Fractional.art Explained

Updated: Sep 28, 2021

Fractional.art allows users to fractionalize their NFT(s) into tokens for others to collect. Fractionalizing an NFT divides it into tokenized shares which allows for partial ownership of an NFT rather than owning the whole thing. Fractionalized tokens entitle owners to a percentage of the NFT's profits once it sells. This can be useful for gaining exposure to high-end NFTs like CryptoPunks if you don't have +$100k to buy a floor Punk. Fractional.art was created by Andy8052 and launched in July 2021.


This post is meant to be used as a guide to understand how Fractional.art works and what it's useful for. As with any platform, there are underlying risks involved so be sure to do the necessary due diligence before jumping in.

 

How it works

Fractional.art operates similar to NFTX or NFT20 in that you deposit an NFT and receive fractionalized tokens in return. A person who deposits their NFT is able to set the amount of fractions the NFT should be divided into. These fractional shares can then be bought/sold on the open market once a liquidity pool is created on Sushiswap/Uniswap/etc. A big difference between Fractional and NFTX/NFT20 is that the former puts deposited NFTs up for auction on their platform instead of depositing it into a pool.


There are a few definitions that are important for learning how Fractional works. I'll go through a few terms that you need to know as well as show you how to calculate potential gains before entering a trade.

Implied Valuation

Implied valuation is the price an NFT is currently valued at. This can be referenced to determine the "entry price" you're getting in at. If the implied valuation is at or below the price you think the NFT is worth, it's probably a good time to buy.


Collectable Supply

Collectable supply is the shares of a fractionalized NFT that are available to purchase. If collectable supply is at zero percent, this means every fraction of that NFT is currently owned.


Reserve price

Reserve price is the amount of ETH required to initiate an auction for a collectively owned NFT. All fractional owners of that NFT can vote on what they think the reserve price should be and then a weighted average of everyone's votes is taken to determine what the price is set at. Click here for more detailed explanation on how reserve price is calculated.


Since auctions start once the reserve price is met, I like to look at this as the lowest price the underlying NFT can sell for. Under this assumption, I've provided some formulas later in this post that you can use to calculate potential profit.


Buyout vs. Swaps

There are 2 ways to swap NFTs on the Fractional platform.

  • Buyout

  • Swap

Buyout: This occurs when someone is willing to pay the reserve price for an NFT. When someone initiates a buyout, an auction for the NFT begins. When the auction is over, fractional owners of that NFT can redeem their shares for the ETH that their collectively-owned NFT sold for.


Swap: Swapping is when you purchase fractional shares of an NFT. In the example to the right, I am paying 0.5 ETH for 77.26 shares of the APEDOG supply. The implied valuation is 64.715 ETH which means that is what the APEDOG NFTs are currently valued at.


How to calculate potential profit

Shares owned / Total Shares = X

77.26 / 10,000 = 0.007726


X times Reserve price = Revenue

0.007726 x 100 = 0.7726 ETH


Revenue - Purchase price = Profit

0.7726 - 0.5 = 0.2726 ETH


OR you can use this formula to calculate ROI


Reserve price / Implied valuation = ROI

100 / 64.715 = 1.54x (+54%)


*Keep in mind that these calculations give you the minimum ROI. Once the auction launches there is no ceiling.


Why is fractionalizing NFTs useful?

Not everybody will benefit from fractionalizing their NFTs but here's a few scenarios it could be beneficial:

  • Collectors that own a very expensive NFT may want to sell half for liquidity but keep the other half to stay exposed to its price appreciation

  • Artists that make 1/1 artwork can reach a larger audience

  • Bundles of NFTs can be fractionalized to create custom collections for speculation

  • You and your friends can pool money to collectively purchase and own an NFT

There will be a lot more use cases once fractionalizing NFTs becomes a more common practice. One of the biggest ideas is using fractional shares as collateral. This could work since the shares have an underlying ETH value when the NFT sells, so they would be redeemable for X amount of ETH.

 

Analysis

Fractional.art works similar to NFTX and NFT20 in that it splits NFTs into fractions, however it has a very different use case. Rather than creating a pool of NFTs for a specific collection, Fractional allows the division of any NFT into "shares" and prices it at an agreed upon value by its collective group of owners.


Pros:

  • Easier liquidity for owners of expensive NFTs

  • Lows barrier of entry to high-quality NFTs

  • Better compatibility with DeFi primitives

  • Allows for speculation on NFTs without needing to own the entire thing

Cons:

  • Less personal connection to the NFT

  • Possible dilution of value to NFTs


My main concern with fractionalizing NFTs is that it may dilute the value of the underlying NFT since it no longer provides the same personal connection to its owners. Obviously this is subjective since everybody has their own opinion on how NFTs make them feel, I'm just speaking from personal experience. As someone who has purchased a couple fractionalized NFTs I'm not incredibly concerned about this but as an investor I must acknowledge the possibility.


I think Fractional.art is a groundbreaking innovation for the NFT space and I can't wait to see the next wave of applications developed from it. It socializes art speculation and creates more flexible liquidity options for NFT owners. Once this concept has more time to mature, the NFT landscape will look completely different than ever before.


Additional information and articles on Fractional can be found on their Medium or by clicking here.

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