Intro - What is this about
Hi Everyone,
a lot of Blockchain games have started developing or have already started selling/even sold out their digital "land" plots.
Some have their landplots already integrated with concrete functions at least in Alpha mode (e.g. Axie Infinity) in the game, while others are more or less finished with the conceptualization but have not rolled out functions (e.g. Splinterlands) or are right in the middle of concept design (e.g. Sandbox)
And as you can read in various articles, the amount people are willing to pay for digital real estate can be quite high and easily reach into the millions of Dollars:
https://coincodex.com/article/12994/someone-paid-25-million-worth-of-eth-to-buy-virtual-land-in-axie-infinity/
As I´m currently evaluating putting a portion of my portfolio from classic investments towards digital real estate, I wanted to share my thoughts with you on What to look out for and how to approximate future digital land value based on the utility method.
If you just want to know my fair value calculation for a Splinterlands plot please just scroll down to "What is the fair value of a Splinterlands plot".
KPI Overview
As a value oriented investor you will try to strive for Warren Buffets Maxim of paying less for things then they are inherently worth. There are various ways for a real estate investor to calculate KPIs to get an idea. I want to give you a short summary of two different KPIs and apply CAP to an example:
1. Cap-Rate
Cap-Rate derives a value estimate of real estate based on comparing the Income you generate from the property and the Fair Market Value of the property.
A typical Benchmark Cap Rate is in a range of 6-12%
2. ROI
ROI derives a value estimate of real estate based on comparing rental income and rental expenses with the property price.
A typical Benchmark ROI is in a range of 6-8%
Valuation Input factors for digital land - Axie Infinity
For starters we need to get an idea of the different input factor ranges that are in the market for digital land with already implemented functions. So lets take a look at Axie Infinity land plots to get this idea.
Rarity
There are several different rarities with a corresponding decreasing volume according to the current wiki:
| Land type | Play-owned | Total Supply | Share in % |
|---|---|---|---|
| Savannah | 5,327 | 22,042 | 24.3% |
| Forest | 5,359 | 22,025 | 24.3% |
| Arctic | 4,171 | 16,537 | 18.3% |
| Mystic | 2,309 | 8,264 | 9.1% |
| Genesis | 75 | 220 | 0.2% |
| Lunas Landing (Center) | 0 | 3,501 | 3.9% |
| Map (water, roads, resource nodes) | 0 | 18,012 | 19.9% |
| Total | 17,241 | 90,601 | 100% |
Market Price
The going price for the different rarities as of today (Marketplace):
| Land type | Lowest asking price |
|---|---|
| Savannah | 17,286$ |
| Forest | 18,144$ |
| Arctic | 32,400$ |
| Mystic | 86,478$ |
| Genesis | 2,591,095$ |
Net Operating Income (NOI)
If we assume the current market prices to be fair based on Alpha tests and leaked knowledge you can make a reverse calculation of expected income based on the CAP formula for each plot type:
| Land type | Lowest CAP Benchmark | Highest Cap Benchmark | NOI Low Cap | NOI High Cap |
|---|---|---|---|---|
| Savannah | 6% | 12% | 1,037$ | 2,074$ |
| Forest | 6% | 12% | 1,089$ | 2,177$ |
| Arctic | 6% | 12% | 1,944$ | 3,888$ |
| Mystic | 6% | 12% | 5,189$ | 10,377$ |
| Genesis | 6% | 12% | 155,466$ | 310,931$ |
Bottom line yearly Net operating income expectation of the market depending on the plot type ranges from ~1,000 USD up to ~300,000 USD. This equals hourly earning rates from ~11,9 Cents up to 35,5$.
Application of Input factors for digital land - Splinterlands
The complexity of land in Splinterlands is a bit higher as there are various additional factors like "Land type", "Land Category", "Land Rarity", Totems and Buildings. (More Info to read here) We also do not know the expected distribution values for rarity, etc.
Target: Calculate the fair value of a Splinterlands Land plot
Rarity distribution
Lets keep it simple for our calculation and assume rarity as the most important value driving factor and rarity distribution to be comparable to Axie Infinity with a Legendary drop rate of ~0,2%:
| Land type | Total Supply | Share in % |
|---|---|---|
| Common | 66,314 | 44% |
| Rare | 63,844 | 43% |
| Epic | 19,478 | 13% |
| Legendary | 364 | 0.2% |
| Total | 150,000 | 100% |
This will net us a total of 364 legendary lands and ~20,000 epic lands after launch.
Net Operating Income (NOI)
We take the NOI of Axie based on rarity but adjust the number basend on the higher total land supply in Splinterlands (150k SPS Vs 90K Axie) by a factor of 1.7 to be on the conservative side
| Land type | NOI CAP 6% | NOI CAP 12% |
|---|---|---|
| Common | 626$ | 1,253$ |
| Rare | 916$ | 1,832$ |
| Epic | 3,134$ | 6,268$ |
| Legendary | 93,902$ | 187,805$ |
This puts us at a yearly expected Net operating income of 626 USD - 187,805 USD.
Market Price / Fair Value
To get the Splinterlands Fair value we just take the previously calculated volume adjusted Net operating income from the Axie example and divide by the CAP Benchmark of 6%:
| Land type | Fair value |
|---|---|
| Common | 10,441$ |
| Rare | 15,264$ |
| Epic | 52,233$ |
| Legendary | 1,565,039$ |
As you can see, a Splinterlands land shoud net between 10,000 and 1,5 Million Dollar based on rarity.
What is the fair value of a Splinterlands plot
As there are not yet any lands in Splinterlands, but only plots that do not have a rarity the question remains: How do we reach the fair value of a Plot without any infos on rarity?
--> We calculate probabilities for rarity and multiply by lowest fair price of each rarity:
| Land type | Lowest Fair value | Rarity drop chance | Weigthed Value of Land Fair value |
|---|---|---|---|
| Common | 10,441$ | 44.2% | 4,616$ |
| Rare | 15,264$ | 42.6% | 6,497$ |
| Epic | 52,233$ | 13.0% | 6,783$ |
| Legendary | 1,565,039$ | 0.2% | 3,800$ |
| Total value plot | 21.696$ |
This brings us to the fair Value of a Splinterlands plot of ~21,000 USD. Taking into account that these little tokes actually trade for ~1,000 USD it is looking like quite a steal.
Summary
Final word of advice:
Please do not take my calculations as an absolute truth as there are a lot of assumptions in this calculation. But I would definitely encourage you to think about this logic of calculating value to at least cross-check your current land investments with your own assumptions to establish your own clear fair value.
So we reached the end. Thanks for reading and feel free to Follow, Upvote and/or Cross-Post this summary. I`m happy about any comment to discuss your opinion on this as we are literally charting new land here 😉
I hope everyone finds this helpfull👍