger than you currently think it will, why do you think that would happen? What would be the upside surprise or something that would surprise you in the other direction? I do think that Blade to Earn and the Metaverse is going to be eventually a trillion-dollar opportunity. I think this will happen if the core economic layer remains open, which means it's not ultimately owned by a Facebook, for example, or a Google or an Apple, like one of the big companies. It may be such a large garden that you don't see the borders, but it's still a walled garden, and you have to play inside it. They have the ability to dictate what that they create is, for example. So what needs to happen is for these economies to remain open, remain on, I guess, public

Starting point is 00:50:17 blockchains that are decentralized enough, where value can flow freely and no one entity can dictate where the value flows towards. How do you think about the scope today, and it would just be helpful to put some numbers around this, for games and for items? So, like, how much fiat money equivalent is flowing through Axis? in a given month. And I guess maybe we'll start there. And then I've got a question about,

Starting point is 00:50:41 what are the most expensive digital assets that aren't not setting aside the art? I think everyone's followed the crazy prices for some of the art, but in games, more in the metaverse. How expensive has stuff gotten so far? I just want to level set on this. This is not some small thing. Axi itself is doing somewhere between $30 to $40 million

Starting point is 00:51:01 or marketplace volume every day. And most of these really have been since May, So it's just in the last three to four months. It's just crossed $1.5 billion of GMV lifetime. And again, like 4.25% of that goes to the token holders of AXS, the governance token. It's a pretty large amount now. And of course, Axi is just like it's the biggest game, but it's not the only game. There's a lot of other games that have come in.

Starting point is 00:51:27 And the most expensive AXE is in the order of several millions of dollars. It's not because of its utility or how good it is in battle, because people actually have pretty good access to axes that are good in battle via breeding. It's because of the collectible layer where there are these mystic axes that were created when the game started that can't be bred like their special collectible axes, similar to, I would say like a crypto punk, which will never be recreated because they have that kind of scarcity level. They're considered like some of the top collectibles in the game. And yeah, some of them are worth from hundreds of thousands to millions of dollars. How much do you think we'll see utility items?

Starting point is 00:52:09 So I think of that as like a collectible, right? It seems like a lot of the highest prices in this crazy world. They're valuable because they're scarce and they're kind of like a signaling thing. Bebel and goods. Yeah, Vibling goods, exactly. But then there's this other thing like there could be a sword that is more powerful than any other sword or something. Do you see items like that that are trading for crazy prices anywhere? Is that happened yet?

Starting point is 00:52:31 So the problem with assets that have, I would say, overpriced. powered utility is that they tend to break the balance of a game. And if you break the balance of a game, then people will quit and leave your economy. If someone can pay a million dollars for an overpower sword and just start whacking everyone and no one else can have access to it. So this is why you don't see a lot of pay-to-win aspects in a lot of Western games. And that's why there's a lot of focus on cosmetics instead of utility because you want the game balanced enough where there's no one party that can overpower other parties just because they have a set of items that is so much better than what anyone else can get. So that's kind of the delicate balance.

Starting point is 00:53:13 And that's why a lot of the highest value items are based around like scarcity and social signaling rather than on utility itself. So as we start to wind down our conversation, I'm curious what you think is the most exciting about all this in the future. We've already talked about the seeds of how this might change the world and change the digital world. What are we not seeing yet or maybe just the very first signs of that has you most excited or interested about the future? I see what's happening with Play to Earn and the Metaverse as fundamentally changing the way of how we think about work.

Starting point is 00:53:49 A lot of people still think about work is I go to an office, I work with a team, we're very serious, we may found a way on the spreadsheet, and then somebody paced me at the end of the day. I think a lot of the work will not be in regular employment, but you have honing a set of skills that you can go in into a lot of these virtual worlds and basically perform these skills inside these games that can earn you something. In a way, it's coming back to the tradesmanship. I may be a blacksmith creating swords in a role-playing game that people are paying me because they have to go kill the dragons over in the other world.

Starting point is 00:54:25 I may be an innkeeper inside a game that I have to buy the land, and then build the inn and then find a way to source the food that I'm serving, to the adventures who are coming in. So the way that we think about value and work, I think, will change a lot as we kind of see how value is earned inside these games and virtual worlds. And honestly, as someone who grew up as a lifelong gamer myself, I'm excited to be part of the building blocks of this world that we're building in the metaverse.

Starting point is 00:54:53 Well, Gabby, the thing that you really, listening to you talk elsewhere and today have made me realize is that what's so powerful here is while a game like Axi could obviously create a game and just airdrop in these core assets, these axes, these characters themselves, by virtue of making the community or the players, the ones responsible for the creation of the assets that matter in a game that make it playable by different parties, opens up this possibility of work in this kind of bizarre, hard to understand new way. And I don't pretend to know if this is the feature or not, but it sure has signs of something that is just potentially drastically impactful on the world in such a fun and unique way for people that are interested in games. I'm so appreciative of your time today.

Starting point is 00:55:36 It's so interesting conversation. I asked the same closing question of everybody. What is the kindest thing that anyone's ever done for you? So I think the kindest thing that anyone has ever done for me was when I was three or four years old, my dad went home from a trip to the U.S. and gave us, siblings, a common. mother of VIC-20. So that was the very first computer that I've had. And I wouldn't be doing what I was doing today if my dad didn't do that. Fantastic. Thank you so much, Gabby. This has been a blast. Thank you. Thanks for having me. If you enjoy this episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes,

Starting point is 00:56:18 and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

Invest Like the Best with Patrick O'Shaughnessy - Gabby Dizon - Mapping the Metaverse Economy - [Founder’s Field Guide, EP. 49]

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.