What the heck is a fractionalized NFT?

Non-fungible tokens (NFTs) have gotten so big, they’ve gotten smaller. They’ve also become something different from NFTs.

NFTs trading volume and search interest are at an all-time high. Their prices are also fetching exorbitant sums: more than $100,000 a pop for CryptoPunks, around $100,000 for CryptoPunks, $50,000 for Bored Ape Yacht Club, and $10,000 for Meebits. 

The more expensive they get, the fewer people there are that can afford them. But what if you could break them into smaller, less expensive pieces? At least two platforms have arisen that let users do exactly that. They call it “fractionalizing” NFTs.

Artists have already issued multiple NFTs at a time that all point to the same image or video.  But fractionalized NFTs are different. The goal in this case is to convert an NFT into tokenized shares. 

Why would anyone want to do that? The answer depends on if you are an NFT “whale” or not. 

Non-fungible no more

If you want to buy bitcoin but you don’t have $50,000, that’s OK; you can buy fractions of a bitcoin. Now you can do the same with NFTs. 

Of course, these fractions are no longer NFTs. “It's just a fungible token which represents a small percentage of ownership of the NFT,” says Andy Chorlian, co-founder of the NFT fractionalization platform Fractional.Art. 

Chorlian clarified:

“Sometimes there's confusion that it represents a particular pixel or a particular space in the NFT. But that is not the case for what we're doing. It’s like, say, there's 100 [fractionalized NFT] tokens and you own one of them, you own 1% of the NFT.”

Fractional’s system allows users to take their NFT and place it in what they call a “vault,” or the hub for all fractions of a particular NFT. 

“You kind of say to the vault, ‘I want to turn this NFT into, say, 10,000 tokens,” explains Chorlian. “And then the vault creates an ERC-20 token contract for you, and generates 10,000 tokens, gives them back to you and says, ‘Hey go out and have fun with these,’” Chorlian says.

Why would someone do that? One reason is that it turns out if you fractionalize your NFT, speculators might bid up the prices and increase the overall value of your NFT. For instance, at the time of this writing, the lowest price (also known as “the floor'') for a fractionalized NFT from the popular project Etherocks is between three and four times higher than that of the non-fractionalized equivalent, according to The Block Research.   

NFT fractions can be sold on Fractional, where they trade like a normal ERC20 token. Technically it’s also possible to trade them on decentralized exchanges like Uniswap and Sushiswap.

NFTing with friends

So you are interested in owning a fraction of an NFT but would rather your co-owners be people that you know? You are in luck. A new platform called PartyBid lets groups of people participate cooperatively in NFT auctions held on other platforms. 

PartyBid uses Fractional’s smart contracts to break apart NFTs into fragments and represent them as ERC-20 tokens, explains PartyBid co-developer Anna Carroll. Anyone can start a PartyBid by entering the link of the active NFT auction on the decentralized auction platform Zora and establishing a name for the party and the potential fractionalized NFT token. 

For example, Fractional’s Chorlian set up PartyBid for CryptoPunk #2066 (see image below) on August 4. A CryptoPunk is a collection of 10,000 randomly generated 8-bit figures that began in 2017. There are subcategories within CryptoPunks that are more valuable due to their rarity, such as the set of nine Aliens, set of 24 Apes, and a set of 88 Zombies. CryptoPunk #2066 is one of these more valuable ZombiePunks. 

ZORA hosts what amounts to traditional art auctions, in which individuals try to outbid each other and the person with the highest bid gets the asset. Usually, these individual bidders are crypto whales — the term for people who hold a large amount of cryptocurrency — and can thus afford to drop thousands of ETH on a single NFT.

But in the case of the auction for CryptoPunk #2066, the PartyBidders, under the name “Party of the Living Dead,” outbid the prior candidate by 54.5 ETH and thus collectively won the NFT. 

“When the auction for Zombie 2066 was coming to an end, there was a big push on Twitter to beat another whale who was winning the bidding war with a +1000 ETH bid,” says Paper Ape, one of the participants who wished to remain pseudonymous for privacy reasons. “After the news broke that our PartyBid raised enough funds to win the auction, it felt like we accomplished a huge task and I could feel everyone’s energy when scrolling through my feed.”

The asset was then split up into $DEAD tokens and disseminated proportionally among the 486 PartyBidders depending on how much they contributed. 

Ry, a UI/UX designer based in New York, owns 100 $DEAD, or 0.0083% of the overall NFT. Participating in a PartyBid, “was an opportunity to hold onto something with that much value that I would not otherwise be able to afford,” he says.

Ry is holding his $DEAD tokens for the prospect of a buyout — when an external party bids greater than or equal to the reserve price for a fractionalized NFT. In the event of a buyout, the fraction owners will receive ETH for their tokens. At the time of writing, an individual is buying out CryptoPunk #2066 for 0.0011 ETH greater than the reserve price of 1,095.9289 ETH. 

Fractional and PartyBid have lowered the barrier of entry to investing in NFTs. But the fractionalization phenomenon has also led to some unexpected social dynamics. Many of the $DEAD owners, for instance, were surprised by the community that emerged around their assets. With over 1.2 million fractions split among 486 people, the group launched a Discord server to allow the $DEAD holders to communicate with each other. 

“It was the first time I had seen a community of people grouping around one asset in real-time exercising the power of democratizing assets,” Ry says. “It was more about the experience and the idea of being tethered to something valuable, versus actually trying to make money off of the endeavor.”

Gabrielle Micheletti, another $DEAD holder who participated in the CryptoPunk #2066 PartyBid, says it was the social aspect that enticed them to take part. 

“My motivation was more about being involved in a live experiment for shared, collective ownership — in this case of a CryptoPunk NFT —  rather than anything speculative or akin to investment,” says Micheletti. “It was for fun: to be part of this movement, for channeling community, connectedness, and at the intersections of a cultural watershed with digital collecting.”