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Fractional NFTs

Today, we’re looking at the intersection of fractional ownership and NFTs. It’s a bit confusing at first, but we try to explain how it all works.

Mini IPOs and Hyper-Fractionalization

Hyper-fractionalization is likely the single most important investing trend of our lifetime.

To be clear, fractionalization itself is nothing new. It’s been around for 400 years. Back in 1602, the Dutch East India Company was the first company in history to be listed on a public stock exchange. By issuing shares to the general public, they in effect became the first company to officially fractionalize.

Then for 400 years, nothing exceptional happened.

..Okay, that’s a lie. Lots happened.

But fast-forward to 2012, when the JOBS act (Jumpstart Our Business Startups) was signed into law by President Obama. This critical legislation loosened regulations for companies raising funds, allowing them to use equity crowdfunding to sell securities, without having to bear the usual costs of a normal SEC registration. It also allowed non-accredited investors to participate, creating an explosion of “mini-IPOs.”

This led to a Cambrian explosion of companies securitizing assets that previously weren’t worth the effort of securitizing, and in turn created entirely new publicly traded markets.

Then in 2021 NFTs went mainstream, and things went into overdrive.

While it took wine, artwork, and farmland hundreds of years to open fractional markets to the masses, the NFT space has done it in mere months.

With new NFT marketplaces popping up every week, it was only a matter of time before they would start to collide with fractionalization.

What is fractional.art?

It’s amazing to think NFTs have been mainstream for less than a year.

The speed at which NFT marketplaces are moving is astounding. But when historians look back on this time, it will be clear artwork was the early driver of NFT adoption.

To that end, no platform offers the variety of opportunities to fractionally invest in NFTs quite like fractional.art.

If Opensea is the “Amazon of the secondary NFT market,” then the fractional.art vault — as its collection of offerings is known — is Opensea’s counterpart for fractionalized offerings.

Through these vaults, you can invest in high-profile projects like Cryptopunks, Bored Ape Yacht Club (BAYC), Artblocks, or even the original Doge meme, whose valuation is currently 46k ETH.

The original Doge NFT minted by Atsuko Sato. Is it high art? No. Is it valuable? Yes.

Fractional.art was founded by Andy Chorlian in early 2021 and was fully operational by June. It is now host to some of the world’s most widely recognized, acclaimed, and expensive artwork NFTs. Exactly the kind of stuff that fractionalization was made for.

How to buy fractions of NFTs

If you decide you want to buy shares of one of these NFT, you first need to connect your digital wallet to fractional.art. Ethereum and Solana have become the defacto cryptocurrencies for the NFT movement, but fractional.art only accepts ETH as payment.

When an owner decides to fractionalize their asset, a set of unique tokens is created. For instance, the Doge Meme NFT has a circulating supply of 16,969,696,969 DOG tokens (har har har), which are ERC-20 tokens compatible with the Ethereum ecosystem.

ERC-20 has emerged as the standard used for all smart contracts on the Ethereum blockchain.

Each token represents one fractionalized piece of the NFT. So basically, you use Ethereum to buy DOG; it could be 100, or 1,000 DOG, etc. Right after you make your purchase, your tokens will appear in your digital wallet.

Voting and buyouts

There’s an additional layer after you make your purchase. As a token holder, you get to vote to set the reserve price for a potential buyout.

This vote is directly proportional to the number of tokens that you own. It cannot be 5x greater, nor can it be less than the current weighted average.

If an outside buyer wants to purchase all the tokens for themselves to own the NFT outright, they would need to place a bid equal to or greater than the current reserve price.

Once this happens, a seven-day auction is triggered, allowing other buyers to place a higher bid.

This can lead to some bizarre manifestations of “DeFi Democracy.” To continue with our example above, the DOG token holders have established an astronomical $72.6 billion reserve price for The DOGE NFT. Absurd? Sure. But it’s their choice. Most reserves are somewhat reasonable.

This video by Giancarlo buys tokens explains how to place bids.

Trading fractional tokens

But wait, it gets even more interesting. Since your tokens are valued based on the price of Ethereum, they can be traded on a Uniswap v3 exchange.

