Is EmberSword Land Worth it?
By: Piggy Crypto
Tags: Gaming, Nft, Metaverse, Ember Sword, Cryptocurrency

As many of you already know, EmberSword recently conducted a community land sale, where purchasers of land are entitled to a percentage distribution of all sale transactions in game. I am personally very excited for this game and this particular use case of NFTs. This is one of the first examples of NFTs being a cash flow generating asset! This means that we can finally apply a more traditional valuation model to these digital assets.

In this article, I will be using a very rough discounted cash flow (DCF) model to value land in EmberSword. Please note that the game is still in development, and there is limited information on the actual mechanics of the game itself, so I have had to make some assumptions. I will link the spreadsheet that I have used at the end of this article so that you can play around with the numbers yourself.

How does Land work?

Essentially, all transactions in EmberSword come with a 7% slippage. 3.5% is distributed to the developers and 3.5% is distributed to land owners. See below image for an example:

Land owners can expect to receive 1% of global transaction values and 2.5% of local area transaction values. The local area is defined as a 20x20 plot around the area where the transaction occurred. Furthermore, different plot types have different token reward multipliers as shown below:

Regular Plot: 1

Settlement Plot: 10

Town Plot: 50

City Plot: 125

Capital Plot: No information has been released so we will just assume that it doesn’t have one for now.

For a more in depth guide to how land works, see the original article published by EmberSword: https://medium.com/embersword/the-vision-of-ember-sword-the-land-sale-1998be5e3fe5

How much land is there?

For the purposes of this valuation, we will ignore the other nations in EmberSword apart from Solarwood as they will not ship with the game. Solarwood is a square 200 x 200 plot map and features roughly 40,000 plots total. See below for a breakdown from OpenSea:

Crunching the Numbers:

Global Rewards:

Based on the numbers that we have been given, we first need to adjust the percentage of the global rewards that each plot of land receives by the multiplier:

Given the above, owning 1 plot of land will give the landowner the following % of the Global reward pool:

Local rewards:

We need to make some assumptions on the local rewards — because the map is a 40,000 square grid and each local area is a 20x20 square, then assuming that transaction volume density is uniform across the entire map, there is a roughly 1% chance that a plot of land you own lies in the local area of a transaction. Hence the local reward pool that a plot of land is eligible for is estimated at 1% of the 2.5%. This is 0.025% of all transactions.

You might argue that transaction density is higher in cities. If that is the case, there are 382 city plots — let’s round that up to 400, and knowing that each city is a 4x4 plot, then we can estimate that there are 25 cities in Solarwood. (Which you can easily verify by counting the red squares on the map from Tokentrove below). If we take a very extreme assumption that every single transaction in the game lies in the local area of some city, then there can be up to a ~4% chance that your city plot lies in the local area of a transaction. This is the most optimistic upper bound for the probability of receiving a local reward. The figures in this article will use the 1% probability from above.

From a brief observation of the map, we can see that City plots are relatively uniformly distributed and it is quite unlikely that there are two cities in the same local area as each other. Let’s use the following example as a common setup for a local area:

16 City plots: This is 1 4x4 City

12 Town Plots: This is 3 2x2 Towns — this is based on the fact that there are as many town plots as city plots, but there are some towns that are very isolated from cities so we will reduce it to 3 towns

13 Settlement plots: Assuming Settlements are evenly distributed across the lands that is not already taken up by a City or Town, we have 1459/40000 x (400–16–12) = 13.57, rounded down to 13

359 Regular plots: Remainder of land

Then the percentage of Local rewards for each plot of land adjusted by the multiplier is:

Given the above, owning 1 plot of land will give the landowner the following % of the Local reward pool:

Putting it together:

Given all this, then the expected annual cash flow of a particular plot of land is:

If we plug these into a DCF model, assuming the following:

5% Annual inflation

Game has a life of 7 years

We run into an issue when making assumptions about the transaction volume, since there is nothing similar on the market, it is very difficult to make comparisons. We will take three cases; pessimistic, neutral and optimistic:

Transaction volume doubles after year 1 and year 2

A pessimistic transaction volume in year 3 of $500 Million (This is half the neutral transaction volume)

