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NFT fragmentation can make the NFT market more democratized by dividing the NFT, and allow retail traders to enjoy the benefits of the NFT price increase.
Original Title: “Fragmented NFT Research Report: Exploration and Practice to Improve NFT Liquidity”
Written by: Lucius Fang, Analyst at CoinGecko Compilation: BeepCrypto
As the name suggests, non-fungible tokens (NFTs) are unique digital assets. But problems also follow. The uniqueness of each NFTs makes them difficult to exchange with other assets, and therefore difficult to price. The following will take you through various practices regarding the fragmentation of NFTs and increasing the liquidity of NFTs.
What is NFT?
Non-homogeneous tokens (NFT) refer to unique digital assets.
Imagine why many of our identity information, such as passports, ID cards, and birth certificates, are still written on paper instead of stored in digital copies? The reason is that we have no way to prove the authenticity of digital files, but NFT can solve this problem by proving the uniqueness of each digital item.
With the support of this technology, NFT has become a brand-new digital asset category, including artworks, sports cards, collectibles, game projects, domain names, and so on.
Why do we need fragmented NFT?
NFT provides another option for digital artists to earn a living. Before that, because digital copying was easy, digital art might not capture much value. By making digital items scarce, more and more collectors are interested in digital space, thereby increasing the value of NFT. The NFT market is indeed profitable, and investors are ready to move, but it is not easy to own a popular NFT.
Like traditional artworks, NFT also has the problem of poor liquidity. Due to lack of trading activity, it is difficult to determine market prices. Without real-time prices, it is difficult for the entire NFT to serve as collateral for borrowing.
Therefore, NFT as a competitive asset still has some shortcomings:
Lack of liquidity leads to high slippage in the buying and selling process
Lack of market pricing, so it is difficult to value
Not a good collateral, low capital efficiency
A large amount of capital expenditure is required to have the opportunity to obtain a high price NFT
The purpose of fragmentation is to solve these problems by making NFT divisible, and to improve the convenience of transactions. Below we will analyze 4 NFT fragmentation solutions-Unicly, Niftex, NFTX and NFT20.
Unicly is a new generation project in the NFT field.
Users can lock a certain NFT collection through Unicly and obtain a non-homogeneous shared token called “uToken”. uToken represents the ownership of the NFT collection. uToken has the right to govern the collection, such as deciding which NFTs can be included in the collection. Unicly supports different types of NFTs, the structure of which is similar to NFT funds.
If you want to redeem the original NFT from the collection, first uToken holders need to vote together to unlock the collection. But buyers cannot bid for the entire collection, and must bid separately for the relevant original NFT. Once the voting threshold is reached, the set will be unlocked and the highest bidder of each NFT can claim the corresponding NFT. Then, uToken holders can obtain the ETH paid by the winning bidder.
Unicly’s governance token is UNIC. UNIC holders can pledge UNIC to get xUNIC, and hold xUNIC to get dividends.
uTokens can be traded within Unicswap. UnicSwap is an automatic market maker (AMM) created by Unicly itself, and it is also a fork version of Uniswap V2. The transaction fee is 0.3%. 0.25% of the handling fee belongs to the liquidity provider of uTokens, and the remaining 0.05% is used to buy back UNIC tokens and distributed to xUNIC holders.
Unicly was launched on April 7, 2021, and currently has 44 collections, including Cryptopunks, Hashmask, Aavegotchi, and Axies, with a cumulative total lock-up value (TVL) of US$45 million.
Niftex is one of the first projects to do NFT fragmentation. It was launched in May 2020, when NFT had not yet exploded.
Similar to Unicly, it allows users to cast fragmented NFTs that can be called “shards”. It initially focused on single NFTs, such as expensive Axies and CryptoPunks.
At the same time, it also allows users to cast fragments for a series of NFTs, and the holders of the fragments enjoy the governance rights of the original NFT. For example, if the original NFT is a piece of land in Decentraland, the income generated from the land, such as rent, can be distributed to the fragment holders. Like Unicly, Niftex also supports many types of NFTs.
Niftex initially adopted Uniswap V1, but recently launched the Niftex v2 version, Niftex decided to build its own exchange and add functions such as royalty distribution. Some NFT art works distribution platforms will allocate royalties from each transaction to artists. This is a novel idea that may significantly increase the income of artists. After all, in the field of traditional art, artists only sell their works for the first time. To get the benefits.
However, for fragmented NFTs, since the entire original NFT is locked in a smart contract, any fragmented sales will not trigger royalties. Niftex has created a new feature called artist transaction fee royalties, some of which will be owned by the artist.
Niftex introduces a buyout clause for fragmented NFTs, even if the buyer does not collect all the fragments, they can still purchase related NFTs. Let’s look at an example to understand how the buyout clause actually works.
