NFT Digest 39, September 2024

September 20, 2024

NFT fractionalization's secure standart

One of the major issues that have led to the decline of the NFT market is limited availability due to the high cost of acquiring unique and valuable NFTs. The exclusivity of ownership has created barriers preventing a wider audience from participating in the market. NFT fractionalization has emerged as a promising solution to these problems. By enabling shared ownership of digital assets, fractionalization lowers the entry barrier for potential investors. This concept democratizes the ownership of digital assets, making NFTs more accessible to a wider audience and potentially re-energizing the market by introducing NFTs into new sectors. The lack of standardization increases barriers to entry due to learning curves, limits interoperability between platforms, and creates security risks.

Fractionalization

NFT fractionalization, often referred to as fractional NFTs (F-NFTs), is the process of breaking down a single non-fungible token (NFT) into smaller, manageable pieces known as fractions. These fractions allow the ownership of an NFT to be divided among multiple individuals, thereby democratizing access to high-value assets. Each fraction represents a tokenized share in the NFT, allowing individual investors or collectors to buy and sell their shares independently of each other. This approach is particularly beneficial for high-value NFT assets, which are typically inaccessible to the average person.

Moreover, fractionalization of NFTs opens up new investment opportunities and scenarios, including in decentralized finance (DeFi). Owners of fractional tokens can engage in liquidity providing, staking, and collateralization, opening new avenues for investment and earning within the DeFi space.

Now let us consider the main approaches to the implementation of fractionalization

Tessera

The platform architecture revolves around several key components, our analysis will focus on nine main contracts. Figure 1 shows the interaction between these smart contracts.

Vault creation. The Vault contract is central to Tessera's functionality. It utilizes a Merkle tree-based permission system that provides security and allows for post-deployment changes. Vault creation is facilitated by the VaultFactory contract, which uses cloning technology to improve efficiency. The VaultRegistry keeps track of vaults and their fractional ownership, represented by FERC1155 tokens, providing transparency and security.
Modules and Targets. Permissions in Tessera are managed using a combination of modules and targets. Modules are advanced contracts that offer features such as auction-based ownership transfers, fixed-supply token issuance, and vaults transitioning to new governance models. Targets, on the other hand, are simpler contracts executed by a vault to manage the lifecycle of tokens, including minting, burning and transferring them. This modular approach allows Tessera to provide flexibility and programmability in the management of fractionalized NFTs.

Tessera Fractionalization protocol — Figure 1: Tessera platform smart contracts

Despite its innovative architecture, Tessera faces integration challenges with broader DeFi platforms and utilizes ERC1155 tokens, which, while versatile, limit wider market adoption compared to ERC20 tokens. Security vulnerabilities and the complexity of managing a hyperstructured system are ongoing challenges that affect user trust and system reliability. Ultimately, these challenges contributed to the Tessera platform announcing its closure on September 1, 2023.

Unic.ly

Unic.ly is a platform for producing digital tokens and offering optimal prices to traders, with an NFT creator and an automated market maker (AMM) platform.

Figure 2 shows the interaction between the main smart contracts.

Creation of uToken and NFT fractionalization. The UnicFactory initiates the process of minting uTokens, which represent fractional ownership of the NFT. Contract Converter fractionalizes these NFTs into uTokens and facilitates auctions to sell these fractionalized assets. Users can buy, sell, or trade fractions of NFTs, and to redeem the underlying NFT from the collection, uToken holders must first vote to unlock the collection.
Staking and Earning Rewards. UnicGallery offers users a platform to stake their uTokens and receive UNIC governance tokens as rewards, incentivizing users to participate in the ecosystem. Similarly, UnicFarm allows users to stake liquidity provider (LP) tokens from different pools to earn UNIC rewards.
Governance. UNIC tokens play a key role in the governance of the platform. UNIC token holders can participate in governance decisions by proposing changes or voting on proposals through the GovernorAlpha contract, and the Timelock contract adds a mandatory delay for governance actions.
Fee conversion and reward distribution. The UnicPumper contract converts tokens collected as fees into UNIC tokens, which are then distributed back to the ecosystem as staking rewards.

Unic.ly fractionalization — Unic.ly platform smart contracts

NFTx

NFTx is a platform designed to create dynamic markets for NonFungible Tokens. Users can deposit their NFTs into the NFTx vault and in return generate a fungible ERC20 token known as a vToken. This vToken signifies a claim to an arbitrary asset in the vault. In addition, vTokens can be used to return a specific NFT from the vault.

