Why DAOs became an essential part of Web3 gaming
TL;DR
DAO is a type of organization leveraging blockchain technology for governance and decision making.
While a DAO structure may vary, its token defines the status of the DAO members and their voting power.
DAO may represent a perfect solution for transparent charity, collective asset ownership, grants, venture funds, and of course gaming.
Gaming DAOs may be considered the next significant shift towards decentralization as they provide more control over projects to their communities and introduce new ways of supporting and funding them.
The most significant applications of DAOs in Web3 gaming include gaming guilds, incubators and accelerators, education, and implementing DAOs as a part of gameplay.
At the same time, DAO as a technology has a number of disadvantages, including relatively slow decision-making procedures, low voting participation, and extra security threats.
Generally speaking, Decentralized Autonomous Organization, or simply DAO, represents a community with shared goals and united by a blockchain-governed structure. Unlike traditional entities, DAOs do not rely on a board of directors or any other central party to decide on the future of the organization. Instead, DAOs run on community votings and smart contracts defining all the rulesets inside them.
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One of the main advantages of DAO over traditional entities involves dealing with funds and budgets. As a rule, working with money requires a lot of trust between the parties, but you can hardly trust people you are dealing with online. In such situations, DAO becomes a perfect solution since its smart contracts can guarantee that the operations will be absolutely transparent and verifiable. On top of that, DAOs have many other benefits, including a simple and democratic structure, fair voting process that doesn’t involve a trusted intermediary, automated and decentralized services for funds distribution, and many more.
DAOs and their rulesets may vary, but the tokens of a certain DAO always determine the status of their holders inside the organization and their voting power. Besides, some DAO tokens are traded on the market. For that reason, these assets may remind you of shares of a public limited company, however, token owners are less restricted by financial regulations.
There are a lot of ways for DAO members to exercise their voting power. The most common models of decision-making inside DAOs include:
Token-based quorum voting when a predefined number of DAO members, e.g. 60%, need to vote for a proposal.
Quadratic voting when voters are allowed to buy tokens and increase their voting power.
Conviction voting based on a continuous expression of aggregated preferences inside a community. Simply put, the weight of the vote increases if it remains unchanged for a long time.
Holographic consensus designed to focus on the proposals that will most likely pass.
Multi-sig voting which represents a balance between central authority and decentralization. DAO members are able to put forward new proposals, however, only a centralized selected committee can vote on their suggestions.
DAOs used to be one of the hottest crypto trends during the last crypto bull run which resulted in impressive interest in this technology and increased activity inside the organizations. However, the key metrics of DAOs seem to correlate with the general sentiment on the crypto market. Thus, according to Cointelegraph research, the total number of votes per month within DAOs in August 2022 has retreated back to the levels of January 2021 amidst the latest crypto recession.
Given the diversity of the decentralized organizations and various challenges they aim to resolve, it’s no wonder that DAOs have attracted a lot of VC capital in recent years. VC investments in DAOs were growing throughout 2021 and reached the peak of $160M in the beginning of 2022.
On the other hand, DAOs themselves may act as investment bodies, and we will dwell on them later.
Why Web3 games need DAOs
In traditional games, players can purchase assets for fiat currency or claim them as rewards. At the same time, game developers reserve all rights for game content, and players do not directly own the assets. They simply hold a license for engaging with the game content stored on the servers controlled by the developers.
Developers and administrators may run polls to determine the general sentiment of the community, but eventually the members do not influence the project’s future and can’t initiate any important changes. Besides, the publishers are trying to gain total control over the operations with items by limiting the links between players and outside markets.
Blockchain technologies have completely changed this model by offering tokenized assets and NFTs which can be seamlessly traded for any currency on exchanges and marketplaces.
Gaming DAOs represent the next significant shift in the industry because they provide more control over game multiverses directly to the community of supporters. DAOs are also introducing more ways for funding and supporting new projects. They give extra opportunities for players that cannot afford to invest into the required assets. Altogether, DAOs are bringing a lot of exciting opportunities which I will briefly summarize below.
