Fractionalization
Note: Data in this section last updated May 28th, 2022
Last updated
Note: Data in this section last updated May 28th, 2022
Last updated
“Fractionalization” is another popular way of obtaining liquidity from NFTs.
It refers to the process of economically splitting up the ownership of an NFT into smaller pieces which can be bought, sold, traded and held by multiple users.
The term “economically” is key here as NFTs can’t actually be divided (much like you couldn’t cut a physical piece of art into smaller pieces without destroying its value). Instead, the process of fractionalization involves the issuance of tokens that represent a claim on the original asset (picture issuing shares on the Mona Lisa…).
As the name suggests, one popular platform for fractionalization is Fractional.
Fractionalization of a CryptoPunk via Fractional
In order to fractionalize an NFT on Fractional, a user would:
Create a Vault: NFT owners deposit their asset as collateral in a “vault” and specify the number of tokens they want to create
Mint Tokens: Once the collateral is deposited, Fractional issues the original owner 100% of the fractional ownership tokens
Distribute Tokens: The owner can do anything she wants with these tokens – she can sell them, give them away or even add them to a liquidity pool
Reedeming Tokens: When the vault is created, the original owner sets a “reserve price” – a price needed to trigger a buyout of the entire collection. If a buyer comes along and pays this reserve price, all of the token holders receive an immediate payout and the original NFT is transferred to the new owner
By way of example – let’s say Alice wants to fractionalize her Cryptopunk. She could put it into a vault, issue 250 tokens priced at 1 ETH each, and sell them to 250 people (keeping 50 for herself). If she sets the reserve price at 2 ETH, a buyer could come along and buy the entire collection for 500 ETH, yielding a profit of 1 ETH for each token holder and 50 ETH for Alice.
Fractionalization yields several benefits in that it: 1) allows the average user access to extremely expensive works (such as CryptoPunks or Bored Ape Yacht Club) and 2) it allows owners to get some liquidity without selling the entire piece.
As such, the platform has done over $1.5 billion in volume.