Vault Creation and Configuration. Users can create vaults for any collection of NFTs by specifying the address of the NFT asset that points to the NFT smart contract. Vault creators can set eligibility criteria to determine which NFTs can be minted in the vault and customize features such as minting, random redeems, and targeted redeems
Minting Process. NFT holders can mint vTokens by depositing their NFTs into the appropriate vault. Each NFT minted into the vault increases the supply of vTokens by one, minus a minting fee set by the vault creator.
Redeeeming NFTs. vToken holders can redeem a random NFT from the vault by spending the corresponding amount of vTokens. For an additional fee, users can choose the specific NFT they want to redeem from the vault.
Staking and rewards. Users can provide liquidity by adding equal values of vTokens and base currency (e.g., ETH) to a liquidity pool on an automated market maker (AMM) such as SushiSwap. In return, they receive LP tokens representing their share of the pool. LP tokens can be placed on the NFTx platform to receive a portion of the fee generated by the vault's activity.

NFTx protocol — NFTx platform smart contract

Сomparative analysis of NFT fractionalization protocols

Common functions and architecture

Tessera, Unic.ly and NFTX share core functions, in particular vault creation, tokenization and governance, albeit with different implementations:

Vault Mechanism. All platforms use a vault smart contract to store NFTs and issue fractional tokens.
Tokenization. Fractional ownership is represented through tokens issued when NFTs are deposited. Tessera uses the FERC1155 standard, while Unic.ly and NFTx use ERC20 tokens. Despite the differences in token standards, all platforms allow fractional ownership trading.
Governance. Each platform includes governance mechanisms that allow token holders to influence decisions. The complexity and depth of these mechanisms vary, with Tessera offering a more sophisticated governance model than the others.
Auction systems:. All platforms facilitate the transfer of ownership through auctions. Tessera builds its auction system into its governance structure, Unic.ly simplifies the process for users, and NFTx emphasizes liquidity pools and token redemption for exchanges.

Unique Features

Tessera's modular architecture. Tessera utilizes a highly modular system with multiple smart contracts performing different functions such as auction transmission, fractional token mining, and management transfers. While this flexibility is suitable for advanced usage scenarios, it creates complexity and potential security risks. Tessera's use of the FERC1155 token limits compatibility with DeFi's ERC20-based platforms, and the lack of direct integration with DeFi reduces its appeal to liquidity-oriented users.
Unic.ly simplicity and DeFi integration. Unic.ly prioritizes simplicity, using ERC20 tokens for broad compatibility with wallets and decentralized applications. Its strong integration with DeFi functions, including staking, farming, and liquidity mining, makes it attractive to users who want to participate in both NFT fractionalization and DeFi activities.
NFTx liquidity and market-making. NFTx supports decentralized exchanges and the providing of liquidity for NFTs.

NFT Fractionalization Standard

This proposal involves defining a set of smart contracts, each with defined roles and interactions, to provide a secure, standardized, and interoperable framework across platforms and applications that serves as a baseline for future fractionalization platforms.

Vault Contract Interface

The Vault contract interface defines the core functions for securely managing the NFT lifecycle during the fractionalization process. It describes standardized methods for depositing NFTs, minitng fractional tokens, and withdrawing NFTs, ensuring compatibility and consistent behavior across implementations.

NFT Deposit Function ransfers NFTs from the depositor's address to the repository. It should confirm the calling party's ownership of the NFT and initiate the minting of fractional tokens corresponding to the value of the NFT.
NFT Withdrawal Function facilitates the withdrawal of NFTs from the vault by allowing fractional token holders to claim the original NFT. The contract should define specific criteria for withdrawal, such as holding a majority of fractional tokens or an auction mechanism.

Fractional token contract interface

The fractional token contract interface represents joint ownership of NFTs and extends the ERC20 interface. It defines standard operations such as minting new tokens when NFTs are deposited, transferring tokens between owners, and burning tokens to adjust ownership shares or when NFTs are withdrawn from the vault.

Minting fractional tokens that are distributed to NFT depositors representing their ownership share.
Fractional token transfer. The ability to transfer fractional tokens between addresses is fundamental to the trading and redistribution of ownership shares. This feature facilitates secure and flexible redistribution of fractional ownership by allowing token holders to make transactions that reflect changes in ownership shares.
Burning of fractional tokens is a mechanism to reduce the total supply commonly used when an NFT is withdrawn. The burning process ensures that the fractional token supply remains accurate and reflects the current distribution of fractional ownership of NFTs.

Auction Contract Interface

This contract manages auctions, tracks bids, identifies winners, and ensures that ownership is transferred after the auction is completed.

