Based on the Azuki series: NFT Valuation Analysis Framework "DRIC"

Authors: Lawrence Li, Walter Huang, Hash Global

Abstract

Azuki is a series of image NFTs themed around Japanese anime, aiming to create a decentralized metaverse brand that is community-created and community-owned. The artistic style of this NFT series balances both Eastern and Western characteristics, boasting high aesthetic appeal and setting a record for becoming a blue-chip avatar NFT project in the shortest time.

Inspired by Asian culture and streetwear, each NFT has different features and clothing. Its community, "The Garden," aims to create a gathering place for artists and Web3 enthusiasts to collaboratively build a decentralized future.

Chiru Labs, the parent company of Azuki, has a vision to create iconic IPs and brands that can last for decades. Its NFT ecosystem includes Azuki, Beanz, Bobu, and more. Collaborations in fields such as fashion and music are continuously expanding, with the goal of building the largest decentralized metaverse brand.

Opensea Trading Volume and Average Transaction Price Trends Since Azuki's Launch

(Note: We define blue-chip as NFT projects with a floor price exceeding 5 ETH and stable prices, widely recognized by the community.)

Introduction to Azuki

Azuki is released as NFTs on the Ethereum blockchain, with plans to establish offline streetwear brand stores in the future, expanding community influence through events such as meetups and music festivals. Conceptually, Azuki adheres to community creation and community ownership. Additionally, the core team will provide resources and guidance to the community. As of now, the Azuki ecosystem consists of three main NFT series:

(1) Azuki

Focusing on "skateboard culture," it connects the represented spirit of freedom and independence with blockchain and NFTs, while also integrating Western cultural elements with the anime system. The highest transaction price for an NFT exceeds $1.34 million, with over $1 billion in trading volume within just over six months, ranking sixth in the historical total transaction volume.

(2) Beanz

Featuring a cute artistic style, symbolizing seeds in a garden, Beanz is a sub-project of the Azuki series, following a similar roadmap. "Final 50 Beanz" have been reserved for commercial development, and we speculate that its future development path will serve as the main base for IP development.

(3) Bobu (Fragmented NFT)

Bobu is one of the virtual characters launched by the team, with Azuki#40 divided into 50,000 fragments, where fragment owners will decide Bobu's future development. The aim is to bring more people into the Azuki community while conducting IP issuance experiments, providing governance utilities for holders to change the traditional construction of IP.

Azuki Valuation

Currently, there is little specific quantification of NFT valuations in the market. Similar to traditional art collectibles, the main reason is that early NFTs lacked objective intrinsic value, largely relying on the narrative of the creative team and community consensus. Starting with blue-chip projects like Bored Apes and Azuki, project teams have gradually focused on empowering NFT value, and we believe it is possible to attempt to build a valuation framework for such NFTs.

We believe the value of NFTs can be subdivided into four dimensions: Drop, Right, IP, and Community, internally referred to as the "DRIC" valuation model.

Using existing public materials from Azuki, we propose hypotheses and parameters to calculate the values of Drop, Right, IP, and Community, ultimately aggregating the values of these four dimensions to derive the total value of Azuki and Beanz NFTs. The specific model is as follows:

· NFT Market value = Drop + Right + IP + Community

Where,

• Drop: The value of items a project team airdrops to holders, including NFTs, physical items, etc.
• Right: Various rights granted to holders by the project team.
• IP: Direct or indirect licensing income obtained by NFTs as IP carriers with the development of Web3 brands.
• Community: Identity symbols and honor-related values created by community cohesion.

In the following sections, when calculating valuations using the "DRIC" model, we will analyze and evaluate Drop and Right as the project team's empowerment of NFTs, with "project team income * feedback NFT ratio" representing the value of these two parts, while the value of IP is achieved through the joint efforts of the project team and the community, continuously replacing and permeating traditional IP value.

The three components of "Drop + Right + IP" represent the basic value of NFTs, while the Community value includes consensus generated by aesthetic preferences and culture, which is difficult to quantify. We will assume that community value is an additional part beyond the basic value, calculated at a certain ratio based on the quality of the project community and included in the overall value.

Below are the detailed calculations for each part:

Drop and Right Value

Drop is defined as the value of items airdropped to holders by the project team. In the Azuki ecosystem, each Azuki NFT holder has been airdropped two Beanz NFTs and one redeemable physical jacket NFT (the redemption channel has been opened), while Right refers to the rights feedback from the project team in developing community consensus, which may include tickets to offline community events, concert passes, etc.

We believe that the project team will continue to empower and give back to NFT holders in the future, and the fundamental source of value for these two parts comes from income. Therefore, we need to differentiate between Azuki and Beanz to predict income and assume feedback ratios to calculate the values of Drop and Right.

The specific assumptions are as follows:

Currently, income mainly comes from primary NFT minting revenue and secondary trading royalties. We expect that the project team may continuously issue a large number of new NFTs, but this income belongs to new projects and is not included in Azuki and Beanz. In the future, there will also be IP income (detailed calculations can be found in section 2.2). Additionally, the project team currently serves as the main feedback entity, but with the addition of community governance, more people may participate in construction through DAO methods in the future, continuously feeding back to NFT value.

