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One of the key tenets of Web3 is decentralisation. Underpinned by blockchain technology, networks are governed by ‘trustless’ consensus mechanisms. All transactions are verified by the participants on the network, with the records held transparently and securely on the blockchain.

This mechanism for transparent, code-based transactions has given rise to the concept of the decentralised autonomous organisation (DAO). DAOs are appearing across several industries where Web3 technologies are being adopted, including Gaming.

With blockchain gaming exploding in popularity, allowing players around the world to earn cryptocurrency through the play-to-earn (P2E) model, savvy and forward-thinking individuals are forming Gaming DAOs to bring a semblance of structure to the industry’s rapid (and sometimes chaotic) expansion.

What is a DAO?

Ethereum describes a DAO as a “collectively owned, blockchain-governed organisation working towards a shared mission.” This new form of organisation exists across a distributed network of nodes (computers) and is governed by a smart contract.

A smart contract is computer code that is executed when its conditions are met. This is a necessary requirement in establishing a DAO. Once these rules have been agreed on by the founders, the smart contract is coded and added to the blockchain, officially forming the DAO. The smart contract will cover various organisational aspects, including:

  • How funds are gathered in the DAOs treasury and distributed between members.
  • Protocols for adding and removing members.
  • Method for members to make proposals, and so on.

While founding members do exist, there’s no centralised group of ‘upper management’ individuals (such as a CEO, CFO or similar) that can make isolated decisions on behalf of the entity or manipulate financial performance. It is governed by proposal, which each member with a stake in the DAO has the opportunity to create and vote on.

The DAO’s treasury is held on a specific address on the blockchain, the records of which can be reviewed by anyone on the network, making all DAO financial operations transparent and traceable. Trust between members is not necessary – the only trust required is in the code that the DAO is built upon, which is visible for anyone to check.

While DAOs and the rules that govern them can take many forms, tokens are mostly used to determine members’ standing within the DAO and their voting power.

These can be freely bought and sold on secondary markets, meaning that access to these tokens often works similarly to that of a public limited company. Capital raising is less restricted for investors than it is with regular investments, as they’re not restricted by financial regulations, locations or industry type.

The decentralised nature of DAOs allows more people ownership stakes in an organisation no matter where they are in the world. The capacity of members to draft their own proposals gives them much more say in the development of the organisation than has previously been seen and allows for a free-flowing pool of ideas to be utilised.

When compared to Web2 organisations, DAOs can be seen as a fully democratised, flat management structure. Voting on proposals is required by all members, and changes can only be implemented if certain criteria are met. DAOs have sprung up across various industries, with gaming experiencing some of the highest levels of adoption.

Pre-DAO Web2 Gaming Landscape

Traditionally, Web2 games were developed and managed by a centralised entity, whether that was a gaming studio or large consortium of game developers.

The administrators of these games may do surveys and polls to gauge the general thoughts and suggestions of the community surrounding their game, but ultimately the community members have no direct control over the direction the game will take.

In-game finance and asset trading aren’t new concepts. Trading Second Life Linden Dollars or World of Warcraft Gold for in-game parcels of land or rare items are prime examples of player-centric economies. However, these economies still existed within a closed game ecosystem.

The gaming studios still had an overall say in the financial mechanics that governed these transactions and limited the link between them and outside markets. This led to dangerously unregulated shadow markets for these in-game items which could be manipulated by bad actors. For example, here are the 5 biggest Gold scams in WoW history.

Web3 Gaming and the Rise of Gaming DAOs

Web3 and blockchain gaming flips this paradigm on its head, and Gaming DAOs are evolving to accelerate the space’s growth. A confluence of Web3 technologies and initiatives such as DeFi and blockchain have combined in the gaming space to produce the concept of play-to-earn (P2E) or GameFi.

Games set up on the blockchain offer players the opportunity to earn tokens and NFTs in-game which can be traded on crypto exchanges or external NFT marketplaces, and eventually converted to fiat currencies should the players wish to take this route.

This represents a significant shift away from the traditional one-way flow of value – from the players that buy, play and maintain the popularity of the games, towards the centralised structures that manage them. The P2E model continually rewards players with real-world economic value.

Gaming DAOs represent the next advancement in Web3 gaming, not only bringing ownership of the gaming universe directly to the community of players that supports it, but adding the new financial mechanisms enabled by GameFi to expand the value of DAO membership beyond purely the games themselves.

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Tokenising in-game assets, trading and voting

Tokens are the key to success in Web3 gaming. They represent the link between the gaming universe and the financial world outside. An exceedingly popular Web3 game, Axie Infinity, has an in-game currency called Smooth Love Potions (SLP).

SLP can be traded on crypto exchanges such as Binance for ‘real-world’ crypto such as Ethereum (ETH). Therefore, if a player is highly successful in their exploits on Axie Infinity, they can make an actual living within the virtual realm.

Gaming DAOs can use tokens to signify positioning within the organisation. As well as the in-game tokens accumulated as assets within the treasury, DAOs will usually have governance tokens which signify ownership within the DAO and measure the amount of return the person gets.

These can be accumulated by members based on the scale of their monetary investment within the DAO, or other factors such as their ‘reputation’ within the community.

To increase efficiency in decision making, DAOs may opt for a liquid setup – the more tokens you have, the more power you have. Or they may opt for a representative democracy, where they elect trusted decision makers to act on behalf of the members.

While some may argue that these structures take away from the very decentralised nature of the DAO itself, this may be a necessary trade-off for DAOs to achieve full adoption across the gaming industry.

NFTs and Gaming Metaverses

NFTs are another form of token that exist within the Web3 gaming space. As well as a game’s ERC-20 governance tokens that can be bought and sold on crypto exchanges, in-game NFTs can also be traded outside of the game’s universe. Some games utilise NFTs as their buy-in criteria to play.

