NFT Rally Paves Way for Fractionalization and Derivatives
NFTs are a simple idea, but not for long. We’ve already seen how they’re being tapped as collateral for loans. Now more complex instruments are coming, thanks in part to projects breaking NFTs into pieces in a process called fractionalization. That’s not all — some financial engineers are reportedly fashioning futures contracts derived from NFTs. …
By: Brady Dale • Loading...DeFi News
NFTs are a simple idea, but not for long. We’ve already seen how they’re being tapped as collateral for loans. Now more complex instruments are coming, thanks in part to projects breaking NFTs into pieces in a process called fractionalization.
That’s not all — some financial engineers are reportedly fashioning futures contracts derived from NFTs.
“In just the last few weeks we’ve had like three or four derivatives projects reach out about using our price feeds,” Alex Gausman, founder of NFTX, a platform for fractionalizing non-fungible tokens (NFTs) told The Defiant.
The advent of NFT futures is just one of the byproducts of the explosion in NFTs this year. Fractional ownership of NFTs is also rapidly changing the way investors are buying and selling these new instruments. NFTX, for instance, is making fractional ownership of pricey NFTs easier, and that opens up possibilities for financializing these crypto collectibles.
Visa’s purchase of a CryptoPunk is just the latest bullish data point, and it wouldn’t be surprising to see other TradFi players do likewise. Even so, the total market is still small, fragmented, and the tooling still has to improve (such as better pricing methods, sales data that crosses multiple marketplaces, and more liquidity).
“Every Defi protocol is looking into NFTs and how to incorporate them,” Ben Lakoff, co-founder of the NFT bundling application, Charged Particles, told The Defiant.
Ben Lakoff is the co-founder of Charged Particles
All that interest has created outsized gains in value for the very most famous NFTs which has priced nearly everyone out of those markets. This is where financialization starts to get interesting though.
The marriage was a given thanks to the culture of composability in Ethereum, said John Palmer, project manager at PartyDAO, an app that helps groups of strangers collectively participate in NFT auctions. “I think there are pretty different ideas and mechanisms involved in NFTs and DeFi, but I think in Ethereum it’s kind of inevitable that there’s overlap. I think maybe the underlying shared principle there is accessibility,” Palmer told The Defiant.
DeFi opens up financial tools and NFTs allow more people to have access to creative work. That opens it up to even more people when financial tooling breaks ownership into parts.
“People want to participate in this hype and the NFT fractionalization allows anyone to own a tiny little piece of that famous and expensive NFT.”
Leonardo de Carvalho
There are a variety of teams involved in fractionalizing NFTs and allowing multiple people to share rights.
Besides those mentioned here, Unicly enables fractionalization of collections of NFTs while also offering sales of individual items within each collection. Fractional.Art turns one NFT into a set of ERC-20 tokens with built in rules around coordinating a sale of the FT. NIFTEX and Nftfy allow owners to break valuable NFTs into pieces.
“People want to participate in this hype and the NFT fractionalization allows anyone to own a tiny little piece of that famous and expensive NFT,” Nftfy co-founder Leonardo de Carvalho told The Defiant over Telegram.
For all the action in NFTs, it can still take a while to sell an expensive piece for the price an owner wants and garnering liquidity can be a challenge. To address that, NFTX enables users to deposit NFTs and get an ERC-20 token that’s worth one random NFT in that pool of similar NFTs (think, one ERC-20 that equals one relatively common CryptoPunk). Those tokens make it easier to establish a floor price, so a trader who thinks the bottom is going to fall out of an NFT market can effectively short it, or bet the price will drop.
Short a Punk
Someone can take a common CryptoPunk, drop it in NFTX and immediately get issued one PUNK ERC-20 token. Those tokens are currently trading on Sushiswap for right around 65 ETH, so the holder could then promptly go there and swap it out for any cryptocurrency listed on the decentralized exchange (DEX).
That provides instant liquidity. As for derivatives, a fungible token gives a lot more flexibility for running bets on the future price of an asset. The trader doesn’t have to short a specific CryptoPunk with specific attributes — they can use the PUNK token to short Punks in general.
And because it’s fractionalized they don’t have to short an entire Punk either. They can take out a very specific position that fits their risk portfolio. On the other hand, PartyDAO has created a way for many people to come together and participate in the auction for an NFT.
“People pool their capital together to form a party, and that party can win an NFT,” Palmer explained. Each participant in an auction gets ERC-20 tokens that represent their portion of the purchase price.
Sense of Community
There are advantages here because the act of buying the NFT happens collectively, which can create a sense of community around owning the item instead of just buying tokens off an exchange. That spirit, Palmer said, is what attracted the people who built the project.
PartyDAO brought this group auction innovation to the table. The underlying ownership structure is built on Fractional.art, at least for version 1.
Now that a working product is out the door, the DAO voted to hire the core build-out team for two months to upgrade the app and develop a new version.
PartyDAO’s product is very new. It ran its first winning auction in early August, but new parties are getting spun up every day. Charged Particles is offering a service that could potentially amp up fractionalization, if and when the market accepts it.
“We’re an NFT protocol. We really want to be this core infrastructure layer of NFTs owning other assets,” Lakoff said.
Charged Particles doesn’t fractionalize — it bundles by allowing an NFT to control a smart wallet that can carry ERC-20 tokens (much like Aavegotchi, a DeFi project with a game). For example, an NFT could hold interest-bearing tokens, such as aUSD. These tokens can also be time-locked, so the NFT holds it but they can’t be spent for, say, 24 months.
His team is betting that when an NFT can carry around other kinds of value it will unlock other use cases. It could be a new kind of bearer instrument in crypto or a way to give a family member money for, say, college graduation. And that asset could also be fractionalized. In fact, that might make it harder to sell yield-bearing assets until they really have time to grow.
“An NFT doesn’t have to just be an NFT, a unique token. Art is just scratching the surface of what an NFT is,” Lakoff said.
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