A fragment is simply an ERC-20 token, and its relationship to an NFT is reflected in the action of buying it out. That is, you can acquire an NFT or a group of NFTs behind it by buying all the fragments. The person who eventually acquires the NFT via fragment buyout is called a "collector".
In the buyout model mechanism, no one owns the NFT except the "collector" who gets the NFT itself after buying all of its fragments - so why would people buy these fragments? The answer is the expectation of a profitable exit.
People want to have the ability to discover value for themselves and exit with a profit, just as they did in the early days of investing in cryptocurrencies. With NFT fragmentation, a buyer doesn't have to wait to buy up all the fragments and become the "collector" - the abundance of liquidity allows investors to exit at any time.
While fragment trading can certainly be active when using this model, NFTs themselves don't generate trade. The buyout model is therefore suitable for fragmentation of high-value NFTs, which tend to have a low turnover rate because few people can afford to hold the NFT itself.
Typical examples include art, real estate, financial instruments, and more.
In reality, buying all of the fragments of an NFT is often only a theoretical possibility. You may be able to buy 80% or 90% of the fragments, but there will always be some fragments that are priced too high to sell, or even lost forever.
Worse, an attacker only needs to hold a very small number of fragments to lock the NFT into the fragmentation contract permanently, which essentially destroys the value base of the fragments. Therefore, we allow the forced buyout of all fragments at their market price under certain conditions, an operation known as a buyout.
To perform a buyout operation, you must meet two conditions:
- 1.The share of fragments held is greater than the "buyout position requirement".
- 2.The "buyout protection period" for the NFT has expired.
For example, if you fragment a valuable NFT on January 1, 2021 and set the buyout protection period to 2 years with a "buyout position requirement" of 80%. Then, only someone who holds more than 80% of the total supply of fragments after January 1, 2023 can initiate a buyout operation.
The "collector" pays the fragmentation contract a lump sum equal to the total market value of the fragment market for the NFT (i.e., the unit price of each fragment multiplied by the total supply). The fragmentation contract then transfers ownership of the NFT to the "collector" and uses this money to repurchase the fragments at the price at which they were bought out.
Example: A CryptoPunk NFT is fragmented, resulting in the issuance of 1,000,000 fragments called CryptoFrags. At a fragment price of 1 CryptoFrag = 1 USDC, a collector with 80% of the fragments initiates a buyout. At this point, anyone else holding a fragment can sell it to the contract at the rate of 1 CryptoFrag = 1 USDC. "Collectors" can also exchange their fragments for USDC.
A fragment is just a regular ERC-20 token and does not change in any way as a result of a buyout. You can still trade your fragment at any price you want, and it can still be used for mining, pledging, lending, and other use cases. A buyout merely takes away the NFT behind it and provides full liquidity at a fixed price.
Where does the price used for the buyout operation come from?
The answer is the core liquidity pool. This is a liquidity pool that is tied to the fragmentation contract at the time of fragmentation, and the buyout operation is priced at the price determined by this pool, regardless of whether it is the most liquid pool or not. It is still wise for the fragment's liquidity providers to provide liquidity to this pool to guarantee a fair and equitable buyout price.