Chapter 1: The Evolution of Currency

In 1834, significant changes occurred in the realm of currency, and today, a similar transformation is taking place in the NFT space.

By Amira Hennes

The concept of a gold standard refers to a monetary system where currency is directly linked to gold at a predetermined rate. Historically, individuals would exchange their paper money for gold at designated locations. For instance, in the 1830s, one ounce of gold was valued at $20.

But why would countries prefer trading in paper currency backed by gold instead of trading gold itself? Despite the criticism often directed at fiat currency for lacking intrinsic value, it plays a crucial role in fostering a productive economy. Handling large sums of cash is far more convenient than dealing with physical gold. Additionally, while gold requires effort to break down into smaller denominations, cash can be divided easily.

Paper money fuels economic activity much like electricity powers a device. However, without a tangible backing, a country can generate money indiscriminately, leading to inflation—something many nations currently experience.

Although money and currency serve different functions, a gold standard illustrates how they can work hand in hand.

Now, you may wonder, what relevance does this have to NFTs? Enter fractional NFTs (F-NFTs)—these innovative assets behave like cash within the context of a gold standard.

Chapter 2: Fractional NFTs Explained

F-NFTs serve as the "digital currency" for NFTs, operating through ERC20 smart contracts that are connected to ERC721 NFTs via the process of fractionalization. Here's a simplified breakdown of how this works:

1. An NFT owner transfers their ERC721 contract to a vault address.
2. The NFT then becomes inactive, and the owner loses access to it.
3. In exchange, the owner receives an ERC20 token that represents a fraction of the NFT stored in the vault.

NFT owners fractionalize their assets for the same reasons individuals exchanged gold for fiat: to enhance utility.

While NFTs and gold are fundamentally different—gold can be divided, whereas an ERC721 contract cannot—both can be made more accessible through derivatives.

F-NFTs, as ERC20 contracts, allow owners to distribute portions just like they would with other Ethereum tokens. This opens up various possibilities:

• Multiple individuals can co-own NFTs.
• Portions of an NFT can be sold while retaining ownership of the remainder.
• NFTs can be traded on centralized and decentralized exchanges.
• The integration of NFTs with DeFi (Decentralized Finance) can yield returns.
• More people can invest in high-value NFTs like Crypto Punks.
• Fractional ownership lowers the barrier for entry for potential buyers.

Moreover, F-NFT owners gain when the original NFT is sold. When the NFT is placed into a vault, the owner sets a reserve price. Buyers can then begin bidding at that price or higher.

To illustrate, consider an NFT valued at 1 ETH, which is fractionalized. Suppose you acquire 30% of it (0.3 ETH). If the reserve price is set at 10 ETH and the auction concludes with a buyer offering 15 ETH, your F-NFT can be exchanged for 4.5 ETH.

Note: Owners can reclaim the ERC721 NFT by redeeming all fractional tokens.