What is NFT fractionalization, and why should artists care about it?
In the past few months, the NFT space has seen tremendous growth. More and more artists and projects have joined the space, and new innovative platforms have emerged that aim to solve problems for artists and collectors and facilitate NFT creation and trading.
One of the more interesting features that some platforms and smart contracts now claim to offer is the ability to fractionalize NFTs, namely divide them into small, fragmented pieces.
Since I’m often being asked this question, let me start by clarifying that we are not talking about some kind of visual fractionalization that divides the artwork into many small pieces. The idea behind NFT fractionalization is a financial one, arising from the worlds of DeFi (Decentralized Finance). Fractionalization allows people to purchase a small stake of an artwork, much like owning a share of a company gives its holder the right to a small part of its equity value.
If you are an artist and you already feel that the blockchain technology of NFTs is something hard to grasp, you might be overwhelmed when people start talking to you about fractionalizing the NFT and financing your work over a DeFi platform. This is exactly the reason why I wanted to take the time and write this article, as the general concept of fractionalization is really not hard to grasp, and I believe it can be of great value to both digital artists and collectors.
Let’s start with the technical part. If you ever bought or sold an NFT on the Ethereum network or any other smartchain, you must have had in your wallet at some point two very different kinds of assets. The first being the NFT itself, the artwork or collectible or whatever kind of file or content someone had minted into a token. The second kind of asset is the one you paid for the transaction with, namely the ‘money’ token of the chain, usually the one used to pay for the work of the miners. On the Ethereum network that token is Ether, or ETH, that has value and is constantly being traded at a certain price against other assets such as other tokens, other cryptocurrencies, and fiat money.
So why do we care about the difference between NFTs and other “money-like” tokens? If you think about it, this difference is exactly what makes NFTs what they are — Non-Fungible. Fungibility is the quality of money that makes it a medium of exchange — every single portion of it is exactly like the other. So swapping two dollars, or Bitcoins, or any other fungible asset doesn’t change anything. One ETH is one ETH is one ETH. Sounds simple, but when you design a new technology, you have to define everything, and fungibility is a quality of an asset that makes it adequate to be used for swapping, paying, trading, etc.
The technological standard for NFTs on the Ethereum network is called ERC-721 (ERC-1155 also exists). The technical details are not important. We just need to understand that during a fractionalization process, the single NFT ERC-721 is broken into many fungible tokens that are built on a different technological standard, ERC-20, the standard of fungible tokens. Actually, broken into is not the correct terminology. One might think of the NFT (the ERC-721 token) used as collateral, or locked inside a smart contract on one side. On the other side, many fungible ERC-20 tokens are minted and can be sold or distributed separately among many stakeholders.
Great! If this is still not completely clear to you, or if you are wondering how fractionalization can help you as an artist, or how art merchants can buy fractionalized art, I will soon publish another blog post about NFT fractionalization to answer all these questions. In the next post, I will also review some NFT fractionalization platforms, specifically one of the most interesting projects of this space — Nftfy.org.
