So how does this game actually work? Are you supposed to lose the fights to get lewd content?
Not quite. The protagonist Karryn starts out uninterested in sex. But the more she is exposed to the prisoners lewdness then it will start fostering a curiosity in her towards lewd things. This means as lewd things happen in fights then she will start gaining passives that start increasing how quickly she becomes aroused and what sexual acts she is willing to contemplate. If she is uninterested in sex acts prisoners won't attempt them on her so the more interested she becomes the greater variety of lewd things the prisoners will do. Sex acts happening in combat can be a path to victory as foes reaching orgasm (once for most enemies but several times for some) will result in them being 'defeated' and leaving the fight.
Of course getting to the state where Karryn is willing to let others use her body to get off, let alone initiate such things herself can take a while. Since losing triggers an extended sex combat scene with the prisoners of a floor it can be a good way to grind passives, especially since several of the passives are gained from being defeated a certain number of time.
So yeah, in short you don't need to lose to see the sex content, but it can help speed up the process.