Auction Initiation. To initiate an auction, the NFT owner or fractional token holder specifies the asset to be auctioned, the starting price, and the duration of the auction.
Placing Bids. Bidders can place bids in an active auction by submitting a bid amount in transactions, which must be higher than the current maximum bid.
Concluding the Auction. At the end of the auction period, the contract finalizes the auction by transferring the auctioned asset to the highest bidder and reallocating bid amounts accordingly. This feature ensures that the highest bidder receives the the asset by returning bids to unsuccessful bidders and transferring the winning amount to the seller of the asset.
Canceling an Auction. This action can be initiated by the contract governance engine under certain circumstances, such as when fraudulent activity is detected or at the request of the asset owner for legitimate reasons. When canceled, the auction status is updated to reflect that the auction is no longer active and all bids placed during the auction are returned to the appropriate bidders.
Redeeming Fractional Value. After an NFT sale, fractional token holders have the right to redeem their share of the sale proceeds. The redeem function calculates the value of the fractional tokens based on the total proceeds of the NFT sale and transfers the appropriate amount of Ethers to the token holder. Fractional tokens SHOULD be burned at redemption to prevent double spending.

Market Integration Contract Interface

The interface allows users to efficiently manage liquidity pools, transact and interact with various DeFi platforms, thereby enhancing the utility and liquidity of ERC20 tokens.

Liquidity Management allows users to add or withdraw liquidity from any pair of ERC20 tokens.
Trade Execution allows users to exchange (swap) one ERC20 token for another within the pool to take advantage of market dynamics and effectively diversify their assets.
Interacting with external DeFI platforms, allowing users to utilize their ERC20 tokens in various protocols to provide liquidity, trading and other financial transactions.

Governance contract interface

The Governance Contract for Faction Holders allows faction holders to propose, vote and implement changes. This system ensures that decisions are in the best interest of the community by using ERC20 tokens for voting rights.

Proposal creation and management. Faction owners can initiate Governance proposals subject to community vote. Proposals may include changes to protocol parameters, updates, or other important decisions.
Voting Mechanism. The contract allows token holders to vote on active proposals. Each holder's voting rights MUST be proportional to their token ownership to ensure a fair and representative governance process.
Proposals Execution. After the end of the voting period, proposals that meet quorum requirements and approval thresholds are executed, enacting the proposed changes to the system. Execution depends on meeting predefined conditions, such as quorum and majority support.

Fee management contract interface

This interface is designed to transparently and efficiently manage the financial aspects of the NFT fractionalization platform, in particular the collection and distribution of commissions.

Fee Collection. Fees are collected from various activities such as NFT transactions, fractional token trading, and other services provided by the platform. This function is responsible for accumulating user fees and storing them securely within the contract for later distribution or reinvestment into the platform.
Fee Distribution. Collected fees are distributed according to predefined rules, including rewarding token holders, covering operational costs, or funding community proposals. This function describes the mechanism for distributing collected fees, ensuring that stakeholders are compensated for their participation and investment in the platform.

Development of NFT Fractionalization standart

Full code and tests are available on GitHub.

The authors combined IVault and IAuction functionality into a single vault contract to reduce gas costs and simplify operations. Along with this, a governance contract for decentralized governance and a simplified, automated market contract to support fractional share trading are presented. Fee management is integrated directly into each contract to simplify the architecture and create customized commission strategies.

Vault smart contract

The contract with integrated features and security measures to support NFT fractional ownership, decentralized auctions and dynamic management.

The Vault facilitates the fractionation process by allowing users to deposit and withdraw NFTs. It accepts multiple ERC721 NFTs, each belonging to a pre-defined collection of NFTs defined at contract initiation. Upon deposit, fractional tokens are minted and allocated to the depositor, correlating each NFT with 1000 fractional tokens. In this example, the number of tokens is fixed for simplicity. Future implementations could explore optimal fractionation ratios depending on the type of asset and its market demand. This mechanism simplifies the management and trading of fractions, increasing liquidity. The exact number of fractional tokens corresponding to the NFT (1000) must be burned for withdrawal, establishing a clear link between NFT ownership and fractional token ownership.

FractionalToken smart contract

The FractionalToken contract is an ERC20 standard token representing fractional ownership of non-fungible tokens (NFTs). The contract implements an IFractionalToken interface that extends the ERC20 token standard by adhering to the proposed NFT fractionalization scheme. This ensures that it complies with both the ERC20 standard and additional functionality specific to fractional ownership. The contract is implemented to include the minting and burning functionality required to manage the dynamic supply of fractional tokens during the NFT lifecycle in the vault.

The FractionalToken contract is associated with the NFT vault. The NFT vault address is authorized to mint or burn fractional tokens.

