Introduction

The NFT race erupted in 2021, with capital and users flooding the market. However, as the fervor continued to escalate, on one hand, the entry barrier to the NFT market was raised, and the base price of leading NFT collectibles soared, necessitating a hefty initial investment that made it unfeasible for ordinary investors to partake in the trade of top-tier projects. On the other hand, the hallmark of NFTs lies in the uniqueness, indivisibility, and minimum trade unit of 1 of each NFT token. Due to their non-fungible nature, their trading liquidity is inferior compared to fungible tokens, making liquidity scarcity a significant hurdle for NFT enthusiasts. To address these issues, the market saw the emergence of NFT liquidity financial service projects that leverage decentralized finance on the blockchain to offer solutions, with NFT fractionalization being one of them.

NFT fractionalization is analogous to stock splitting in traditional financial markets, which entails dividing a stock with a high denomination into several shares with lower denominations to augment the liquidity of stocks in the market. NFT fractionalization involves partitioning the ownership of a piece into multiple fungible tokens. Each token holder gains a fraction of the NFT asset’s ownership.

Currently, NFT fractionalization projects that have emerged in the market predominantly use NFT collectibles as underlying assets, issuing tokens to generate liquidity. These can be broadly categorized into index-based and fractionalized models:

1. Index-based: This involves locking several NFT collectibles with similar prices into a vault. Users set the trading prices and the vault issues tokens. Token holders can redeem any NFT collectible in the vault with the corresponding tokens at any time. Notable projects employing this model include NFTX and NFT20.
2. Fractionalized: This entails locking one or more NFT collectibles in a vault and tokenizing the vault. Users can invest in the NFT collectibles in the vault by trading and purchasing tokens. Projects adopting this model include Unicly and NIFTEX.

Introducing NFTX

NFTX is a distinguished platform specializing in forging liquidity for non-fungible tokens (NFTs). Essentially, users deposit their NFTs into the NFTX vaults and, in exchange, mint a sophisticated ERC-20 token known as vToken. This versatile token can be traded on the Sushiswap secondary market, or used to reclaim an NFT from a specific vault in a randomized manner, effectively augmenting the liquidity of NFTs.

NFTX prides itself on an indexation platform for fragmented NFTs. Its inaugural version, V1, debuted on Ethereum mainnet in January 2021, swiftly followed by the launch of Version 2 in July, and an NFT index fund platform in August.

It’s pertinent to note that V1 originally housed two fund models: D1 and D2. Under the D1 fund model, users minted vTokens by selecting the corresponding NFT vault; NFTs within the same vault bore the same price and were, in principle, exchangeable randomly. D2 was a composite fund, crafted from the basic tokens in D1, allowing users to invest in the collective value without holding multiple tokens. The team discerned a stronger inclination towards the D1 fund among users, with tepid demand for D2. Consequently, Version 2 retained only the D1 fund type, and the PUNK D2 fund was gracefully retired in August 2021.

Business Logic

Minting vTokens

Users deposit NFT assets into a vault, minting a single vToken. The protocol subtracts a 5% minting fee, resulting in an allocation of 0.95 vTokens. NFT assets within the same vault are considered homogenous and bear identical values.

Source of image: https://nftx.io/vault/0x269616d549d7e8eaa82dfb17028d0b212d11232a/buy/

It is essential to recognize that the NFTs in the vault typically represent the baseline price within a series, hence depositing highly scarce NFTs is not advisable. The vTokens minted by users are ERC-20 tokens backed by NFT assets and possess the following functionalities:

• Provision of liquidity to liquidity pools on SushiSwap
• Acquisition of transaction fees
• Utilization as collateral for borrowing stablecoins
• On-demand conversion to NFTs stored in the vault

Among these functions, when users pool vTokens on SushiSwap for trading, they can earn transaction fees. Simultaneously, as liquidity builds and trading volumes surge, vTokens facilitate price discovery, determining the floor price of NFTs.

Redeeming NFTs

Users have the flexibility to redeem the initial NFTs at any given moment. The platform provides two modes of redemption: Random Redemption and Specific Redemption. Random Redemption entails the random allocation of an NFT from the vault, exempt from any redemption fee. In contrast, Specific Redemption allows users to redeem a particular NFT at the expense of a redemption fee, set by default at 5%, which means users need to spend 1.05 vTokens to redeem a specific NFT.