DAO applications in Web3 gaming
The total number of active DAOs experienced an explosive growth by 660% from 2019 to 2020. The DeFi industry was certainly the leader in implementing DAO solutions and accounted for 40% of the decentralized organizations. At the same time, only 5% of DAOs were purely focused on blockchain gaming. It’s important to note that some entities may combine a number of applications in different spheres. Thus, DAOs focused on NFTs and GameFi comprised 26%.
In this article, we will describe the DAO solutions and applications that are native for Web3 gaming and have played the most significant role in the development of the industry. But DAO can resolve many other problems associated with transparent charity, collective asset ownership, grants, venture funds, and many more. This technology has many applications across various industries while gaming is experiencing some of the highest levels of adoption.
Web3 gaming guilds
The roots of Web3 gaming guilds go back to the 2000s when gamers formed communities and clans to coordinate their strategies. The members of the guild completed missions together and shared honor and loot after that. The DAO structure and its financial component are the elements that set Web3 guilds apart from the earlier experiments.
First of all, Web3 gaming guilds aim to provide access to Web3 games for players that do not have funds to invest into the required assets. These players, or simply scholars, can rent NFTs and assets from the guild to complete quests and other in-game activities. In return, scholars have to send the rewards they earned to DAO’s treasury. The total yields are distributed between the guild members based on the rulesets established by DAO’s smart contracts. For example, one of the most notable Web3 gaming guilds, Yield Guild Games (YGG), provides 70% of the revenue to the player, 20% goes to the community manager, and 10% remains with the guild.
The prices of many guild tokens, including ones of the popular DAOs, like Yield Guild Games, Merit Circle, BlackPool, GuildiFi, and Avocado Guild, experienced an enormous decline last year. This drop may be attributed to the lack of the sustainable tokenomic model in the games guilds were focused on or to their failure in developing employment opportunities around the Web3 titles.
At the same time, Web3 gaming guilds are not only focused on asset consolidation in order to invest into the game economy and to make assets more accessible for the general audience. Another prominent Web3 guild, ReadyPlayer DAO, has recently partnered with Avalanche to promote the projects built on this popular blockchain. In order to do this, the DAO will lead the content creation and provide marketing support for Avalanche. On top of that, ReadyPlayer DAO will also support the blockchain in organizing esport tournaments and competitions for the featured games. In this regard, it is worth mentioning that it has also launched the creators network with massive rewards, early access passes, and many other bonuses for content creators.
Incubators and accelerators
As we have mentioned earlier, some DAOs may act like VCs and invest in other projects in crypto space. According to Cointelegraph research, in Q1 2022, the share of DAO investments reached a peak of 9% of total VC investments in the blockchain industry but dropped to less than 6% later in the same year.
The decentralized incubators and accelerators are focused on boosting the development of blockchain startups and advancing the adoption of Web3 gaming. In return for their investments, the entities may receive a portion of the revenue in different forms. For example, an NFT incubator DAOFY helps enthusiasts to turn their ideas into products in exchange for a royalty share.
Game7 is a perfect example of a pure blockchain gaming accelerator launched by BitDAO, another significant decentralized investment body. This DAO has a treasury managed by the community which is used for funding the software development and defining industry standards. Developers can apply for technology grants to build Web3 games and initiatives. Eligible expenses include servers, hosting, marketing, project management, and many other objectives.
Certainly, there are other DAO incubators and accelerators with game projects in their portfolios. For example, Alliance DAO features remote programs and educational sessions for Web3 startups, namely for DeFi and gaming companies. StepN, dYdX, Dodo, SZNS, Solv Protocol, Legends of Verani are just a few of the accelerator alumni.
Source: cryptorank.io
Blockchain education for developers and builders
We may consider these DAOs the most well-intentioned initiative in Web3 space in general. These organizations directly interact with builders and developers and seek to distinguish themselves from other DAOs. The list of them includes Developer DAO, LearnWeb3 DAO, OdysseyDAO, and many other projects aiming to educate and onboard Web2 developers or newbies by providing them with all sorts of guides and materials on cutting-edge Web3 technologies.
This category also includes DAO initiatives aimed to resolve specific problems of blockchain gaming. As an example, Matchbox DAO intends to help developers in exploring the potential of on-chain gaming. For this purpose, the organization creates technical infrastructure and develops educational resources for builders. This DAO also organizes hackathons, provides grants and mentorship to boost the development of on-chain gaming.