These NFTs can come in the form of collectible items, customised skins, potions, weapons, armour, or other avatar wearables. Gaming Metaverses can allow these specialised NFTs to be used across several gaming titles seamlessly.

The strategy game Reta Wars is a blockchain gaming project showcasing a ‘war-to-earn’ model of gameplay. It pits two DAOs against each other, having them compete to earn NFT ‘heroes’ which can be used in-game to grow the faction’s territory and produce resources to be used in battle.

This ambitious project represents an increased level of immersion for gamers (especially those that have joined DAOs) and sets the stage for the expansion of the ‘Retaverse’ – Reta Wars’ Gaming Metaverse, in which NFTs will be a crucial component.

Guilds

Gaming Guilds have been around for a long time, usually formed by a likeminded group of gamers and made possible by the integration of Web2 infrastructure and gaming networks.

The concept of a Web3 Gaming Guild DAOs (also known as Crypto Gaming Guilds) follows on from the emergence of MMORPG games in the early 2000s and 2010s, where newly connected players formed guilds and clans to co-ordinate their gaming strategy. The members of the guild would share in the glory of completed missions and the loot they accumulated in-game.

Web3 Gaming Guilds differ from their Web2 counterparts mainly through their DAO structure and the financial element that GameFi brings to the table.

Web3 Gaming Guilds tend to operate in a similar way to investment clubs and often lend the required NFTs to new guild members (usually referred to as ‘scholars’) so they can access the games that the guild focuses on – this helps lower income players across the globe to access P2E gaming without needing to invest large sums of cash to get started.

Those players will then go out and ‘quest’, completing in-game tasks and acquiring tokens or NFTs. This loot (or ‘yields’) will then go back into the guild’s treasury and be distributed amongst the members proportionally according to the rules set out in the DAO’s smart contract.

One such Gaming Guild DAO that employs the scholarship model is Yield Guild Games (YGG). Tokenised loot is shared between their members on a tiered system – 70% of the total goes to scholars, 20% goes to community managers, and the final 10% remains in the YGG treasury.

YGG claims that there are over 10,000 Axie Infinity scholars across 10 countries, with 10% of the rental fees going back to the DAO’s treasury. YGG raised $28.4m across five funding rounds as of 2022.

Other ways accumulated assets may be used by the guild are for yield generation, auction, or speculative growth investments.

Further, some guilds try and indemnify themselves against the potential for certain gaming titles to decline in popularity (and therefore cause their income to suffer) by aggregating scholarship opportunities across multiple guilds, bolstering resilience and earning potential by incorporating a wider array of titles without needing to shift focus entirely.

The data created by all of these activities become an important market strength indicator across the gaming world, giving rise to third-party DAOs which have a specialised focus on more diverse and potentially risky investment strategies.

Incubators & Accelerators

Incubator and Accelerator DAOs commit to a more macro-focused approach, looking at entire industries and trying to accelerate the adoption of Web3 as a whole.

These DAOs aim to develop Web3 startups consultatively, providing access to expertise and solutions as well as funding for the projects they support. Accelerating the development of Web3 Gaming means tackling the ubiquitous challenges faced by the industry such as the onboarding of new players, open standards, and interoperability.

To make a return on investment, Incubator and Accelerator DAOs will have an agreement in place with the Web3 startups and projects that they support that defines their compensatory expectations. Depending on the type of project, it could be a proportion of the profits the startup makes or even royalties from NFT minting, as is the case with DAOFY by Rootstrap – an NFT Incubator DAO that helps NFT authors to develop their ideas and thrive within the market.

An example of an Accelerator DAO in gaming is Game7, describing itself as a “bold attempt to create and gamify a community passionate about shaping the future of gaming by helping fund builders, empower educators and support creators”.

This DAO boasts an open-source grants program, events program, and a facility for developing tooling, products and standards in the Web3 Gaming space, focusing on fairness and sustainability.

Developer DAOs

Developer DAOs are often seen as the most ambitious form of a DAO in the gaming industry. These are DAOs that have delved directly into the development of the games themselves, differentiating them from Guilds, Accelerators and Incubators.

Star Atlas has recently formed a Developer DAO to accompany its new NFT marketplace. The space themed MMO game combines web-based strategy with combat gameplay. Running on the Unreal 5 Engine, it allows players to explore a gigantic galaxy and combines adventure with in-game currency called ATLAS and NFTs in the form of spaceships which can be traded on external NFT marketplaces.

Whilst Star Atlas shows great promise, Developer DAOs and their projects are sometimes considered as very risky by many industry players. As the decisions of DAOs are democratised with community voting, it could prove problematic when it comes down to key decisions in game development.

There’s no requirement for those voting to be experts in game development or to have a strong understanding of the mechanics involved, so there’s the potential for projects to stall or be derailed by misguided consensus within the community. Thankfully, most DAOs enable members to liquidate their assets and leave if they feel that they no longer agree with the direction the DAO is heading in.

Conclusion

While DAOs are a new concept, they’re being adopted with enthusiasm across the gaming sector.

Differing aspirational motivations of founders has led to the types of DAOs to vary substantially – from Guilds built around gaming titles that offer their members financial incentives and a sense of belonging, to Incubators & Accelerators that work towards advancing the blockchain gaming industry as a whole.

DAOs have even branched out into becoming their own gaming studios in effect, which are looking at creating their own blockchain games based on full community consensus in decision making.

It remains to be seen just how these decentralised organisations will continue to transform, but it is becoming clear that DAOs are looking to have a decisive role in shaping the Web3 gaming industry.

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