NFTs, or non-fungible tokens, are one-of-a-kind digital assets. Each image represents an individual token—usually an ERC-721 token for NFTs on the Ethereum blockchain, the network that completely dominates the market for this kind of stuff. As such, you can only trade the whole NFT. You can’t own a little bit of a picture, after all!
But what if you, uh, could?
Cutting Up Fine Art
Enter fractionalized NFTs, an unusual form of NFT investing that splits up an NFT token, for instance a Bored Ape Yacht Club JPEG, into innumerable fungible tokens. Shares in this fractionalized ape can trade on crypto exchanges like Uniswap in the same way you’d trade Ethereum or Wrapped Bitcoin.
True fractionalized NFT trading involves moving an NFT into a vault, holding it there, and issuing tokens that each represent a tiny claim on that NFT. You cannot remove the NFT from the vault unless you hand back all the tokens—a tall order if you have sold these tokens to unregistered and anonymous investors.
The idea behind fractionalized NFTs is comparable to fractionalized stock trading, a relatively recent form of equities investing that allows you to buy, say, half a share in Tesla instead of buying the whole stock. (It’s also how Bitcoin trading works; you don’t have to buy a whole Bitcoin but can instead just buy $100 dollars’ worth of a Bitcoin.)
Why Bother?
There are two advantages to fractionalizing an NFT. The first is that the barrier to entry of owning an expensive JPEG becomes a whole lot lower. It’s similar to how, rather than investing in an entire house, investors can gain exposure to the housing market by buying a far cheaper share in a real estate investment trust (REIT). Of course, they lack the house itself, but still, it’s something.
The second is that, because these NFTs are held in vaults, and lots of people have a claim to the NFT stuck inside, lots of people can vote on what happens to the NFT! The tokens that represented the fractionalized NFT thus confer rights analogous to shares and shareholders of a company.
In NFT land, this might involve voting to lend out NFTs on lending platforms to earn yields; or to stake the NFT as collateral in a lending protocol, to play around with yet more fungible tokens in the crypto markets.
Because governance can become quite complex, some decentralized autonomous organizations (DAOs) avoid fractionalizing the NFT directly and just sell shares in a shared investment pool whose sole purpose is to buy a lot of NFTs.
Where Can You Fractionalize NFTs?
So, who actually offers this service? One of the most popular vaults is Tessera, formerly known as Fractional. It lets you fractionalize an NFT, then set a buyout price that allows you to take control of all shares of the NFT and pay the holders of fractions.
Another is NFTX, which allows you to do pretty much the same thing as Tessera—the main difference is that instead of investing in individual NFTs, you invest in bundles of fractionalized NFTs. It’s like trading index funds composed solely of NFTs.
It should be noted that the market for this kind of thing is certainly niche. As of this writing, for instance, NFTX has a total-value locked (TVL) of just $21 million, meaning that it is on the smaller side of things.
