In this blog, we shall discuss a relatively new but popular concept in the world of NFTs and DeFi, NFT fragmentation. We shall be discussing the principle, working as well as the advantages of fragmenting an NFT into several hundred pieces.
What Is NFT Fragmentation?
By the process of NFT fragmentation, an ERC-721 token can be fractionalized into numerous ERC-20 tokens using a smart contract thus distributing its ownership and making it easy to own, transfer and trade.
On the first of September in 2021, PleasrDAO fragmented its Doge NFT into 16,969,696,969 ERC-20 tokens (DOG) and auctioned 20% of them through MISO, a token sales platform of SushiSwap. They raised 11,942 ETH, which is way higher than the price of the original NFT worth 1696.9 ETH. This was the first popular incident of NFT fragmentation.
Some Popular NFT Fragmentation Projects
Fractional is a decentralized NFT fragmentation protocol running on the Ethereum blockchain. Using Fractional, curators can lock their NFTs or a basket of NFTs in a vault run by a smart contract and create the desired number of ERC-20 tokens.
Fractional is different from other similar protocols in the aspect that it allows the curators to specify curators’ fees and earn a certain percentage of the fragmented tokens each year. The curator can also set the reserve price which is the price needed to trigger a buyout/auction of a particular fractionalized NFT/s.
Niftex is a popular project which has numerous fragmented NFTs from various famous NFT projects like CryptoPunks and Axie Infinity.
Users wanting a complete NFT can use the ‘buyout’ option available on Niftex. If the price offered by an interested buyer is accepted by the NFT holder, the holder’s fragmented tokens would be burned. Apart from this, Niftex also has a ‘royalty retention’ function by which the platform automatically reserves 5% of the fragmented tokens for the owner of the NFT.
Unicly attempts to bring together artists/designers, investors, collectors, and traders under a single roof in a very interesting way. Apart from providing NFT fragmentation services, Unicly also introduced AMM (Automated Market Maker) and liquidity mining to its users.
On Unicly, curators can fragment their NFT/s and generate uToken and decide its specifications (name, total supply, percentage required to vote to unlock NFT, etc) themselves using smart contracts. After creating uToken, users can provide liquidity on the AMM platform called UnicSwap. The process and the related aspects are similar to providing liquidity on UniSwap.
Apart from the possibility of being a liquidity provider, users having the fragmented ERC-20 tokens can also bid to buy a complete NFT.
Why Would Anyone Fragment A Collectible?
Low liquidity in the case of NFT has proved to be a huge problem in the world of nonfungible tokens. Because of the very high prices of popular NFT collections, it is getting increasingly difficult for interested sellers to find suitable buyers in a short period of time.
For ordinary people wanting to jump on the NFT wagon, owning such rare NFTs can cost a fortune. Fractionalizing such pricey NFTs can help small investors compete with the big whales of the game and make them a fractional owner of an expensive piece of art which would not have been possible otherwise. Simply put, NFT fragmentation allows common people like you and me to become a collector.
People pooling their funds together to buy high-priced NFTs has become a common strategy to compete with the whales of the NFT game. With this new concept of fractional NFTs, strangers can now join hands to collectively buy and own an expensive NFT in a trustless manner through the use of smart contracts.
After fractionalizing an ERC-721 NFT, the resulting ERC-20 tokens can be used to interact with various DeFi protocols and enjoy the benefits of various DeFi services like lending and borrowing.
Prior to fragmentation, NFTs had a world of their own. After fractional NFTs came to the DeFi scene, the incorporation of NFTs into the traditional DeFi world became relatively easy and introduced the world of DeFi to new and exciting possibilities.
Though there are many roadblocks when it comes to the NFT market, concepts like these help restore our faith in the future of non-fungible tokens. Also with the rapid development of the metaverse, who knows what turn the crazy NFT wagon will take.