DAOs inside Web3 games
Finally, a lot of Web3 games incorporate DAOs as a part of gameplay or even as independent players. At the same time, many projects utilize DAO in order to make their game transparent for players and driven by the community.
Alien Worlds
Alien Worlds is a sci-fi game running on the WAX, Binance Smart Chain, and Ethereum blockchains. The metaverse consists of six planets with each one representing a DAO, known as Syndicate, with its own resource strategy and incentives. Players have to travel the universe and mine Trilium (TLM), the game’s native token. Then, they can use it for staking in order to get the voting rights and submit DAO proposals. Eventually, the most successful participants can run a planetary council. Alien Worlds is a perfect example of DAO gamification. However, the game lacks real gameplay and is mostly focused on farming opportunities.
Reta Wars
Reta Wars is an economic simulation of the constant war between two factions, Gaia and Nate, representing in-game DAOs. Players have to join one of the factions and vote for the right decisions which can bring victory to their DAO. Participants have to work together to mine important resources and develop the best strategy to win the daily battles. The voting rights depend on the players’ contribution to specific battles and the amount of NFTs they possess. Eligible participants can cast their votes for battle maneuvers, like placing specific units, or for the land they want to conquer. The voting usually causes a lot of disagreements among the members of the community.
A variety of extra gameplay elements, like resources, units, NFT-heroes, and well-designed graphics, are making Reta Wars a remarkable Web3 title with a loyal community of gamers.
Illuvium
Illuvium is probably one of the most famous Web3 projects that features a DAO focused on the project's development. The team of the game tries to make it fully transparent and open for the community. The holders of the ILV tokens can participate in governance via DAO and Illuvinati Council. Eligible members can propose amendments for the ecosystem via Illuvium Configuration Change Proposals (ICCPs) and Illuvium Improvement Proposals (IIPs). The list of proposals is open for everyone and includes different suggestions, from creating specific artworks and characters in the game to adding new liquidity mechanisms.
Civitas
Civitas is another promising Web3 city building strategy we talked about before. The owners of CITI tokens can participate in the game DAO in the same way the gamers do in Illuvium. At the same time, Civitas is also going to introduce subDAOs for the cities that act like independent governments. SubDAOs will allow players to upgrade the skill tree of their community, use treasury funds to reward citizens, and influence the staking procedure.
DAO criticism
The very name of DAO implies that decentralization is the key tenet of its structure. Though DAOs certainly have a lot of benefits over traditional organizations, like flat structure and way to submit proposals, these organizations are usually runned by groups of the most influential members, the major token holders, or core developers. These groups establish rulesets and control procedures. In this sense, DAOs resemble some modern democracies where every citizen has a right to vote but the key decisions are made by the establishment.
Another problem of DAOs is connected with low voting turnout which mostly accounts for less than 2% in about a half of the decentralized organizations. The voting participation rate is inversely proportional to the size of organization. This means that DAOs with massive communities show less involvement in voting procedures.
Some members may be poorly informed to participate in polls, others may simply have no time, or have other priorities. But the low participation rate creates even more challenges for DAOs today. The list of the problems includes transparency, frauds, and protecting minority voters. As an example, one of the cases appeared in May 2021 when Harvard Law Blockchain & FinTech Initiative casted 99% votes in favor of its own proposal in Uniswap DAO to create a fund of $28-42M at current prices, and dumped half of the amount after receiving despite the initial plan to allocate it over 4-5 years.
Security is another major pain point of DAO. Despite the fact that the new structures can be launched by a few lines of code, DAOs require extra measures to prevent phishing attacks, user interface exploits, and many other online threats. On top of that, a lot of DAO members prefer to work anonymously, and that creates additional risks.
Final thoughts
Despite having a number of disadvantages mentioned above, DAOs may bring many incredible opportunities into the world of blockchain gaming. Gaming guilds, as one of the most prominent supporters of this technology, aim to create a level playing field for Web3 gamers by renting out the assets. Incubators and accelerators leverage the DAO voting system to select the most promising Web3 projects, while other DAOs intend to resolve specific educational and technological problems. On top of that, some Web3 games incorporate DAOs as a significant part of their gameplay or even as independent players. Thus, DAO already has a lot of applications in Web3 gaming, and we will probably see more of them in the future.