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NFT Fragmentation
What is NFT Fragmentation?
NFT fragmentation refers to the process of breaking down a non-fungible token (NFT) into smaller, more manageable pieces. It is also known as NFT Fractionalization. With the value of NFTs catapulting dramatically in recent years, large masses are unable to afford a single, whole NFT. By fragmenting NFTs into smaller pieces, more people can purchase a piece of an NFT, making it more accessible to a wider audience.
Fractionalizing an NFT is done by creating multiple "child" tokens that represent a fraction of ownership of the original "parent" token. These child tokens can then be traded or sold separately, allowing for greater flexibility in terms of ownership and liquidity.
Benefits of NFT Fragmentation for Liquidity, Ownership, and Flexibility
The key benefit of NFT fragmentation is that it can help reduce the risks associated with investing in NFTs. By owning a piece of an NFT rather than the whole token, investors are able to diversify their portfolio across multiple assets, thereby reducing the overall risk. This also helps to reduce the impact of any potential downturns in the market, as the value of one child token may not be as affected as the value of the entire parent token.
Additionally, NFT fragmentation can help to increase liquidity in the market. When an NFT is fragmented, it allows for more people to buy and sell pieces of it, increasing the number of potential buyers and sellers, and making it easier for people to find buyers or sellers for their NFT pieces.
Types of NFT Fragmentation: A Comparative Study
NFT Fragmentation can be classified into two broad categories with several other sub-categories depending on the following two factors:
Classification depending on the asset architecture.
Classification depending on the application scenarios.
Classification depending on the Asset Architecture
Proportional Fragmentation: This type of fragmentation allows for the NFT to be divided into multiple smaller NFTs, each of which represents a proportionate share of the original NFT.
Non-proportional Fragmentation: This type of fragmentation allows for the NFT to be divided into multiple smaller NFTs, each of which represents a specific aspect or attribute of the original NFT, such as a specific scene, character, or item.
Time-based Fragmentation: This type of fragmentation allows for the NFT to be divided into multiple smaller NFTs, each of which represents a specific time period or time slot within the original NFT, such as a specific scene, character, or item.
Layer-based Fragmentation: This type of fragmentation allows for the NFT to be divided into multiple smaller NFTs, each of which represents a specific layer or aspect of the original NFT, such as a specific scene, character, or item.
Asset-based Fragmentation: This type of fragmentation allows for the NFT to be divided into multiple smaller NFTs, each of which represents a specific asset or property of the original NFT, such as a specific scene, character, or item.
Location-based Fragmentation: This type of fragmentation allows for the NFT to be divided into multiple smaller NFTs, each of which represents a specific location or geographical area within the original NFT.
Classification depending on the Application Scenarios.
Retail Model
For low- to medium-value NFTs with high turnover rates, experts recommend the Retail model.
In the retail model of NFT fragmentation, a parent NFT is broken down into smaller, child tokens that represent a fraction of the ownership of the original token.
These child tokens can then be sold to the public at a set price, allowing for more affordable access to NFTs.
The retail model allows for a larger audience to buy and sell fragments and increase liquidity in the market.
Buyout Model
For high-value NFTs with low turnover rates, experts recommend the Buyout model.
In the buyout model of NFT fragmentation, a parent NFT is offered for sale as a whole, and a single investor can purchase the entire NFT in one transaction.
This model allows for a single investor to own the entire NFT, but also allows for a single point of failure if the investor is not able to resell the NFT at a higher price.
This model also allows for a larger ownership of the NFT but also a higher risk of market downturn as the value of the NFT is affected if the investor can't resell the NFT.
Similarities | Differences |
|---|---|
Both methods allow for more affordable access to NFTs by breaking them down into smaller pieces. | Retail model allows for the public to purchase fragments at a set price. |
Both methods can increase liquidity in the market by making it easier for people to buy and sell pieces of an NFT. | In contrast, buyout model allows a single investor to purchase the entire NFT in one transaction. |
Both methods can help to reduce the risks associated with investing in NFTs by spreading ownership across multiple assets. | Retail model allows for a larger audience to buy and sell fragments, while buyout model allows for a single investor to own the NFT entirely. The value of the fragments in a retail model may not be as affected by any potential downturns in the market as compared to buyout model, where the value of the NFT may be affected if the investor is not able to resell the NFT at a higher price. |
Why Fragment NFTs?: A Revolution in Digital Assets Domain
Build Community
The scarcity of premium NFTs disrupts the community-building aspect of the business. Without a user community, there is no mass fanbase—consequently, there is no asset liquidity. An example of this effect is the surge in the popularity of avatar NFTs like Bored Apes and Zombie NFTs, which greatly benefited from being able to maintain a large group for one common project.
The NFT fragments allow the high-value parent NFT to be owned by more people, which in turn builds a broader community centered around your NFTs and platform.
Lower Barriers and Ease of Business
High-value NFTs act as natural roadblocks for many small investors. The emergence of NFT fractionalization makes it possible for small-scale and private entities to invest in NFTs without any capital barrier—more traders to participate.
Gain Access to Invested Capital
Instead of selling or mortgaging an entire NFT or collection, people can fragment an NFT and sell a small number of fragments on the open market. This creates a collateralized lending market for NFTs.
Connect NFTs to DeFi - The Possibilities are Endless!
There are multiple ways of community governance in the ERC-20 space— DAOs, profit sharing, mining, and derivatives. NFT is split up into a bunch of ERC-20 tokens by NFT fragmentation techniques. Imagine a future where you can use your avatar to participate in governance, buy options on meta-universe props, and enjoy the benefits of NFT deposits - all of this is possible with NFT fragmentation!
Concluding Remarks
However, there are also some potential downsides to NFT fragmentation. One of the main concerns is that it may lead to the dilution of the value of an NFT. As more and more child tokens are created, the value of each individual token may decrease, leading to a decline in the overall value of the parent token. Additionally, the process of fragmentation may be complex and difficult to understand for some people, leading to confusion and mistrust among investors.
In conclusion, NFT fragmentation offers a new approach for access, liquidity and reduced risk for NFTs, but also has its own challenges and potential downsides. It is important for investors and creators to understand the implications of fragmentation and consider it as a way to enhance the value of their NFTs or as a way to access NFTs in a more affordable way.