What is Uniswap? It’s a cryptocurrency exchange platform where different ERC-20 tokens can be exchanged for one another or for ETH. Different digital wallets (such as MetaMask, Coinbase, or MEW) can come together to trade for any other kind of ERC-20 tokens.

Uniswap isn’t the only platform where you can do this. Two other well-known platforms are Curve and Balancer.

Crowdfunding fractionalization through Partybid

We can’t speak about fractionalization without diving into Partybid.app, which we mentioned earlier this month when we looked at Nouns DAO.

Partybid allows anyone to begin a “party” in order for a group of people to pool their money together to place bids on different NFTs. They are essentially a way to crowdfund NFT purchases. You can either join a bidding party or to start one yourself.

Partybid currently supports Foundation and Zora, two popular NFT marketplaces. But any developer can also include Partybid in their auctions through Partybid’s Marketwrapper extension.

Since Partybids are a way to buy NFTs with a group, users should heavily promote any Partybid on social media to 1) have as many contributors as possible, and 2) try to lure a “whale” that can fund a substantial portion of the bid. We previously wrote about Partybid’s use to win Noun 11 from the Nouns DAO project. In it, more than 100 investors won Noun 11 for 113.33 ETH (with a whale contributing 97% of the winning bid).

Interestingly, Noun 11 was further fractionalized into 118,998.81 NOUN11 tokens. The implied valuation of Noun 11 now stands at 206 ETH, also benefitting from its fractionalization because of the higher volume of people that are now invested in the asset.

Noun 11 was the first Noun to be acquired through Partybid, a platform for fractionalized NFT purchases.

Partybid is significant because most of the top projects in the NFT space are financially unattainable for most people.

The software has allowed NFT fans to crowdsource their funds into a potential winning bid for higher-end NFTs at the point of auction, as opposed to a secondary market. This allows potential buyers to get in on these high-value projects at the lowest possible price.

Who created Partybid?

Partybid was created by PartyDao, a decentralized autonomous organization (DAO) responsible for developing what they envisioned as open participation in the crypto industry by winning NFT auctions.

The DAO was born out a tweet, of all things. In April 2021, crypto researcher Dave White wrote, “Wouldn’t it be cool if…” and software developer Denis Nazarov replied, “wouldn’t it be cool if…we deploy automatic DAO to bid on any NFT auction, and call it Partybid.”

Since that moment five months ago, more than 2,100 ETH has now been transacted through Partybid auctions.

PartyDAO is now a collective of programmers, engineers, researchers, and marketers who are interested in the movement of NFTs – fractionalized or otherwise – between different platforms and down to individual wallets.

Despite it’s short-lived existence, PartyDao is starting to gather some notable successes:

  • The Party of the Living Dead bought a rare Zombie punk and established a virtual group identity
  • Sirsu’s Crypto Cookout brought people together to win auctions for black and brown CryptoPunks.
  • PartyPAC collected funds to donate to CoinCenter in the fight against legislation threatening the crypto industry.
  • More recently, Nouns announced recurring Parties to bring people together on a regular cadence

Interestingly, their focus has shifted to developing software for “multiplayer crypto products.”

How Partybid works

Through Partybid, you can either start a “Party” for the NFT you want, or join a Party of like-minded bidders.

Once you join or create a party, you can put in any amount of ETH that you like. Your bid will be combined with the bids of other “partiers” to try and win an auction. Again, it is highly recommended that you try to gather as many “partiers” before the auction. This way, you’ll have a greater chance of generating a winning bid because of the volume of people involved and, in turn, the number of people the partiers can involve.

If a party wins an auction you will receive tokens proportionate to the amount you put in. Partybid charges a 5% service fee to any winning bid, but the fee is usually covered by the overages of the collective bid. If you don’t win an auction, you can reclaim the unused funds from the bid.

Partybid sends the winning NFT to fractional.art where it can then be fractionalized even further to potentially garner greater liquidity.


