Crowdfunding to buy an avatar? I would call it NFT performance art

Yesterday, CryptoPunks became popular again.

Payment giant Visa officially announced that it would invest $150,000 to purchase CryptoPunk 7610. After the news was released, the market trading enthusiasm was high. Within four hours, CryptoPunks completed a total of 217 transactions with a total transaction volume of 16,175.75 ETH (about $53.38 million), which directly drove the floor price of CryptoPunks to 68.88 ETH (about $230,000).

Amid the carnival in the market, another piece of news related to Cryptopunks also caught our attention: Cryptopunk 173 was traded at 99.9 ETH (about 333,000 US dollars) last night. Although the transaction price is not high, the transaction form of Cryptopunk 173 is quite special.

Cao Yin, managing director of the Digital Renaissance Foundation, said on Twitter that Cryptopunk 173 was initiated by it and completed through community crowdfunding, with a total of 100 community members, each contributing 1 ETH. "This is how we play NFT, and why the Chinese community is extremely important to the NFT market."

Image from Cao Yin's Twitter

Since the community members have agreed not to speak out, it is not clear how the specific ownership of Cryptopunk 173 will be divided and how it will be handled in the future. However, purchasing high-priced NFTs through crowdfunding is a beneficial attempt (or "art practice") for the domestic community.

Compared with the centralized crowdfunding form, some overseas projects have chosen to fragment NFTs through smart contracts to solve the NFT liquidity problem. Below, we will analyze the current status of the NFT fragmentation protocol market and the new problems that may be faced in combination with specific projects.

1. The NFT market is hot, and crowdfunding, spin-offs and other supporting methods are available

Since the beginning of this year, the NFT trend has been growing more and more popular.

From the perspective of the entire market, NFT sales in the first quarter of this year exceeded US$2 billion, an increase of at least 20 times compared to the fourth quarter of 2020; even though the entire crypto market was cold in the second quarter, NFT transactions remained hot, with sales reaching US$2.5 billion; in July and August, as the market rebounded, trading volumes on platforms such as Opensea continued to hit new highs. At the same time, the demand for NFT avatars (headshots) such as Cryptopunks, Bored Apes, and Pudgy Penguins has grown to a new level, with the floor price of Cryptopunks reaching 68 ETH.

However, the booming NFT market also faces many problems. On the one hand, NFT avatars lack a systematic pricing method, their true value is difficult to quantify, the audience is small, and the price recognition is low; on the other hand, like traditional artworks, NFTs also face liquidity problems, and because each transaction price is an instantaneous transaction price, it is difficult to link with DeFi as collateral; in addition, even for "out-of-the-box" and highly recognized single products such as Cryptopunks, due to the heavy capital investment, the investment threshold is raised, and ordinary users cannot benefit from their appreciation.

In the long run, the NFT market is bound to become a playground for niche players. Popular NFTs are worth hundreds or thousands of ETH, and ordinary players are unable to participate even if they want to. In this context, the NFT fragmentation solution came into being.

In simple terms, NFT fragmentation can "split" a complete NFT into several ERC20 standard fragmented tokens. These tokens can be traded and circulated in the secondary market, thereby indirectly improving the overall NFT liquidity; and the price of the fragmented tokens formed by each transaction will also be fed back to the overall NFT, providing price discovery function.

To sum up, NFT fragmentation not only increases the liquidity of NFT itself, but also helps investors lower the threshold for participating in NFT investment, which helps expand the NFT market.

Crowdfunding to buy NFTs and NFT fragmentation are essentially the same, both of which involve sharing NFT ownership. However, crowdfunding often involves first investing and then buying, while NFT fragmentation involves more of buying first and then breaking it up.

Comparing the two, there may be some problems with crowdfunding through centralized methods: for example, who will host the NFT, who will explain the right to display the NFT? How to achieve the exit and secondary resale of fragmented NFTs? If these problems can be handled well, crowdfunding can be regarded as a way of playing that is more in line with user habits.

2. Analysis of the fragmented NFT market

Unlike centralized crowdfunding, NFT fragmentation protocols all host NFTs through smart contracts. However, in terms of specific implementation methods, different projects have different rules. CoinGecko analyst Lucius Fang divides these projects into two main categories: 1. Bundling method/aggregation method; 2. Funding.

(1) Bundling method/aggregation method

The bundling method refers to creating a fund that accepts different NFTs, and then tokenizing the fund. Users can purchase fund tokens to "hold" the original NFT collection in disguise. Representative projects are NIFTEX and Unicly.