Assuming that an NFT has 100 available shards, the minimum condition to trigger a buyout is to hold at least 10% of the shards. If the buyer wants to buy the entire NFT at a price of 100 ETH, the condition for triggering the buyout is that the buyer needs to prepare 10 shards and 90 ETH. If you want to cancel the buyout, the shard holder needs to buy the 10 shards at a price of 10 ETH. This system is designed to prevent invalid transactions.
According to data from DappRadar, Niftex currently has 25 different types of fragments, including Cryptopunks, Axie Infinity, and Bored Ape Yacht Club, with a cumulative total lock-up value (TVL) of US$3.7 million.
Unlike Unicly and Niftex, NFTX does not support the fragmentation of a single NFT. NFTX focuses on creating funds for NFTs of equal value to help NFT projects establish a price bottom line.
NFTX has two types of funds:
1. D1 Fund
Each D1 fund token is 1:1 corresponding to the relevant NFT. For example, if a user has 2 PUNK-FEMALE, it means that the user can redeem two random female CryptoPunks at any time.
2. D2 Fund
Each D2 fund token is an LP token of the Balancer liquidity pool, and a collection of multiple D1 fund tokens. For example, PUNK is a D2 fund, a collection of five different D1 CryptoPunks funds, namely PUNK-ZOMBIE, PUNK-FEMALE, PUNK-BASIC, PUNK-ATTR-4, and PUNK-ATTR-5.
These funds are constructed by users depositing their NFTs into the pool, a process called minting. For example, if a user deposits 5 CryptoPunk, he can get 5 PUNK-BASIC tokens in return. Users can exchange into NFT at any time, but please note that the exchanged NFT will be random. Therefore, users should not deposit high-value NFTs or NFTs they want to treasure and love.
Each CryptoPunks has its own unique attributes. Certain rare attributes and combinations will determine the price of CryptoPunks. Therefore, NFTX has created five different funds to meet different price points.
The fund token is established based on the ERC-20 standard, so it is fungible. Users can choose to provide liquidity on decentralized exchanges such as Sushiswap, and the default trading pair is ETH. If the trading pair has sufficient liquidity, it will not only help create a price bottom line for the NFT, but also increase the liquidity of the NFT. Of course, liquidity providers can also earn transaction fees from it.
If the fund token Punk-Basic is worth US$40,000, it means that the bottom line of the price of each CryptoPunks is US$40,000.
It is expected that the NFTX team will also launch NFT lending and random gift card functions in the future. Currently NFTX does not charge any fees, but in the NFTX v2 book, the team plans to increase coinage and redemption fees, and there will be additional fees for redeeming specific NFTs from the fund.
As of June 2021, NFTX has supported as many as 35 projects, such as CryptoPunks, Hashmasks, Bored Ape Yacht Club, CryptoKitties, and Axie Infinity. The number of successfully locked NFTs was 2,675, and the cumulative total locked value (TVL) reached 2.2 million US dollars. .
NFT20 is also an NFT index fund project, and its governance token is called MUSE. Similar to NFTX, the NFT20 fund only supports NFTs from the same project with similar prices.
There are two ways to sell NFT through NFT20:
1. Ordinary minting; users can deposit their NFT into the corresponding project fund pool and mint 100 NFT20 tokens. Among them, 5% (5) will be given to MUSE holders as a handling fee, and users can get 95 NFT20 tokens.
2. Dutch auction; if users believe that their NFT is worth more than 100 NFT20 tokens, they can create a Dutch auction to set their own price. The Dutch auction is a type of auction in which the price will gradually decrease during the auction process until it is completely sold.
At present, the Dutch auction is only used as an intermediary, and the purpose is to use NFT20 tokens to promote the sale of high-priced NFTs. Therefore, all transactions that occur are peer-to-peer, and NFT sales revenue will not be included in the fund.
Unlike NFTX’s redemption of random NFTs, NFT20 allows the redemption of designated NFTs, which provides greater arbitrage space. If the NFT favorites find that the NFT in the pool is worth more than 100 NFT20 tokens, they can immediately purchase and redeem these NFTs with 100 NFT20 tokens.
As of June 2021, NFT20 has supported 34 NFT projects with liquid funds on Uniswap, including well-known projects such as Hashmasks, Wrapped Moon Cats and Gan Punks. At present, the number of successfully locked NFTs is 1 million, and the cumulative total locked value (TVL) has reached 1.8 million US dollars.
Adhering to the principle of decentralization, any NFT project can create its own fund pool in NFT20.
In order to attract more users, NFT20 also introduced several unique features, such as a card game called “NFT Royal” and NFT lightning loan feature. Recently, NFT20 launched the Polygon network.
*Indicates that only funds with liquidity> 0 USD are counted
**Indicates that the cost of selling at a fixed price (selling the pieces at a fixed price within 6 days) is 0. Self-issuance (distribute all the fragments to yourself, you can distribute by yourself in a suitable way) 1% fee will be charged
From the table, we can see that there are two ways to fragment NFT:
- Bundling method / collective method
Below we will discuss the advantages and disadvantages of these two methods.