Current Developments

As of May 2023, data from Dune indicates that the market prices for NFT collectibles of the same series and rarity are similar. NFTX adopts an indexation approach, fragmenting NFTX assets. The model’s strengths lie in establishing a price floor for NFT collections. Additionally, token holders can easily redeem the original NFT assets. However, a limitation is that each vault can only accept NFTs from the same series and of similar value. Consequently, the NFTs acquired upon redemption may not necessarily be the original collectibles deposited.

Examining the business metrics of NFTX over the past year, the total value locked (TVL) in vaults has surpassed $30 million; the accumulated revenue from fees over 30 days is around $160,000; with 587 active users within the last 30 days.

Source of image: https://dune.com/nftx/NFTX-Dune-Dashboard-Protocol-View

PUNK is the largest vault on the NFTX platform, with a TVL nearing $14 million, constituting approximately 46% of the total TVL. Observing the evolution in the number of PUNK holders, there was a drastic increase in August 2021, skyrocketing from a few dozen to over three hundred. Since then, growth has plateaued, with no new breakthroughs. Currently, PUNK has around 430 holders.

Source of image: https://dune.com/nftx/NFTX-Dune-Dashboard-Single-Vault-View

The data reflects moderate activity on the NFTX platform, with a limited pool of participants, mainly blue-chip NFTs enjoying a high degree of consensus, with the PUNK vault holding the largest proportion.

Token Model

The native token of the project is NFTX, with a total supply of 650,000 units. Among these, 60% are allocated to early members of the community, 10% are dedicated to establishing the initial liquidity pool of NFTX DAO, 20% are reserved for market-making activities on vaults such as CryptoPunk, and the remaining 10% belong to the founders, which will be released linearly over a period of five years.

Of the NFTX allocated to early community members, approximately 390,000 NFTX (representing 60% of the total supply) were distributed through community fundraising. Out of these 390,000 NFTX, half (equivalent to 195,000 NFTX) was raised through Ethereum (ETH), and the remaining half through NFT funds.

The smart contracts of NFTX are governed and controlled by the NFTX DAO. This implies that NFTX token holders possess the authority to modify smart contracts. All protocol alteration proposals necessitate the backing of token holders constituting 80% of the participating votes, and the voting period spans 24 hours.

Conclusion

NFTs experienced significant growth in 2021, yet the inadequate liquidity of NFTs hindered the progress of this burgeoning sector. Fragmentation emerged as one of the solutions to this conundrum. Essentially, it entails packaging non-fungible tokens and transforming them into fungible tokens, thus availing standardized financial services. The significance of this approach is twofold.

On one hand, it bestows NFT owners with the ability to fractionalize and sell portions of their NFTs, which facilitates obtaining liquidity in the form of Ethereum (ETH) by divesting partial ownership. Should NFT holders wish to reclaim their NFTs, they must repurchase a portion of the NFT ownership as per platform regulations.

On the other hand, those who venture into purchasing tokens of fractionalized NFTs stand to benefit from potential returns should the underlying NFT appreciate in value. Additionally, an opportunity exists for arbitrage by purchasing fractionalized NFT ownership on one platform, redeeming the complete NFT, and then vending it on another NFT trading platform.

At present, this niche is still in its nascent stages with low liquidity, and both user numbers and trading volumes are insubstantial. Consequently, it hasn’t markedly ameliorated the liquidity constraints of NFTs. The value of fragmented tokens hinges upon the underlying NFT assets, which often exhibit high uncertainty and valuation challenges. The current fragmentation platforms predominantly use collectibles and artwork as underlying assets, and issuers tend to select NFTs with high market appeal for fragmentation. As such, the fractionalized assets that users acquire are often high-priced NFTs that have undergone market speculation, which exposes them to substantial risks of price decline. Furthermore, with the overall crypto industry experiencing a downturn, the entire NFT market languishes with low prices and trading volumes.

NFTX has made significant strides in just over a year. Its fundamental business logic has been well established and a modicum of liquidity has been achieved. The project exhibited commendable performance amidst the NFT market frenzy, establishing itself as one of the frontrunners in the NFT fragmentation arena. However, the NFTX platform is currently only moderately active due to the overarching circumstances in the cryptocurrency industry, with limited user participation and a concentration of assets in Cryptopunks. As the NFT landscape progressively matures, fragmentation as a versatile application mechanism can potentially amalgamate with other infrastructures such as lending and leasing products, thereby expanding its applicability. As an early mover, NFTX holds a distinct advantage and could be a harbinger for novel development opportunities within the domain.