How to fractionalize NFTs

Using Fractional to distribute ownership over Non-Fungible Tokens (NFTs).
Aug 24, 20216 min read

Dear Bankless Nation,

Someone told me the bear case for Non-Fungible Tokens (NFTs) is that they’re illiquid.

“DeFi will solve that” I said.

And so it is. Today we’ll explore how using fractionalization.

Fractionalizing allows you to take an NFT and split it into a bunch of pieces—usually in the form of ERC20 tokens—then use it in DeFi.

Trade fractions of an NFT on Uniswap? No problem.

Get them listed in Aave’s money markets? Yep. (hasn’t happened yet but it’s coming)

Fractionalizing means we can create liquidity on NFTs with efficient pricing.

A protocol called Fractional is one of the new protocols tackling this niche (listen to our AMA with the founder here). They’ve exploded on the scene (just raised $8m in funding) and have become the go-to platform for the fractionalization of popular NFTs.

William shows us how to use it today.

Hint: strong potential for a retroactive airdrop in the future 👀


How to fractionalize NFTs with Fractional

Fractional is a new decentralized protocol for fractionalizing NFTs into ERC20 tokens.

This Bankless tactic will show you how to mint tokenized fractional ownership of NFTs via Fractional, as well as how to navigate other notable utilities around the upstart protocol.

  • Goal: Learn how to fractionalize NFTs with Fractional
  • Skill: Intermediate
  • Effort: At least 30 minutes to learn the basics of Fractional
  • ROI: Understanding of a new NFT vertical

NONE OF THE CONTENT HERE IS FINANCIAL ADVICE. Fractionalizing NFTs may have legal implications depending on your jurisdiction, including the United States. Please consult a lawyer & use at your own risk!

Unlocking NFT liquidity via Fractional

With the crossroads between DeFi and NFTs continuing to flourish, NFT fractionalization protocols are on the rise. They foster improved NFT liquidity and price discovery and democratize access to NFTs via collective ownership.

The idea? A holder can take a desirable but illiquid NFT to a fractionalization protocol and once there mint the NFT into many ERC20 tokens. These ERC20 tokens are fungible (thus readily tradable) and fractional, meaning they collectively represent the underlying asset(s) and can be distributed among multiple owners.

We’ve seen a handful of such protocols rise to date, like NIFTEX and Unicly.

The newest to arrive on the Ethereum mainnet is Fractional, which launched in July 2021 and in short order has become a popular new outlet for unlocking NFT liquidity in permissionless fashion.

Some of Fractional’s top NFT vaults right now.

Bankless Resources on NFTs:

A brief guide to Fractional

At its core, the Fractional protocol has two main types of stakeholders:

  • 🛒  Buyers— Users who buy fractions of desirable NFTs to gain exposure to these cultural assets.
  • 👩‍🎨️  Curators— Users who mint NFTs into fractionalized ERC20s through the protocol and earn curator fees, i.e. inflationary fractions of the underlying NFTs.

To facilitate these processes, Fractional centers around three main smart contracts: one for vaults of a single fractionalized NFT, another for vaults of multiple fractionalized NFTs, and a final one for facilitating vault governance parameters.

Additionally, keep in mind that because these smart contracts are open and permissionless, anyone can build their own Fractional front-end or interact directly with the protocol using a Web3 wallet — that is, instead of using the preliminary fractional.art website.

Indeed, if this main site is ever inaccessible for any reason, you could follow this helpful guide to interact directly with the project’s smart contracts.

That’s the power of Ethereum baby!

🖼️ How to fractionalize NFTs

Fractional’s fractionalization interface

If you’re interested in fractionalizing an NFT via Fractional your first step is to settle on which NFT you want to use.

⚠️ Fractionalizing your NFT may have legal implications depending on your jurisdiction! Please use at your own risk.

Once you have that down, the process works like so:

  1. Head over to fractional.art, connect your Web3 wallet, and click on the “Fractionalize” button at the top of the website.
  2. You’ll be taken to an interface where you can choose the NFT or NFTs you want to fractionalize. Then input your vault’s name, token supply, token symbol, reserve price, and management fee.

Press “Continue,” at which point you’ll be prompted to approve Fractional to transfer the NFT(s) in question. Confirm the approvals in your wallet and then make the transfers as needed. Lastly, press the “Fractionalize” button and confirm your final mint(s).

Keep in mind that for baskets, every NFT will need to be approved + transferred in separately before you can mint your ERC20s.

  1. Once your vault is live, you can use the “Settings & Actions” dashboard to edit its description, update its auction parameters, and so forth.

👛 Setting a vault’s reserve price

In the face of potential future buyouts, Fractional’s vaults rely on a price system in which fraction holders “continuously vote on a reserve price” and the “weighted average of this vote decides on the price needed to initiate a buyout.”

This may sound a bit confusing at first, but in a recent blog post the Fractional team provided two examples that break down the process quite simply.

The examples are as follows:

If you own 100% of the ownership tokens and set the reserve price to 100 ETH, the reserve price will be 100 ETH. However, if you own 75% of the tokens and someone who own the other 25% votes on a reserve price of 50 ETH instead, the reserve price will instead be 81.25 ETH.

If you only own 49% of the token supply and vote on a reserve price, but no one else who owns the remaining 51% of tokens has voted on a reserve price, there will be no reserve price set for the vault.”

That said, a Fractional buyout begins whenever a person or group deposits enough ETH to meet or exceed a vault’s determined reserve price. An auction then takes place and if the buyout succeeds, that vault’s fraction holders are able to redeem their ERC20s for ETH.

🎉 The party’s on with PartyBid

Ultimately, Fractional is new cultural lego at the crossroads of DeFi and NFTs. This dynamic opens up all kinds of novel Web3 possibilities, like PartyDAO’s recently released PartyBid tool.

PartyBid is a decentralized app for facilitating collective bidding on NFTs. The dapp allows groups of friends and/or strangers to raid bid (“raid” in the gaming sense) on choice NFTs together, granting regular investors strength in numbers versus whale collectors for the first time in the NFT ecosystem.

Long story short, PartyBid helps groups acquire NFTs via Foundation or Zora auctions and then trustlessly fractionalizes the winnings through Fractional, thereafter distributing the ensuing ERC20s pro-rata to the party’s participants.

The dapp’s already been used to acquire CryptoPunks, Nouns, and other major NFTs, and it’s all possible courtesy of Fractional’s open infrastructure.

🔭 Zooming out

Fractional is paving the way to new NFT liquidity and token utility possibilities, and the aforementioned example of PartyBid is but a taste of the innovations that could sprout up around the fractionalization protocol going forward.

At the same time, and as much as it personally pains me to say this as a fan of DeFi + NFTs, Fractional isn’t a protocol that everyone should mint through right now. That’s because some jurisdictions like the United States treat fractionalized artworks like securities.

In other words, within such jurisdictions fractionalized NFTs appear to clearly meet the threshold for securities registration requirements. Make sure you’re aware of your jurisdiction’s relevant laws before issuing fractions of your NFTs.

Lastly, it’s worth noting the Fractional team has previously said they plan to “progressively decentralize the protocol to ensure long-term resilience & upgradability.” As such, a Fractional governance token down the road seems well within the realm of possibility! Use Fractional and start farming those retroactive rewards!

Action steps

  • 👀  Review Fractional’s top live vaults. Which opportunities, if any, jump out at you? Sound off in the comments below, what do you think!
  • 📰  Read Fractional’s “Dust Rekt Me, Help!?” guide to learn how to close a vault when you don’t own 100% of the fraction supply.

Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.

Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here.

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