The fractionalization of NFTs will lead to better social tokens

Brian Flynn
0x565B
February 28th, 2021

There’s been a renewed interest in social tokens over the past few months because of the rise in NFTs. This post is both a reflection of social tokens over the past year and how the rise of NFTs can shape the future of social tokens.

Currently, social tokens are valuable because of tokenized programmable access. If you hold 55 Friends with Benefits (FWB) tokens, you can access the private discord that has some of the top creative talent in crypto. Tokenized programmable access became popular in the summer of 2020 with a discord bot called Collab.Land which let any token community (ERC721 or ERC20) create their own token-gated discords. This led to some innovative use cases like token-gated discord for Neolastics, ESSAY holders, and more.

I have a social token called $JAMM which I tried using for a token-gated newsletter. At the time, it cost about 100 tokens ($50) to read the newsletter each week. While this led to better price discovery for my content, I wasn’t able to realize any of the value from the content that I wrote and it even limited the distribution of the content because it was behind a token paywall.

In summary, while tokenized access was the first type of social primitive that showed the potential of tokens, it alone lacks the ability to create meaningful sustainable social token communities. Here are the problems it suffers:

  • No realization of value - there is no way for early token holders to realize the value of the increase in value of the community.
  • Free rider problem - anyone can join the community if they own enough tokens, but are not incentivized to contribute to the community.
  • No on-chain cash flows - community does not gain from new members entering the community, they gain in new people buying a token to access.

A better alternative: The fractionalization of NFTs

The fractionalization of NFTs has long been the holy-grail of liquidity for NFTs. There’s been a few platforms that tried to do this, like NIFTEX (not to be confused with NFTX), which breaks NFTs down into shards so collectors can get exposure to high-valued NFTs. While these platforms have seen some relative level of success, there’s been a key component missing to create demand to own fractional shares: perpetual royalties.

Perpetual royalties of NFTs was first created by the SuperRare team has since been instantiated by protocols like Zora which introduce the ability to set a royalty and sell-on-share price of an NFT.

NFT creators in the future will have two paths: independent or collective. As an independent, creators can realize the full upside of their NFT creations, and earn their built-in royalties. But the collective model is an entirely new way to build distribution. By fractionalizing the royalties of an NFT, creators gain more distribution. These fractional royalties can be represented in the form of tokens, which are inherently programmable like NFTs. Creators will strategically distribute these tokens to users who can help them sell the NFT, potentially at a higher price than if they were to do it alone.

Social tokens around an object first, not a community

image

Instead of creating social tokens around a community or an idea, tokens should be issued in lieu of royalties of a digital object. This aligns members around an outcome or goal (success of the NFT), as opposed to an infinite time horizon where the objective is unclear.

You could then create tokenized access mediums like Collab.Land with these fractional shares which let these owners collaborate in an ephemeral type of way. When the sale of the NFT is completed, the owners of the fractional shares are paid out proportionately to the amount of tokens that they own. The community is then secondary, and forms around the shared interests in the digital object.

2 levels of ownership: Owning an NFT and owning a piece of a royalty

With the event of a creator fractionalizing their royalty stream to get more owners, it opens up two possibilities of ownership. One is the buyer of the entire NFT, and the other is a fractional buyer. You’d want to buy a fraction if you’re just speculating on the future value of the asset and think you can contribute to the success of the sale. On the flip side, you’d want to buy the entire NFT if you want to acquire the entire rights to the piece of media altogether and signal to others that you own it.

The key distinction is that through fractionalization, it opens up the potential to get more contributors to contribute to the success of creative works represented as an NFT.

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