CapsuleNFT: The Journey to Fractionalization
The fractionalization of non-fungible tokens (NFTs) can be assumed to have an inverse relationship with the Capsule Protocol — a decentralized code library that allows users to wrap any token within an NFT. While the Capsule Protocol allows users to take fungible tokens and make them non-fungible, fractionalization does the opposite — allowing users to take non-fungible tokens and make them fungible. However, what would happen if both were applied to each other? If one were to take a Capsule NFT, holding fungible tokens, and fractionalize it, what would that truly mean?
There are endless possibilities that arise from the combination of fractionalization protocols and the Capsule Protocol. As such, I decided to take the first step and experiment utilizing current fractionalization technologies and applying them to Capsule NFTs.
What Is Fractionalization?
Fractionalization is the act of dividing a single NFT into many smaller pieces — each piece tradable and ownable by anyone.
The primary benefit of fractionalizing an NFT is to increase the liquidity of an illiquid asset. Non-fungible tokens by nature tend to be less liquid than their fungible counterparts. This often makes ownership of NFT collections less accessible. Since users are currently forced to buy each NFT as a whole piece, it limits other individuals from buying and participating in the collection and community — both from a price and scarcity perspective. This is in stark contrast to fungible tokens or traditional cryptocurrencies, where users are not required to buy full units, but are able to buy fractions of the unit — drastically decreasing the barrier to entry and participation.
The Journey to Fractionalization
To fractionalize my first Capsule NFT, I headed to the Fractional.art protocol. Upon entering the site and selecting the fractionalize button on the interface, I noticed something strange. Although I owned two Capsule NFTs in my wallet, only one was visible in the application. The missing Capsule NFT was my Dollar Store Kids NFT (D$K) — which was controversially delisted from Opensea a few months priors.
I figured that the site may have a bug and I would visit another fractionalization protocol, Unic.ly. However when going to the next option, I encountered the same issue.
Upon further inspection, I came to an interesting conclusion: both platforms were pulling wallet data from Opensea through an API. Since Opensea removed the Dollar Store Kids collection from their platform, Fractional.art and Unic.ly would not display the Dollar Store Kids collection on their platform. I found it incredibly interesting that, despite the crypto-industry being founded on decentralization, there is a surprisingly large amount of reliance on centralized entities.
“…despite the crypto-industry being founded on decentralization, there is a surprisingly large amount of reliance on centralized entities”
However, I was determined to fractionalize my D$K and I knew that there was a way to get it done. Even if my D$K did not appear on Fractional.art or Unic.ly’s websites, I figured that it was possible to directly access their contracts on-chain to fractionalize my D$K.
In order to perform the appropriate transactions on the backend, I followed 3 simple steps:
Step 1: Create a fractionalized NFT using the fractionalization protocol’s front-end.
Besides my D$K, I had another Capsule NFT in my wallet that was recognized by the Fractional.art protocol — I decided to use this one for my test transactions. Using the Capsule NFT and the Fractional.art front end, I had little trouble turning my “Bloq in a Box” NFT, which contains 10 Vesper tokens, and 100 Lumerin tokens, into over 5 million fractionalized ERC-20 tokens within a vault titled “Bloquettes in a Sphere”.
Step 2: Inspect the fractionalization contracts and transactions performed in order to complete the transaction process.
After successfully fractionalizing my first Capsule NFT, I was ready to review the underlying transaction data that was used to complete the process. The overall process was completed as follows:
- Approve the Fractional.art contract to interact with my Capsule NFT
- Fractionalize the Capsule NFT
- End product: Bloquettes in a Sphere
Step 3: Reverse engineer the transactions and perform the same steps, directly interacting with the contract by utilizing write methods on Etherscan.
Understanding the two transactions completed in Step 2 allowed me to utilize Etherscan’s write contract functionality and re-perform the steps using the inputs for my D$K. The steps were as follows:
- Approve the Fractional.art contract to interact with my D$K
- Fractionalize the D$K
- End product: 100 Cent Kids
Finding Meaning in 100 Cent Kids
The Dollar Store Kids collection was made up of 3333 NFTs each backed by one USDC (read more here). By splitting a D$K NFT into 100 fractionalized tokens, we’ve theoretically created 100 cent tokens. However, the thought experiment does not end there — after all, the D$K NFT itself is not worth a dollar, rather its underlying tokens are. If that’s the case, what do the fractionalized pieces actually represent and what are they worth?
I believe that the fractionalized pieces of a Capsule NFT represent something brand new. Every step that was taken to reach the final product, has altered the meaning and value. While a relationship between the fractionalized tokens, the original non-fungible token, and the underlying tokens stored in the Capsule NFT exists — there’s no perfect formula to determine what the new value of the fractionalized tokens is worth. This only becomes more complex when introducing further fractionalization mechanics that may be more suited towards a specific use case — another area that I see great value being added to the NFT community.
Conclusion
Within a few simple steps, the crypto-industry witnessed the creation of the first two fractionalized composable NFTs. By demonstrating the simplicity of this process — we hope to spur innovation and encourage others to build upon the ideas of the Capsule Protocol and the fractionalization of NFTs. To learn more about how fractionalization can play a part in the use cases of CapsuleNFT and the potential implications of this first step, I encourage you to read and explore the CapsuleNFT Gitbook.
If you thought this was cool — just wait until you start thinking about what it means to fractionalize Iron Capsule NFTs. Stay tuned for more info...