Fractionalization through Otis and Rally Road

Otis and Rally helped pioneer the world of physical asset fractionalization, so it’s only logical that they would want to dip their toes into fractionalized NFTs. Given their existing platforms, it’s a no-brainer.

Last week, Wyatt wrote a special issue analyzing the three Cryptopunks dropping on Rally and Otis.

Otis

Otis made major headlines when it IPO’d Cryptopunk 543 on August 12, immediately cementing themselves as a leader in the fractional space for NFTs.

The initial offering was for $1 per share with 51,500 shares available, representing 60% of the amount available for investing while the asset maintained 40% retained equity.

As of this writing, the shares are now trading for $11.50 per share, constituting an incredible 1,050% return. Punk #543 is now trading at a valuation of $592,250. This is especially significant because it ranks near the bottom in rarity with a rank of #7971 out of 10,000 Cryptopunks according to rarity.tools

Rally

A little more than a month later, Rally IPO’d its first Punk on September 17 – Punk #9670 – for the bargain price of $72,000.

Rally was able to purchase this Punk for $65,046 on July 13 according to Larva Labs. Punk 9670 ranks #7705 in rarity according to rarity.tools. When compared to Otis’ Punk, which is ranked similarly to Rally’s, it would appear that there is a huge arbitrage opportunity. But Rally investors were only able to purchase a maximum of two shares at $10 per share.

Rally will be IPOing Punk 8103 on September 21 with a current market valuation of $559,800. It’s ranked in the top 50% of rarity with a rank of #4801. If markets remain relatively stable within the next week, the initial offering could represent a buying opportunity for investors given that a much less rare Punk – Punk 543 on Otis – is currently valued at $592,250.

Aside from Cryptopunks, Otis also IPO’d a collection of six NFTs from artist and musician Grimes at $10 per share on July 29 from her War Nymph Collection, Volume 1. Three mints of Newborn 1 (out 100) and three mints of Newborn 3 (out of 100) were made available on July 29. As of this writing, the collection is now trading at $64.44, representing a 544% return in two months.

Otis also offered shares on September 27 of Chromie Squiggle #524 at $1 per share. We previously wrote about Chromie Squiggles and it being the first generative art project from the new Art Blocks platform, which was the first platform to dedicate itself entirely to generative art. Trading for this generative art NFT has not yet begun.

Conclusion

There is clearly a burgeoning industry in the fractionalization of NFTs.

Since Blue-Chip NFT prices are so high, lots of talented people are working hard to make many of these NFTs as accessible as possible.

The concept of PFP, otherwise known as picture for proof and profile pic, could be seen in this week’s Cryptopunk drop by Rally. Scores of new fractional investors were proud to show off the $20 investment they made for Punk 9670, more than a few of whom changed their profile pictures the Punk.

Does 50 different people owning an NFT dilute what makes it special? Sure, a bit. But there is a compelling argument to be made that many people care more about their profile pictures on Twitter and Instagram than they do about the pictures they hang in their own homes. And as we’ve said before, half of the allure in this space stems from emotion & identity. It’s no different than owning a watch, car, or any other physical asset.

Look, nobody really knows where this is all going. Even the very people that are at the forefront of developing the NFT space will be quick to admit that they are not entirely sure where the space is headed.

However, one thing is for sure – innovation in the space continues daily. This is a good sign for future NFT markets, and is at the very essence of what makes DeFi so exciting.

The NFT space is wide open now, and thanks to fractionalization, it’s open for anyone to participate.

– – –

A big thanks to our newest analyst Horacio Ruiz for helping out with this issue. Read his recent issues on Nouns DAO, Cryptodads, and Honus Wagner.

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Author

Stefan Von Imhof

Stefan Von Imhof

Stefan lives and breathes asset analysis and valuations. Formerly the Head of Product at Flippa – the world’s largest marketplace for buying & selling online businesses, he built Flippa's Due Diligence Program, and has bought & sold dozens of websites & newsletters. Prior to Flippa he was the first product manager at HG Insights, a market intelligence company sold to Riverwood Capital Partners in 2020. Originally from Boston and later Santa Barbara, CA, he now lives in Australia with his wife & Boston Terrier, Charlie.

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