Niftex was born in May 2020 and is one of the earliest NFT fragmentation protocols. It allows users to mint fragmented NFTs called "shards" and circulate them in the market (mainly Uniswap). If the original NFT (such as land on Decentraland) has income (rent), shard holders can also share the income according to their proportion. In the Niftex v2 version, Niftex decided to build its own exchange and add new features such as royalty distribution.

Odaily Planet Daily found that there are currently more than 20 types of NFT fragments in Niftex. However, judging from the transaction data, Niftex has only 47 active users per day and an average daily transaction volume of around $10,000, which is still in its early stages.

Unicly also supports the splitting of different types of NFTs to obtain non-homogeneous shared tokens "uTokens", such as UPUNK, UAXIE, etc. These uTokens can be traded on Unicly's own DEX (Unicswap); and Unicly has also issued a governance token, UNIC, to increase the liquidity of uTokens through liquidity mining. In this regard, Unicly's design is more complete than Niftex.

In terms of data, Unicly currently has a locked-in value of US$54 million, far ahead of other NFT fragmentation protocols.

(2) Funding

Funding aims to create a "bottom line price" by creating NFT funds with similar prices. Representative projects are NFTX and NFT20.

Unlike the aforementioned projects, NFTX does not support the splitting of a single NFT project, but aggregates NFTs with similar prices. For example, a user deposits 3 CryptoPunks and can get 3 PUNK-BASIC tokens, which are traded on DEX to obtain the market fair price; if the fund token PUNK-BASIC is worth 10 ETH USD, it means that the bottom line price of each CryptoPunks is 10 ETH. It should be noted that if the user wants to redeem the NFT, the redemption process will be random, and you may not be able to get the original NFT.

Data shows that NFTX’s current average daily trading volume is US$1.4 million, with a maximum of 140 daily trading users, and the protocol’s locked value is US$32 million.

NFT20 has made improvements on the basis of NFTX: on the one hand, it issues the governance token MUSE, and 5% of the NFT20 tokens minted by users will be drawn as a handling fee to the MUSE holder; on the other hand, NFT20 allows the redemption of designated NFTs. This model is obviously more popular with users. Data shows that the average daily trading volume of NFT20 is 3.09 million US dollars, and the highest number of trading users in a single day is 303, which exceeds NFTX.

To sum up, the advantage of the bundling method/collection method is that it can fragment individual NFTs of different types, and it is not affected by the original price of NFTs. Users can access high-profile, high-priced NFTs (such as Cryptopunks); but its disadvantages are also obvious. Each NFT must be valued separately, and if the project is not popular, liquidity will also be affected. Although the indexing method can create a floor price for the same series of NFTs, the same fund cannot accept different series of NFTs, which is also not conducive to the release of liquidity.

In addition to the above-mentioned projects, Paragon, DAOFi, and Fractional also performed well in the field of NFT fragmentation protocols and are worthy of attention.

3. Questions about NFT fragmentation

Regarding NFT fragmentation, my colleague Azuma has an idea: if an NFT is split into 100 parts, only one of them needs to be held for sale, and others will not be able to collect all (buy out). In the traditional art field, this method may be feasible, but in the decentralized market, this problem has been solved.

Take Niftex as an example. It adds a buyout clause. Even if the buyer does not collect all the fragments, he can still purchase the relevant NFTs - the minimum condition to trigger the buyout is to hold at least 10% of the fragments. Assuming that an NFT has 100 fragment tokens, the unit price is 1 ETH/fragment. The player only needs to hold 10 fragments and 90 ETH to force a buyout; if the buyout is to be cancelled, the player needs to buy the 10 fragments at a price of 10 ETH. This system is designed to prevent invalid transactions. The design of this buyout mechanism also prevents the NFT market from price imbalances due to fragmentation.

Another question worth discussing is: Should NFT fragmentation protocols issue governance tokens? Judging from the operational data of several projects mentioned above, projects that issue governance tokens are more popular than those that do not. The inherent logic is that governance tokens can incentivize market makers, thereby providing better liquidity for fragmented NFT derivative tokens.

Of course, the NFT fragmentation market is still in a very early stage. The total locked-in amount and transaction volume of the above projects are not even as good as that of an emerging DEX protocol. However, with the continuous development of the NFT market, fragmented protocols will have development opportunities. In the future, perhaps each of us can own a fragment of CryptoPunks 3100 (ranked first in transaction price).