CoinEx Institution | Mind-blowing! How Fractionalization Gives Rise to the Most Expensive NFT Art Ever
In March 2021, Christie’s Auctions announced the successful bid of the NFT Art Everydays: The First 5,000 Days at $69.34 million, comparable to works by Vincent van Gogh and Picasso. This makes Beeple, a previously little-known artist, the top 3 most expensive contemporary painters. A few days ago, through fractionalization, the total worth of Feisty Doge NFT, a Shiba Inu photo, exceeded $100 million, making it the highest-priced NFT in the world. At one point, the photo was worth more than 25,000 ETH. However, back in June, it was sold for only 13 ETH. In two short months, thanks to fractionalization, Feisty Doge NFT soared more than 2,000 times. What makes that happen?
In the summer of 2020, DeFi started a new round of bull. In 2021, we saw an NFT summer, where OpenSea registered record-high trade volumes and the highest on-chain service fee, beating that of Uniswap. Despite the vibrant trades, NFT also suffers from poor liquidity and high unit price. To address these problems, NFT fractionalization was created.
Generally speaking, NFT fractionalization refers to the deposit of non-homogeneous NFTs for the generation of homogeneous tokens. The process makes it easier for users to purchase and own a certain percentage of NFTs. Through fractionalization, users previously intimidated by high-value NFTs or artists (e.g. Beeple) can now purchase these artworks. In addition, fractionalizing NFTs brings more asset liquidity for the original holder without selling the entire artwork. Moreover, NFT fractionalization helps the market with NFT valuation and price discovery.
Fractional, an NFT Fractionalization Platform
Using Fractional, a decentralized NFT fractionalization protocol, NFT owners can tokenize their NFT ownership and mint ERC-20 ownership tokens, which can then run as normal ERC20 tokens and govern NFT assets. For example, an NFT can be fractionalized into 100 new homogeneous tokens, each representing one percent of the total ownership.
The user first logs in to the Fractional website for minting tokens. After connecting to a wallet, the NFT artworks under the wallet will be shown on the platform. The user then selects the NFT for fractionalization and sets the specific parameters, including the vault name, the token supply and symbol, the reserve price, and the management fee. Finally, he clicks “Continue” and authorizes the platform. Then, the relevant NFT will be transmitted to a new vault address, and the corresponding amount of ERC-20 tokens will be transferred to the user’s wallet.
These new ERC20 tokens can then be sold in Dutch auctions. For instance, users can create a liquidity pool on Sushiswap and sell their ERC20 tokens, or give them to friends as a gift. Holders of ERC20 tokens are able to maintain collective ownership of the locked NFT with shared rises and falls of value and determine the reserve price for auctioning the locked NFT based on the holding proportion. If a buyer is interested in the whole NFT, he can start the auction by making an ETH transfer no less than the reserve price. After the auction, the successful bidder will get the NFT, and token holders can claim the corresponding ETH.
Say if a collector holds a PINK icon worth $100,000, he then creates a total supply of 100,000 ERC20 tokens on Fractional and sets the reserve price at $200,000. Next, this collector sells 20% of the supply or 20,000 tokens for $1 each. Users accepting the value of this PUNK art buy the fractionalized tokens, and then the NFT is jointly owned by all token holders. When the secondary market price of the PUNK exceeds $200,000, buyers would be willing to bid at the reserve price, thereby triggering an auction. Hypothetically, the auction lasted for 3 to 7 days, and the final bid was $250,000. The successful bidder would transfer the corresponding amount of ETH and obtain this NFT, and the token holders would burn their fractionalized tokens for ETH subscription to receive both the principal and return.
What makes Feisty Doge NFT the most expensive NFT art through fractionalization?
- On June 15, 2021, the NFT was successfully bid by Twitter user Cryptopathic at 13 ETH on ZORA.
- On August 19, Cryptopathic minted 100 billion NFD tokens using the said NFT on Fractional.
- Cryptopathic then added 25 ETH and 5% NFD to the initial SushiSwap liquidity pool. At this point, Cryptopathic set the total market value of NFD to 500 ETH, which is a 38-time rise compared with the reserve price of 13 ETH.
- On Twitter, Cryptopathic announced that the Feisty Doge NFT will be fractionalized into 100 billion NFD tokens and that everybody can buy a part of the ownership. Backed by promotions by Cryptopathic, a crypto influencer with nearly 150,000 followers, and other big names in the crypto field, low-priced MEME-style NFDs started to go viral on Twitter. Driven by strong FOMO, flocks of clueless buyers rushed into the pool. On August 22, traders of Feisty Doge NFT peaked at 6,000 a day. As a result, the NFD price exceeded $0.0012 at its peak, translating to a total market value of $120 million. Compared to the figure when liquidity was first added, the NFD price soared by nearly 100 times; and if you look at the initial reserve price, the growth is more than 1,000 times.
- Thanks to strong market FOMO, Cryptopathic sold a large number of NFD tokens, making a profit of 3,000 ETH at the minimum. Using the Ethereum transaction mixing protocol Tornado, he managed to transfer at least 1,200 ETH. Though NFD continued to drop in value, the current total worth of Feisty Doge NFT remains high ($50 million).
Feisty Doge NFT demonstrated the potential of fractionalization for NFT. On the one hand, by allowing retail investors to own popular NFTs and offering NFT collectors more liquidity at the same time, fractionalization addresses NFT’s longstanding flaws, covering poor liquidity and the lack of demand. More importantly, fractionalization has brought a new and promising DeFi approach, incorporating lending, leverage, staking, etc. However, on the other hand, it creates more room for speculation. If buyers are not familiar with the NFT value behind their fractionalized tokens, they may purchase NFT ownership for prices far higher than the price in the secondary market.