# How to fractionalize NFTs *Author: William M. Peaster* *Published: Aug 24, 2021* *Source: https://www.bankless.com/how-to-fractionalize-nfts* --- Dear Bankless Nation, Someone told me the bear case for Non-Fungible Tokens (*NFTs*) is that they’re illiquid. *“DeFi will solve that”* I said. And so it is. Today we’ll explore how using fractionalization. Fractionalizing allows you to take an NFT and split it into a bunch of pieces—usually in the form of ERC20 tokens—then use it in DeFi. Trade fractions of an NFT on Uniswap? No problem. Get them listed in Aave’s money markets? Yep. (*hasn’t happened yet but it’s coming) * Fractionalizing means we can create liquidity on NFTs with efficient pricing. A protocol called [Fractional](https://fractional.art/) is one of the new protocols tackling this niche (*[listen to our AMA with the founder here](https://bankless.ghost.io/-ama-with-andy-fractional)). *They’ve exploded on the scene (*[just raised $8m in funding](https://www.theblockcrypto.com/linked/115122/fractional-nft-platform-raises-7-9-million-in-seed-funding)*) and have become the go-to platform for the fractionalization of popular NFTs. William shows us how to use it today. *Hint: strong potential for a retroactive airdrop in the future *👀 - RSA --- # **How to fractionalize NFTs with Fractional** **Fractional** is a new decentralized protocol for fractionalizing NFTs into ERC20 tokens. This Bankless tactic will show you how to mint tokenized fractional ownership of NFTs via [Fractional](https://fractional.art/), as well as how to navigate other notable utilities around the upstart protocol. - **Goal**: *Learn how to fractionalize NFTs with Fractional* - **Skill**: *Intermediate* - **Effort**: *At least 30 minutes to learn the basics of Fractional* - **ROI**: *Understanding of a new NFT vertical* --- ✋ *** NONE OF THE CONTENT HERE IS FINANCIAL ADVICE**. [Fractionalizing NFTs may have legal implications](https://itsartlaw.org/2019/11/19/fractionalized-art-ownership-intersection-of-art-and-securities-law/) depending on your jurisdiction, including the United States. Please consult a lawyer & use at your own risk!* --- # **Unlocking NFT liquidity via Fractional** With the crossroads between DeFi and NFTs continuing to flourish, NFT fractionalization protocols are on the rise. They foster **improved NFT liquidity and price discovery **and **democratize access to NFTs** via collective ownership. The idea? A holder can take a desirable but illiquid NFT to a fractionalization protocol and once there mint the NFT into many ERC20 tokens. **These ERC20 tokens are fungible** (*thus readily tradable*) **and fractional**, meaning they collectively represent the underlying asset(s) and can be distributed among multiple owners. We’ve seen a handful of such protocols rise to date, like NIFTEX and Unicly. The newest to arrive on the Ethereum mainnet is **[Fractional](https://fractional.art/)**, which launched in July 2021 and in short order has become a popular new outlet for unlocking NFT liquidity in permissionless fashion. ![](https://storage.ghost.io/c/e4/b7/e4b77544-5a37-4f0b-8824-8440aa348476/content/images/public/images/d1025d11-7c8a-4de2-8d05-8786fd85060e_1445x825.png)**Some of Fractional’s [top NFT vaults](https://fractional.art/explore) right now.** --- ***Bankless Resources on NFTs***: - **[NFTs 🤝 DeFi | Market Monday (Aug. 16th](https://bankless.ghost.io/nfts-defi-market-monday/))** - **[How to get exposure to CryptoPunks 💎](https://bankless.ghost.io/how-to-get-exposure-to-cryptopunks/)** - **[Tools for NFT Summer 🏖️](https://bankless.ghost.io/tools-for-nft-summer-)** --- # **A brief guide to Fractional** At its core, the Fractional protocol has two main types of stakeholders: - 🛒  **[Buyers](https://docs.fractional.art/fractional/for-fractional-nft-owners)**— Users who buy fractions of desirable NFTs to gain exposure to these cultural assets. - 👩‍🎨️  **[Curators](https://docs.fractional.art/fractional/for-curators)**— Users who mint NFTs into fractionalized ERC20s through the protocol and earn curator fees, i.e. inflationary fractions of the underlying NFTs. ![](https://storage.ghost.io/c/e4/b7/e4b77544-5a37-4f0b-8824-8440aa348476/content/images/public/images/1ca1d1a5-c888-4c1c-8cb3-55c45ff786a4_1500x500.jpg)To facilitate these processes, Fractional centers around **three main smart contracts**: one for [vaults of a single fractionalized NFT](https://etherscan.io/address/0x85Aa7f78BdB2DE8F3e0c0010d99AD5853fFcfC63#writeContract), another for [vaults of multiple fractionalized NFTs](https://etherscan.io/address/0xde771104c0c44123d22d39bb716339cd0c3333a1#writeContract), and a final one for facilitating [vault governance parameters](https://etherscan.io/address/0xE0FC79183a22106229B84ECDd55cA017A07eddCa#writeContract). Additionally, keep in mind that because these smart contracts are open and permissionless, **anyone can build their own Fractional front-end** or **interact directly with the protocol** using a Web3 wallet — that is, instead of using the preliminary [fractional.art](https://fractional.art/) website. Indeed, if this main site is ever inaccessible for any reason, you could follow this [helpful guide](https://medium.com/fractional-art/facts-anyone-can-directly-interact-with-the-fractional-protocol-without-relying-on-fractional-art-6e6b32cddd08) to interact directly with the project’s smart contracts. That’s **the power of Ethereum** baby! ## **🖼️ How to fractionalize NFTs** ![](https://storage.ghost.io/c/e4/b7/e4b77544-5a37-4f0b-8824-8440aa348476/content/images/public/images/602c344d-0a4f-4aba-ab82-a6dc6ce17613_1685x1561.png)**Fractional’s [fractionalization interface](https://fractional.art/fractionalize). ** If you’re interested in fractionalizing an NFT via Fractional **your first step is to settle on which NFT you want to use**. --- ⚠️ *Fractionalizing your NFT may have legal implications depending on your jurisdiction! Please use at your own risk.