Bundling method/collection method (used by Unicly and NIFTEX)
The bundling method refers to creating a fund that accepts different NFTs and then tokenizing the fund. Users can purchase fund tokens to access the original NFT collection.
Support fragmentation of a single NFT
Small investors have access to diversified high-priced NFTs
Token holders can have the right to govern the original assets to maximize the value of effectively used NFTs, such as income-generating NFTs (game plots).
It is difficult to redeem the original NFTs. There is almost no way to redeem a single NFT, and the entire bundled asset needs to be bought out to release the related assets.
There is no price bottom line to refer to. Each NFTs must be individually valued in order to arrive at a valuation of the entire bundled asset.
Indexation (used by NFTX and NFT20)
The indexation method aims to create a price bottom line by creating NFT funds with similar prices.
By observing the TVL (total lock-up value) of these four projects, we can draw a very positive conclusion that the bundling method has successfully attracted higher assets under management (AUM). This is mainly because the bundling method allows the inclusion of high-priced NFT assets more flexibly.
Although Unicly has only been online for 3 months, it currently has the highest TVL. One reason for Unicly’s success is driven by its mobile mining project, which allocates UNIC tokens to uTokens’ liquidity providers; and another reason is the creation of uJENNY, the first one built on Unicly Decentralized Autonomous Organization (DAO). uJENNY contributed nearly 40% of Unicly’s TVL on its own. Jenny DAO’s goal is to obtain valuable NFTs. In this sense, it behaves like an NFT hedge fund.
There are already quite a few NFT DAOs appearing, pooling capital to protect rare NFT assets, including PleasrDAO, FlamingoDAO, and Yield Guild Games, they are all NFT DAOs worthy of attention. Investors can access the NFTs of these DAOs by obtaining their governance tokens. From this perspective, we can regard Unicly and NFTX as platforms that can create more NFT DAOs.
Even though the bundling method seems to be more widely used, this does not mean that the indexation method has failed. NFTX has contacted multiple DeFi index providers to include their fund tokens in the NFT index. For example, PieDao has incorporated two NFTX funds-PUNK-BASIC and MASK into its NFT index “PLAY”. Cross-border cooperation with different DeFi projects is likely to prove to be the key to future applications.
The price bottom line is used extensively by the NFT community as a metric to define the success of a particular NFT project. For example, the price bottom line of Bored Ape Yacht Club has exceeded the price bottom line of The Meebits, and the NFT community is celebrating this big reversal.
Setting a price bottom line is definitely a valuable thing, because it can be used to get the lowest estimate of the NFT project. However, if most of the value only belongs to the rarest NFT, then the bundling method will be the way to get most of the value.
NFT platform token valuation
Looking at the governance tokens of various projects, the value of UNIC may be relatively underestimated. However, after the publicity in the first quarter of 2021, the NFT market has cooled down significantly. In addition, even with these fragmentation attempts, the NFT market is still considered to be illiquid, and its due rate is not ideal.
Unicly’s main source of income is a 0.05% fee from transaction volume. In the past month, UnicSwap’s daily trading volume only hovered between 500,000 and 1 million US dollars.
We assume that the average daily transaction volume is $750,000. In this case, the annual transaction volume is approximately 274 million U.S. dollars. If it charges a 0.05% fee, Unicly’s annual income is only a meager $137,000. In other words, the NFT market is still in its early stages.
DaoFi released Fraction.art, a primary art market that launched NFT fragmentation. After selling in the primary market, users can purchase NFTs in the secondary market facilitated by DaoFi.
Fractional allows users to cast fragmented NFTs. Currently, the product is still in test mode. You can try the beta version on their website.
NFT received unprecedented attention in the first quarter of 2021, with amazing sales, such as Beeple’s art works that sold $69 million. But most ordinary people have no good way to access these high-priced NFTs. NFT fragmentation aims to democratize the NFT market and allow retail traders to enjoy the benefits of these NFT price increases.
The fragmented NFT market is still in its infancy, but it has great potential to disrupt the illiquid asset class market. The size of the real estate market alone is expected to grow to US$2.8 trillion in 2021. The art market is another market waiting to be disrupted. During 2020, the sales of the art market will reach 50 billion U.S. dollars. There are already some cryptocurrency projects to solve these problems, such as RealT.
The application of NFT fragmentation is still lacklustre. The combined TVL of the top four projects in this field is less than $100 million, and for the DeFi protocol, this is a very easy number to reach. As an asset class, NFT has a long way to go to prove its profitability and sustainability. However, with the rise of digital natives and the increasing demand for alternative investments, NFT fragmentation may become an investment dark horse in the next decade.