Based on the above assumptions, we calculated the primary and secondary income of the project team from 2022 to 2028 and the value fed back into NFTs, splitting it into Azuki and Beanz. The specific results are shown in the table below:

IP Value

In Web3, IP value is not only returned to trademark holders; NFT holders can also enjoy the value of IP licensing. Yuga Labs (the company behind Bored Apes) initially set very clear terms, confirming that holders can use their NFTs for commercial and personal purposes, pioneering the experiment of NFTs as image rights.

It is precisely because of the openness of copyright that we can see domestic brands like Li-Ning, Greenland, and Beike using NFT ownership to interact and collaborate with the Bored Ape image and community, without undergoing a series of lengthy business negotiations and complex authorization processes. The openness of licensing has further promoted the popularity and prosperity of the NFT market. Similarly, Azuki has emulated this design and community core.

Based on this, we list the calculation formula for the value achieved by Azuki IP development and make assumptions:

• NFT IP Value = IP Market Size * Web3 IP Penetration Rate * Market Share of This NFT IP

We first calculated the annual revenue of Web3 IP brands through penetration rates, then made assumptions about Azuki series' market share and profit margins to derive its revenue and profit situation. The specific results are shown in the table below:

Brand companies need to adapt to the new environment with new methods and lower traffic costs as times and media change. Sanrio expands co-branding licensing application scenarios, Disney has created a four-horsepower model including "consumer products + streaming media + film and television entertainment + theme parks," and Line Friends has developed fast dissemination channels based on emojis since the arrival of the Web2 era.

Azuki's vision is to become the next-generation anime brand based on NFT technology. In terms of realizing IP value, we will see many interesting experiments in the future. Currently, attempts are being made in NFT fragmentation and NFT airdrop physical items, and in the future, there will be closer integration with the offline physical world, as well as outputs in areas including anime content. Therefore, we believe Azuki will create an IP kingdom with stronger interaction with the community.

Community Value

The community generally refers to the totality of all NFT holders, but the community we refer to here includes not only holders but also members who identify with the community culture and are willing to participate.

The often-mentioned identity symbols, honors, and even consensus are manifestations of NFT community value. As an important but difficult-to-quantify part of NFT value, we make the following assumptions in Azuki to attempt calculations:

The more mature the community, the greater its value. The new generation's concepts are also changing, just as luxury goods may no longer symbolize wealth and blue-blood status; NFTs increasingly represent lifestyle attitudes and choices that showcase individuality.

Returning to the Azuki community, the emergence of DAO concepts in the Web3 world has accelerated the enthusiasm for collective participation in co-construction. In April 2022, the Spirit DAO, based on the Azuki community, was established, initially attracting over 400 holders to join and building a large treasury. While continuously purchasing in the market, it also uses the energy of the DAO community to help spread NFTs externally, including using funds to encourage secondary creation competitions and anime production. The Twitter introduction of Spirit DAO founder Iced Coffee also states: "IP related queries please dm/tag me," clearly indicating the community's energy accumulation for the project's development.

Valuation Calculation

Based on the above analysis, we attempt to assess Azuki's value using the DCF method. By deeply analyzing the value composition of Azuki and Beanz, we analogize the overall NFT to a company, predicting future cash flows and discounting them to determine the value of NFTs.

In the valuation, considering the high growth and uncertainty of the NFT industry, we set the discount rate at 20% and perpetual growth at 1%. Ultimately, we find that Azuki's current market value is $460 million, and Beanz's current market value is $240 million. The specific process is shown in the table below:

The above analysis derives the total market value through the "DRIC" model. Due to the rarity design of Azuki NFTs, the floor price will be influenced by its rarity factors. We can calculate the impact of rarity through transaction and supply ratio data, with the specific formula as follows:

· NFT Floor Price = Total Market Value ÷ Rarity Parameter ÷ Total Supply

We calculate the rarity parameters based on data from the NFTGo.io platform. NFTGo categorizes the rarity of Azuki and Beanz into Legendary, Classic, Rare, and Normal. By analyzing over 40,000 transaction data points, we calculate the rarity parameters to be 1.34 and 1.10, respectively. (The higher the rarity parameter, the higher the community consensus, indicating a willingness to pay for high-rarity NFTs.)

Knowing that the supplies of Azuki and Beanz are 10,000 and 20,000 respectively, based on the NFT floor price calculation formula, we ultimately derive the floor price valuation for Azuki to be $34,240 and for Beanz to be $10,910. (Based on the current Ethereum price of $1,500, this is approximately 22.83 ETH and 7.27 ETH, respectively.)

As a representative of the fusion of Eastern and Western aesthetics, we believe Azuki will occupy an important position in the entire Web3 brand landscape in the future.

This article explores the logic of NFT value judgment using Azuki as an example, with the overall methodology based on our understanding and perception of NFTs. Considering the rapid changes in the crypto market, the valuation framework is merely our perspective, especially regarding how to assess the future IP ecosystem value of Azuki. We hope to hear feedback from peers and the community to jointly improve the valuation model.

At the same time, Azuki is also growing rapidly, and its future strategic planning and development path remain to be observed. We will update this report periodically based on market changes and feedback. If you have any questions, please contact us at contact@hashglobal.net.

The birth and popularity of NFTs have been viewed by some as a speculation similar to the tulip bubble, while others see it as a new form of brand narrative. Regardless, one thing is clear: we need to continuously embrace change and learn. The development of the internet and the business world cannot be approached with a "carving the boat to seek the sword" mentality; only then can we seize opportunities in new fields.