GovernanceContract smart contract

This contract facilitates governance for fractional holders by using an ERC20 token representing fractional ownership as the basis for voting. This approach ensures proportional distribution of decision-making power according to fractional ownership. To improve the security and integrity of the governance process, a mandatory delay between the approval of proposals and their execution was introduced.

To determine quorum, each proposal tracks its execution status, votes for and against, total number of votes, and total number of tokens at the time of creation. Proposal initiation is conditioned on the proposer having a minimum threshold of total tokens. This ensures that only interested parties with significant interest can propose governance actions. For a proposal to be considered valid, a quorum threshold set at 50% of the total number of tokens is required.

The implemented voting process allows token holders to cast their votes on active proposals within a set voting period. The process is protected from reentrancy attacks to preserve its integrity. This design ensures that governance actions reflect the collective will of faction holders.

Approved proposals are scheduled for execution after a certain delay, allowing for review and possible intervention, increasing transparency.

MarketIntegration Smart Contract

This contract is designed to provide a simple solution for managing liquidity and securing transactions between two different ERC20 tokens.

At initialization, the contract requires the addresses of two ERC20 tokens. These addresses allow the contract to interact with assets representing ownership of different assets, or a pair of investment and utility tokens. Users can enter or withdraw their tokens into or out of the liquidity pool. Trading between two tokens is facilitated by a mechanism that takes into account current liquidity holdings and utilizes slippage protection. The contract solves the slippage problem by allowing traders to specify a minimum allowable number of tokens to be withdrawn, ensuring that traders receive a value close to their expectations or the trade will fail.

Slippage refers to the difference between the expected price of a trade and the price at which it was executed. It arises from price movements between the time a trade is initiated and the time it is completed, which is often compounded in volatile market conditions.

Conclusion

One of the main benefits of standardization is the potential for increased interoperability. By creating a standardized set of guidelines and protocols, different platforms will be able to interact more smoothly, enabling the transfer and trading of fractional NFTs across different ecosystems. This will increase the liquidity of NFTs and foster innovation by allowing developers to build on a common foundation rather than reinventing the wheel for each new project. The lack of a common standard creates significant security, interoperability, and scalability problems. This paper proposes a standardization framework that aims to address these issues by offering a structured approach that ensures consistency and security across platforms.

A standardized approach will enforce best practices in smart contract design, access control, and transaction validation, reducing the likelihood of security breaches.

It should be noted that apart from the mentioned projects, the problem of fractionalization is solved by Floor protocol. A different approach to solving the problem of illiquid assets liquidity is used in the standard ЕRС-404 and its modifications.

NFT News

Artoshi — All NFTs in BTC Ecosystem in one aggregator:
- Get Your Web3 ID
- Discover Mints
- Explore Collections
- NFT Launch Calendar

H olders.at is an NFT snapshot app by https://x.com/jackqack. You can get token holder snapshot of any NFT collection on Ethereum, Polygon, BNB Smart Chain, Arbitrum, Optimism, Zora and Base blockchains, at any block. Copy, share or export the list of NFT collection token holder wallets to file for future airdrops and allow lists.

Baseline introduced loops. Loops allow users to effortlessly increase exposure to bTokens. Looping consists of repeatedly borrowing bTokens to buy more bTokens, creating a leveraged position. When the price of the bToken rises against the reserve asset, the looped positions earn increased profits: Unlike basic loans, where users must pay interest based on the amount borrowed, Loops uses a funding rate mechanism to charge fees on looped positions. In this system, the protocol automatically “reduces” both collateral and debt over time, allowing users to maintain unlevered leverage without actively managing the position. Typically, a loop is most beneficial when:

The bToken’s price is close to its BLV, providing maximum capital efficiency and less downside risk.
You have strong confidence in the short to medium term growth of the bToken price.
You understand the risks and have a clear exit strategy.

Orderbook NFT marketplace Mintify now supports ordinals.

Magic Eden and Mocaverse will create the NFT launchpad MagicMoca. The platform will be exclusive to owners of Moca NFTs, Moca IDs and MOCA Coins who will get early access to these launches. $MOCA will serve as the primary currency for all transactions on the MagicMoca platform. In addition, Moca ID holders will be able to participate in curated launches and increase their reputation on the blockchain.

Now delegators can vote on proposals directly through interactive videos on OmniFlix.

NFT multy-chain bridge explained with Ruby Edelstein, ‪XP.NETWORK

Fungify launched the NFT Index, consolidating the six biggest collections into one simple token.

Unique Network announced the launch of the first developer environment for NFT XCM (cross-chain NFT) transfers, starting with two major networks for developers and parachains in the Polkadot ecosystem.