* --- Once you have that down, the process works like so: - Head over to [fractional.art](https://fractional.art/), connect your Web3 wallet, and click on the “**Fractionalize” button** at the top of the website. - You’ll be taken to an interface where you can choose the NFT or NFTs you want to fractionalize. Then input your **vault’s name, token supply, token symbol, reserve price, and management fee**. Press “Continue,” at which point you’ll be prompted to approve Fractional to transfer the NFT(s) in question. **Confirm the approvals in your wallet and then make the transfers as needed**. Lastly, press the “Fractionalize” button and confirm your final mint(s). *Keep in mind that for baskets, every NFT will need to be approved + transferred in separately before you can mint your ERC20s*. - Once your vault is live, you can use the **“Settings & Actions” dashboard** to edit its description, update its auction parameters, and so forth. ## **👛 Setting a vault’s reserve price** In the face of **potential future buyouts**, Fractional’s vaults rely on a price system in which fraction holders “continuously vote on a reserve price” and the “weighted average of this vote decides on the price needed to initiate a buyout.” This may sound a bit confusing at first, but in a [recent blog post](https://medium.com/fractional-art/reserve-price-a-key-fractional-vault-property-to-understand-6dbaf476beb3) the Fractional team provided two examples that break down the process quite simply. The examples are as follows: > “*If you own 100% of the ownership tokens and set the reserve price to 100 ETH, the reserve price will be 100 ETH. However, if you own 75% of the tokens and someone who own the other 25% votes on a reserve price of 50 ETH instead, the reserve price will instead be 81.25 ETH.**If you only own 49% of the token supply and vote on a reserve price, but no one else who owns the remaining 51% of tokens has voted on a reserve price, there will be no reserve price set for the vault*.” That said, a **Fractional buyout** begins whenever a person or group deposits enough ETH to meet or exceed a vault’s determined reserve price. An auction then takes place and if the buyout succeeds, that vault’s fraction holders are able to redeem their ERC20s for ETH. ## **🎉 The party’s on with PartyBid** Ultimately, Fractional is new** cultural lego** at the crossroads of DeFi and NFTs. This dynamic opens up all kinds of novel Web3 possibilities, like PartyDAO’s recently released [PartyBid tool](https://www.partybid.app/). PartyBid is a decentralized app for [facilitating collective bidding](https://www.partybid.app/about) on NFTs. The dapp allows groups of friends and/or strangers to raid bid (*“raid” in the gaming sense*) on choice NFTs together, **granting regular investors strength in numbers** versus whale collectors for the first time in the NFT ecosystem. Long story short, PartyBid helps groups acquire NFTs via Foundation or Zora auctions and then trustlessly **fractionalizes the winnings through Fractional**, thereafter distributing the ensuing ERC20s pro-rata to the party’s participants. The dapp’s already been used to acquire [CryptoPunks](https://www.partybid.app/party/0x92a5f605a82663dd1E05914380540063368D0dBe), [Nouns](https://www.partybid.app/party/0xd6ba6f10c981CC8C6C8244EC7d7Dc5BD81865333), and other major NFTs, and it’s all possible courtesy of Fractional’s open infrastructure. ![](https://storage.ghost.io/c/e4/b7/e4b77544-5a37-4f0b-8824-8440aa348476/content/images/public/images/670fc364-8f9a-4865-a208-0432f6c8557f_1910x936.png) ## **🔭 Zooming out** Fractional is paving the way to **new NFT liquidity and token utility possibilities**, and the aforementioned example of PartyBid is but a taste of the innovations that could sprout up around the fractionalization protocol going forward. At the same time, and as much as it personally pains me to say this as a fan of DeFi + NFTs, Fractional isn’t a protocol that *everyone *should mint through right now. That’s because some jurisdictions like the United States treat **fractionalized artworks like securities**. In other words, within such jurisdictions fractionalized NFTs appear to clearly meet the threshold for securities registration requirements. Make sure you’re aware of **your jurisdiction’s relevant laws** before issuing fractions of your NFTs. Lastly, it’s worth noting the Fractional team has previously said they plan to “progressively decentralize the protocol to ensure long-term resilience & upgradability.” As such, a **Fractional governance token** down the road seems well within the realm of possibility! Use Fractional and start farming those retroactive rewards! --- ### **Action steps** - 👀  Review **[Fractional’s top live vaults](https://fractional.art/explore)**. Which opportunities, if any, jump out at you? Sound off in the comments below, what do you think! - 📰  Read Fractional’s “**[Dust Rekt Me, Help!?](https://medium.com/fractional-art/dust-rekt-me-what-now-2c175e687978)**” guide to learn how to close a vault when you don’t own 100% of the fraction supply.