Children's game is extremely pretty (1-3)
I believe the answer is:
'children's game' is the definition.
(I Spy is a guessing game)
'is extremely pretty' is the wordplay.
'extremely' suggests removing the centre (only the extremes of the word are used).
'pretty' with its centre removed is 'py'.
(Other definitions for i-spy that I've seen before include "Children's alphabet game" , ". ... with my little eye (children's game)" , "Game played with young children" , "Children's guessing game" , "Wordgame" .)