An introduction to fractional NFTs with Tessera
In September 2021, when asked which Ethereum use-case has been the most surprising, Vitalik Buterin responded: "NFTs".
NFTs may not have been a widely anticipated by-product of blockchains, but their far-reaching applications to real life have taken Web3 by storm. NFTs have changed the game for not just digital property ownerships, but are slowly impacting the way we approach ownerships of tangible objects as well. Fractional NFTs are a subsection of NFT innovation that are helping to bring new perspectives to ownership. Let's find out how! 🕵️
What is a fractional NFT?
Like its name suggests, a fractional NFT is a fraction of an NFT that you can buy to own. Fractional NFTs allow many people to own one NFT or a collection of NFTs. Consider NFTs that are too expensive for someone to buy. Or a property that multiple people want to share and co-own. By fractionalizing an NFT, multiple people can do exactly that. Through co-ownership, fractional NFTs create new opportunities for community building. Fractional NFTs are also easier to sell away and buy, which makes entry and exit into the asset easier than illiquid NFTs.
How do you split an NFT?
Smart contracts are used to split NFTs through vaults and AMMs. Let's look into the famous NFT fractionalizing protocol, Tessera, to illustrate this.
When an NFT owner deposits their NFT in a vault, the NFT is represented by ERC20 or ERC1155 tokens that each represent a fraction of the NFT. These tokens representing each fraction are available in a liquidity pool via a fraction-to-ETH pairing using an AMM, which sets the price in ETH. A fractional owner can conduct numerous activities with these tokens, including adding liquidity to Sushiswap to generate rewards.
What can fractional NFTs mean for NFT use cases?
The primary impact of NFTs involve how asset ownership works. The internet reinvented the medium through which we communicate and consume media among a whole basket of other activities. Fractional NFTs are doing the same for how we own share-able assets. Although fractionalization of assets already exist outside of the blockchain (think stocks and ETFs), the way they are facilitated is different - just like consuming music at the theatre in the 1800s is different from consuming music through Spotify today.
For example, one of the big pain points in managing home ownership is the complex logistics of paperwork and high costs of 3rd party liaisons. According to Antony Lewis from R3 publication, NFT fractionalization will be particularly impactful in private equity. To Lewis, NFT fractionalization is "about reimagining the whole end-to-end process of finding and matching investors with investment opportunities, and the subsequent secondary market opportunities once an investment has been made."
Learn more about NFT Financialization
NFT fractionalization is only one way NFTs are being used in DeFi. This week, our explore screen covered dApps that are useful for generating greater liquidity, enabling additional ways of extracting value from your NFTs, options markets, and more! Learn more from our grill notes here!