Fractionalizing NFTs: The Struggle And The Secret Cure
Look. I’m going to crack open a vintage subject.
Soften your forehead, unclench your jaw, relax your shoulders. Do not hold tension in your body. You have my word that we’ll approach it from an entirely new angle. I present to you — the struggle and the cure — NFT fractionalization edition.
The Struggle
Fractionalizing NFTs is one of those obvious things to work on — you have non-divisible assets in front of you, what do you do? well you make them divisible, duh. Unsurprisingly, it has been top-of-mind over the past few years.
Before we get to the part where i use a lot of exclamation points and present objectionable opinions, let’s recall the common talking points of fractionalization:
- The Good: Democratized access; a feeling of pseudo-ownership over unattainable assets, and accessible exposure to their price performance.
- The Bad: Lack of emotional attachment to the asset. No strong feeling of ownership. An itching feeling of inferiority compared to the group of actual owners. People’s tendency to prefer owning a whole asset in a lower priced collection (commonly a derivative collection, if they’re passionate about the original).
- The Ugly: Stop it Arad you’re too funny.
Many have tried, and boy has it been a struggle. The OGs were Niftex. They were so ahead of the pack that no other competitor has appeared for practically a year after their launch.
Niftex had all the assets and all the mind-share. It was all theirs for the taking.
Everyone knew about these fractions. Everyone was vocally excited. But reality told a different story; the price of these shards/fractions basically only moved in reaction to real floor movements.
Whenever a big move happened, someone in Punks chat would recall “oh shit the Niftex prices are still behind , i can capture the move there”. Often that person was indeed the first to do so… and so it went. The shard prices reliably tracked the NFT collection.
At first, the consensus was that they should trade at equal or higher value than the underlying NFT. But that was practically never the case — they were usually trading for a DISCOUNT valuation.
Nobody wanted to actually own them. Purchases were pretty much always in reaction to the underlying collection moving.
This is certainly NOT how an attractive asset behaves. Nor how an engaging product feels like.
Since then — Niftex was abandoned and the team was acqui-hired. Many others have tried to the same thing, employing slightly different approaches. None have gotten sustained traction even while the NFT space was growing exponentially in short time. Niftex was merely a cautionary tale, one that was repeated many times over, in slightly different variations.
Brief intermission; Look, reader. Lest you think I enjoy kicking an idea when it’s already down — I want to note that my disillusionment with fractionalization goes as far back as 2 years ago:
Moving on. We’re here to talk about the spicy stuff.
The Cure
OK, I lied. I don’t have the cure. But I believe I’ve distilled the most important secret ingredient of its recipe. Hear me out.
How do we do fractionalized assets right?
WE UNANCHOR THEM.
Yes, unanchor. It’s a word. We release them from the burden of having a price anchor. This, in my view, is the root cause of their struggles.
Let me show you what I mean with two examples of fractionalized assets that have done well:
Both have been among the most successful fractionalizations by far. And yet, they really don’t have much in common. The what, why and how… are all wildly different when comparing these two.
EXCEPT THAT FOR BOTH, NOBODY HAS A CLUE HOW TO VALUE THEM!
Let’s process this.
The Doge NFT is only very loosely anchored to the price of Dogecoin, but really, it’s more a beast of its own. Price movements in Dogecoin do not translate to a linear reaction in the price of the NFT fractions. They are viewed and treated as separate assets — It’s not immediately obvious whether a price relationship should exist between the two, or to what degree.
Bobu has that same quality. Yes, it has some kind of relationship to the Azuki collection. But how should the market value it? Nobody’s got a clue. It’s not priced reflexively in a predictable and repetitive manner — it stands tall as its own asset, with its own sphere of speculation — and that makes all the difference.
Contrast these to assets that historically have not done well when fractionalized; A Cryptopunk ape, an Art Blocks set, or an Autoglyph… all of which are very clearly anchored to market prices of Cryptopunks floor, the sum of Art Block floors, and the Autoglyphs floor, respectively. (note: a rare punk has a pretty clear linear relationship to punk floors prices — the market knows how to value simple rarities in collections — so for our purpose, it’s anchored almost as strongly as any floor asset).
The secret ingredient is for the fractionalized NFT to stand proud on its own. To not simply serve as a second-hand price derivative. The speculation and price discovery is a crucial part of the experience. And the feeling of being part of something special, something incomparable, unanchored — is the core, the essence of, an exciting crypto asset. It is part of the journey.
Hammered down from a slightly different, more spiritual angle —for a fractionalized asset to be attractive, it should have its own unique place carved out for it within the grand story of its universe.
Dramatic pause.
If you found this short piece interesting, even if you disagree with parts of it (which is to be expected, I tend to be opinionated!),some interaction with the twitter thread so others may see it too would be appreciated.
Yours truly,
Thanks to Derek and Alex for helping me refine my thinking on the subject!