SunPump, a meme coin generator project has teamed up with APENFT to launch the first fair launch platform for NFTs on the TRON blockchain. The new platform, NFT Pump, allows users to purchase NFTs using TRON’s native token TRX .

NFT Development

Cybersec specifics in NFT realm and “multy-chainity” question.

NFT Analytics

NFT Lending GONDI Introduced V3

It’s retains everything users love about GONDI:

⌛ Pro-rata Interest
💰 Instant Refinancing
⛽️ Cheapest Gas
🤝 Renegotiations

Just now it’s even more flexible and capital-efficient, setting new standards in the NFT Lending space.

Tranche Seniorityc across loan tranches, allows tailored strategies:
- Senior tranches → Repayment priority
- Junior tranches → Lower repayment priority

Efficient Renegotiations. Lenders can extend outstanding loans with one click and don’t need to have balance in their wallet.

‘Largest Lien Buyout’. Holder of the largest tranche gets an exclusive 48-hour window to buy other tranches + interest. Otherwise, liquidation proceeds to public auction. This feature makes multi-tranche loan defaults better.

Collection Offers: Now eligible for New & Existing NFT Loans. Borrowers get more options to choose from when extending their loans, and lenders can deploy capital faster.

Close to Maturity Lockup. With V3, loans can’t be refinanced during the last 10% of the duration. (Loans can still be renegotiated by anyone at all times).

More about Gondi.

Web3 Gaming Industry in 2024

Game growth is outpacing user growth. As of August 2024, the market value of blockchain gaming tokens was $15.83 billion, equal to 1.36% of bitcoin’s market value over the same period. This is a significant decrease from the peak value of $98.68 billion reached on November 26, 2021, representing a decrease of 83.96%. The highest market value of gaming tokens in this cycle was $41.04 billion on March 14, 2024, which is still short of the previous cycle’s peak.

Web3 Game Token Market Cap & Bitcoin Market Cap

On the other hand, despite the dramatic increase in the number of blockchain games from less than 700 in January 2021 to 3,402 by August 2024, the growth of the active player base has not kept pace. The number of games with more than 1,000 monthly active users (MAUs) increased from 45 in January 2021 to 291 in August 2024, but this is still less than 9% of the total number of games. This discrepancy can be attributed to incomplete blockchain data and the concentration of traffic on a few star games, which creates a “head effect.”

Moving beyond financial incentives. The industry has seen a shift towards “play and earn” models that place less emphasis on earning and reduce financial risk, moving away from the previously popular “play to earn” models.

Global differences in cryptocurrency regulation create significant challenges for the globalization of Web3 games.

Despite the industry’s challenges, daily active users (DAUs) in the blockchain gaming sector reached an impressive 4.37 million as of Aug. 31, based on active user addresses.

Ensuring long-term user engagement. The industry is moving towards more robust engagement strategies that focus on long-term player retention. This includes integrating complex game mechanics, evolving narratives, and character development systems that keep players engaged over time. In addition, community development through social features and regular updates can significantly increase user engagement.

User engagement, C2C (consumer-to-consumer) transaction volume, and the overall health of the in-game economy, are critical for Web3 games.

Cryptopunk at 98% off

Punk 2386 , with a current high bid of 600 eth, sold for 10 ETH. This ape punk was fractionalized into 10,000 ERC20 tokens on 9/26/2020, and spread out among what is now 257 holders.

This was done on a now decommissioned platform called niftex (contracts go on forever). The scheme is such that any shareholder can propose a buyout price and if no one objects, they can buy the asset after 14 days.

0x282 initiated a buyout on 8/28 (14 days ago). At least two shardholders took notice of it. One put it off because he thought he had more time, but another (@gmoneyNFT) made an attempt to block…

To block the buyout, you must actually buy the seller’s shares at a price higher than the offered price. 0x282 has offered a price of 0.001 ETH per share (10 ETH for all shares), so the actual counter must be 0.0010000001 as defined in the contract:

gmoney filed a counterclaim for 0.000001 ETH (1000000000000 wei), slightly less than the amount demanded.

At this point, if any other shareholder had contributed 10,000 wei (two TEN TRILLIONTHS of a cent) to the counterclaim, the buyout would have been blocked.

But two ten trillionths of a cent was not committed and 0x282 walks away with the trophey.

NFT Market

Disclaimer. To date, analytical tools are still evolving and provide only approximate data that do not cover all chains, DAG systems and other types of distributed ledgers, as well as NFTs or less common types, such as utility or financial.

Global Markets (30D)

NFT Marketcap is $29,085,881,351 Down

NFT Marketcap, September 2024