Meet the Dark Horse of DeFi: Fractional NFTs
Decentralized finance (DeFi) has cemented itself as the most popular trend in the crypto industry in 2020.
Fueled by innovative products and high-return token launches, DeFi has caught the attention of the larger Ethereum (ETH) ecosystem. Everyone from retail investors to venture capital firms have been after a piece of the DeFi pie, with over $2.25 billion in digital assets now locked in DeFi applications.
While the majority of the focus to date has been on DEXs, lending applications and protocol governance tokens, a new dark horse from the non-fungible token (NFT) sector is quickly gaining attention: fractional digital assets.
Fractional NFTs: A Path to Liquidity
As we’ve previously covered, NFTs are digital assets that underpin things like crypto art, blockchain game items and digital collectibles. These assets derive their value from their scarcity, collectibility and other intangibles that have driven the value of their non-digital counterparts for thousands of years.
However, NFTs also benefit from an inherent utility, where their value is also a function of what they can be used for. No better example exists than blockchain gaming, where NFTs can represent everything from characters to in-game items. With these applications, owners of the NFTs can drive value by performing tasks that impact the uniqueness or “status” of the asset.
While the uniqueness and scarcity of NFTs have long been their selling point, it has also limited access to a larger market of cryptocurrency investors. Currently, the majority of NFT trading is facilitated by auction-style markets (think: eBay), highlighting the lack of liquidity within the market.
This is where the next step of innovation is beginning to emerge. By bringing liquidity to the NFT market, it expands the pool of potential investors through products that are more akin to what is found within the traditional crypto markets.
Currently, the leading approach is called NFT fractionalization — the process of locking an NFT into a smart contract that breaks it into smaller parts, which are represented by fungible tokens.
For those familiar with token standards, this would be taking an ERC-721 NFT and breaking it into an equivalent number of ERC-20 tokens.
Early Adopters of NFT Fractionalization
There are a few groups pioneering this new trend. The first being NIFTEX, a new startup that is working on fractional sharding technologies. NIFTEX allows users to fractionalize their NFTs into “shards,” which are purchased initially in an IPO-like format.
From there, a market is created for the shards using the Uniswap protocol, allowing investors to buy and sell the shards like they would with any other altcoin. Leveraging a shotgun-buyout clause format, investors can ultimately accrue enough shards to gain access to the original NFT.
NIFTEX has seen some major early wins with the Axie Infinity community, where ultra-rare Axies owned by community members have been fractionalized and sold via the NIFTEX platform.
— NIFTEX 🧩 (@NIFTEXdotcom) July 11, 2020
While an in-game character may not be the best kind of NFT to fractionalize, as there’s little incentive to own part of a highly unique NFT unless you plan to rebuild it, it is an interesting starting point.
Another startup at the forefront of NFT liquidity is Polyient Games, an investment firm focused on NFT startups where I head up development. The firm is building a first-of-its-kind NFT ecosystem platform that will feature a next-generation NFT marketplace.
This marketplace will feature offerings like exclusive NFT auctions, a peer-to-peer NFT exchange system and more liquid NFT trading products that are designed for mass adoption.
To kickstart the platform, Polyient Games is launching a new NFT called Polyient Games Founder’s Keys (PGFKs), a membership and rewards token that provides holders with benefits like discounts on NFT transaction fees, opportunities to receive NFT airdrops and early access to future products.
Details on the $PGFK sale.
20K capped supply. Launch date set for August 4th.
— Polyient Games (@PolyientGames) July 1, 2020
PGFKs, which will be available for purchase starting on August 4, have been designed from the ground-up to function in traditional crypto trading products and DeFi applications. To accomplish this, illiquid PGFKs will be convertible into PGFK Particles (XPGPs), a unique ERC-20 token that represents a 1:1000 fraction of a full Founder’s Key.
PGFK holders will be able to split their tokens and add them to the XPGP pool, providing liquidity to the market in return for a portion of the transaction fee rewards. However, this comes with a trade-off, as PGFKs locked into a fractional contract will not receive the typical PGFK rewards.
XPGP Trading will work like any other liquid ERC-20 token with a dedicated swap protocol in the Polyient Games Marketplace, however, once a user has 1,000 Particles, they will have the option to mint a PGFK that provides all of the normal rewards.
The swap protocol is just the start, Polyient Games is also planning to launch a suite of DeFi products around PGFKs and XPGPs that will provide additional value to the ecosystem and incentives for both tokens.
While these are undoubtedly exciting times, it’s important to note that it’s still early days and the technology has not been battle-tested, even to the extent that you’d see in other DeFi applications.
Additionally, as with most new crypto trends, there will be some applications and use cases that simply don’t make sense. At the end of the day, not all NFT assets should be fractionalized and investors should assess the value proposition that is put forth.
As I previously mentioned, a large part of the value of an NFT asset is derived from its application utility, so fractionalization without utility or that eliminates utility will ultimately probably not succeed in the long run.
However, if done correctly, NFTs could gain additional utility and value while furthering the adoption of the asset class.
Disclaimer: SludgeFeed’s co-founder, Craig Russo, is the Director of Innovation at Polyient Labs and is directly leading the development of Polyient Games. This article is for informational purposes only and should not be taken as investment advice. Always conduct your own due diligence before making investments.