A neutral transaction volume in year 3 of $1 Billion (This is roughly the annual revenue of Roblox in 2020)

An optimistic transaction volume in year 3 of $4 Billion (This was Fortnite’s revenue in the 2020 peak. Axie did $370 Million sales volume in June, which translates to roughly $4.4 Billion annually. Global gaming skins market is estimated at $40 Billion)

Annual Transaction Volume Growth Rate Thereafter of 10.35% (this is the estimated growth rate of the global gaming market until 2026)

Then we get Net Present Value (NPV) of the following for each land type:

Link to spreadsheet (you can download a copy): https://docs.google.com/spreadsheets/d/11pHhLT3sSEzqwCmENvAvs62aD7uTL9a9lFS81MM66RY/edit?usp=sharing

Instructions: The bright green cells are the NPVs. You can edit the numbers in the bright yellow cells if you don’t agree with my assumptions. I highly encourage anyone reading this to play around with the numbers on the spreadsheet. Especially since City plots take up so much of the local revenue share, you may want to consider purchasing a more isolated piece of land to avoid this.

Assumptions and further discussion

Obviously, there is still much that we don’t know about the game yet so it is entirely possible that all the assumptions I have made about the game could be completely wrong:

Bigger than Fortnite, Roblox and Axie?

This is probably the biggest question mark in all of this. We honestly have no idea how big EmberSword can get. Both in terms of transaction turnover and playerbase.

On one hand, The Axie figure is from mid-July and it will probably get even bigger as the year goes on. In fact, that Axie figure is from having around 350,000 daily active users (DAU). Roblox has about 40 MIllion DAU as of Q1 2021 and “only” did $1 Billion in revenue in 2020. From the limited data that we have, there certainly seems to be a tendency for P2E games to have higher transaction turnover — This is possibly due to the P2E nature of the game and player’s treating the game as a primary source of income.

However, it can also be argued that this is not necessarily the case since Axie is fundamentally different — breeding and selling Axies are one of the core game mechanics in Axie and is necessary in order to be better at the game, therefore inflating transaction volume. Comparatively, EmberSword NFTs are cosmetic only and not essential to the core gameplay.

It also needs to be considered that there are so many P2E games coming out and unlike Axie currently, EmberSword will need to compete much harder for market share.

Assumptions about the game and growth rate

I have assumed that the game only has Solarwood land, but realistically, there are still 3 more nations, each with 40,000 plots of land up for sale in the future, which will significantly dilute the revenue share of Solarwood landowners by up to 75%. I have not accounted for those in the model because there is no information on when the additional land will be up for sale.

Furthermore, I assumed that the game would double in sales volume in the first two years and then grow at a constant rate from year 3 onwards. This was to mirror the network effects in user growth, however, there are no data points to estimate this growth rate realistically due to the game not being released yet.

The 7 year life cycle of the game is also not necessarily an appropriate assumption — however, my reasoning behind this is that exponential growth in users usually tapers and then rapidly declines as players move to the next hype game.

Ability to Generate further cash flows in game

There may be the ability to generate further revenue by being a landowner from in game activities such as collecting rent. This model only takes into account the revenues from the built in distributions.

References

https://venturebeat.com/2020/12/18/newzoo-u-s-gamers-are-in-love-with-skins-and-in-game-cosmetics/

https://www.globenewswire.com/news-release/2021/05/06/2224267/0/en/Gaming-Market-Growth-Trends-COVID-19-Impact-and-Forecasts-2021-2026.html

https://itsblockchain.com/axie-infinity-sales-volume/#:~:text=Home%20Crypto%20Market-,Axie%20Infinity%20made%20370%20million%20in%20sales%2C%20averaging%2030%20million,for%20the%20last%2030%20days

https://theconversation.com/axie-infinity-online-games-where-people-earn-as-they-play-are-transforming-gaming-164881

https://www.statista.com/statistics/1192573/daily-active-users-global-roblox/

https://www.statista.com/statistics/806975/lol-revenue/

https://www.businessofapps.com/data/roblox-statistics/

You can find me at: https://twitter.com/piggy_crypt0