NFT Shards & The Art Market

Fungible Non-Fungibles in relation to Shardable CryptoArt

Sharding brings Fungibility to  Non-Fungible Tokens

NFTZine will be looking at the concept and application of Wrapped or Fungible NFTs in more detail in later articles, as the sector is just starting to take its first infant steps before becoming a commonplace, albeit in crypto circles, yield mechanism. For now, we will just touch on it as an introduction to a galvanizing edition to rapidly emerging NFT functions. Until recently with the exception of the NFT trailblazers Coloured Coins, with nominal BTC value and CryptoPunks with  (as explained in our earlier article) their peppercorn inert ETH. The now-standard ERC721/1155 standards had no inherent value to enable transaction with the ETH blockchain.

With the recent explosion and hype around the NFT market in the crypto world larger vendors such as CryptoKitties, with their Wrapped Kitties, ERC20 tokens “each backed by a 1:1 ERC721 token” and Aave with Aavegotchi. With, in the writer’s opinion, more intelligent and dynamic system, whereby each Aavegotchi NFT feeds to an escrow contract with Aave supported ERC20 collateral. Such tokens attract yield via Aaves Lending Pool which awards additional tokens held in in the native wallet.

No matter how much the staff at NFTZine love all the fantastic artwork, collectables and other intellectual property out there, wrapped up as single ERC721s or multiple ERC1155s, we can’t help being tantalised by the idea of all the aforementioned NFT wrapped digital assets, becoming less illiquid and generating some DeFi yield. This is a capability will become an integral part of the blockchain-based digital IP distribution system, that is the way the NFT sector is evolving.

Next, we come to sharding. Ever wanted to own one of these mouthwateringly expensive, soon to be record-breaking, headline-making, trendsetting pieces? but lacked the collateral to do so? Well, now you may we be in with a chance to own at least a part! Sharding is where a buyer can own an ERC20 token that is linked to an NFT, which is representative of the portion of the NFT you hold. The same principle is true of both ERC20 NFT’s (such as CryptoPunks) and ERC721/1155 standard assets. As these tokens are now wrapped, with a crypto value, hence no longer having non-fugibility. This all means that your shards can be pooled and put to work to attract whatever asset incentive your chosen pool has to offer. If you want to have a gander at the top 10 shard pools have a look at ShardMarketCap

NIFTEX, are the current market leaders in creating and pooling NFT Shard assets, they have construed an ingenious buy out clause, which NFTZine were so impressed and roused by that we would be remiss were we not to go into detail about it. The clause provides a mechanism which guarantees that an NFT can be redeemed from its component shards. This puts to bed the problem that many analysts foresaw as a problem with the shardables market, i.e once a token is broken up, chances were that it would stay that way in perpetuity. This posed the valid question that the shards would be less valuable than the token as a discrete entity, as they are secured against an asset that can never be fully realised. Prior to this mechanism, classical governance was relied upon to augment the shards, that being the issuing ERC20 registry. The DistrictOx Educational Portal has a fantastic page on the role of governance in relation to ERC20 token management. If any of this is lost on you I steadfastly advocate that you give the page a read.

The first clause in the buyback system we will be looking at is the “Shotgun Clause”. You might think of it as the NFT Shard version of a corporate “hostile takeover”, where an entity, in this case, the tokenised asset can be bought out without the congruence of all the stakeholders. There are some mandatory requirements that must be enabled within the smart contract set which must be met before a successful buyout can be initiated, some are implicit to the NIFTEX agreement, others are more circumstantial. First, the buyout mechanism must be implemented, which in this set,  is by default. Next, the NFT asset must be held in custody within the same set. I could not find any literature to elaborate on this further, but I think it would be implicit that such shards cannot be stored off-chain. There must also be no existing buyout in process, so only one in progress at any one time. Most importantly, to stop timewasting and ensure the veracity and intent to follow through the shard owner who is initiating the process must lock the total Ethereum value, totalling the combined sum of the fragmented token, into the custody of the aforementioned token registry.

The above passage really goes into the nuts and bolts, the back end of the process. Let us have a look at how the NIFTEX pooled shard owner kicks this whole process off. One would, of course, go to NIFTEX, then, in “My Assets” select the shard you wish to reunite and push the “Claim NFT” button. This will take you to the buyout GUI (Graphical User Interface). You will be presented with some stats regarding your ownership as seen below.

If you have a look at the image directly above, you will see the “Make an offer” box, where you need to make your offer per shard. If we assume there are 10 shards in total, and you own 2, and you believe the whole token is now worth 10 ETH one would insert an offer of 8 ETH. In reality NFTs are broken into hundreds if not thousands of component parts, as such do your maths, and make sure you have enough ETH in your wallet to meet the obligation. If you have absorbed what we have covered so far you will have noted that you have to have enough ETH for the process to kick-off successfully, so you would have wasted the most valuable asset you have in life, time.

You will then be presented with the two possible outcomes of the exercise, and be shown what will occur if your offer is either accepted or rejected

This is when things start getting even more interesting, and a 2-week countdown starts. As the other shard holders will, of course, receive notification of the offer. If they decide that the offer is a low ball and not worthy of the piece of the calibre that it is, your offer can be rejected, and a counterclaim initiated to buy you out. This is to ensure that your offer is fair, and again that there is no time-wasting, and to discourage unreasonable offers. 

If we assume that you have played nice, put in a fair offer, and no rejections with counteroffers have been issued by the end of the two week consideration period, your offer will be deemed as “Accepted”. The Buyout instigator will be able to have the whole piece in their wallet, to do with what they will The previous owners will be endowed with the ETH the buyer committed as part of the process, to receive the ETH the sellers must burn the related shards. If a counterclaim was initiated but failed to raise the funds necessary they will also get a refund.

If the offer is rejected, the instigator loses their share, at the price that they offered. The shard owners who initiated the counter-buyout are transferred ownership of the initial claimant’s shards, equal to the ETH they locked as part of their claim. ETH then changes hands at the rate proportional to the offer and the shards they hold. There is a less interesting rejection scenario, where no counteroffer is lodged, but the offer is not deemed high enough by the other shard owners, and the NFT remains dissipated until a successful claim is implemented.

The above NIFTEX process was only launched halfway through 2020. Sharding and shard staking are still very much in their nonage period. Exciting new developments are happening all the time. It is only, in the writers opinion a short interval until venture capital investors catch wind and the model will start to encompass all manner of instruments to maximise yield and safeguard assets as the fiat benchmark sums start to balloon. NFTZine will, naturally be doing its best to bring you all the news and updates as they occur. Thanks for reading and if you found this interesting or of value please do share it about, and/ or leave comments below. Our admins will be pleased to answer any questions to the best of our abilities. If you hear about any developments in this fast moving, exciting new era of digital assets please reach out to us.

Write by : Benny Steele

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