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Andy Chorlian: From MakerDAO and NBA Top Shots to Fractionalizing NFTs

May 26, 2021 ·

By Tom Shaughnessy

The Delphi Podcast Host and GP of Delphi Ventures Tom Shaughnessy hosts Andy, the founder of Fractional, the project leading the charge on Fractionalizing NFTs. The two discuss Andy’s journey from MakerDAO, to being an early NBA top shots collector to creating Fractional. They dive into the Fractional project on the reasons behind breaking an NFT into pieces, the process, putting the puzzle back together and much more. Delphi Ventures is a proud investor in Fractional. 

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 Music Attribution:

  • Cosmos by From The Dust |
  • Music promoted by
  • Creative Commons Attribution 3.0 Unported License

Show Notes:

(3:12) – First Question: Andy’s Background.

(10:44) – Top Shots Elevator Pitch.

(19:07) – Where did the idea of Fractional come from.

(23:04) – Benefits of fractionalizing an NFT / Differences for different types of NFTs.

(26:36) – Thoughts on people sharing a part of a NFT.

(30:51) – Fractionalization Walkthrough.

(34:16) – The Curation Fee.

(41:30) – Fractional buyout structure / Forms of fractionalization.

(48:19) – Fractional plans for the community.

(49:56) – What’s on the horizon for Fractional.

(51:25) – Fractional’s Team.

(52:15) – Risks to fractionalizing NFTs.

(54:43) – Thoughts on fractionalized shards through Fractional trading on other blockchains / L2.

(57:03) – Where to find Fractional.

Interview Transcript 

Tom (00:00):

Hey, everyone. Welcome back to the podcast. I’m your host, Tom Shaughnessy. I also help lead Delphi Ventures. Today, I’m extremely excited to have on Andy. I think everyone knows him from Twitter. He’s leading Fractional, which is an NFT fractionalization platform. Andy, how is it going?

Andy (00:17):

Hey, it’s going really well. Thanks for having me. I’m excited to be here.

Tom (00:20):

Andy, I have to open up with, I mean, every day at Delphi in one of our chats, I see one of your tweets get shared. It’s incredible.

Andy (00:29):

That’s really funny. For a long time, I wasn’t very active on Twitter and then during COVID I started to tweet more and just share posts. And now at this point, it’s just become a nice way to, I’m working on stuff, I’m doing serious stuff, I’ll go to Twitter, send some stupid tweet or sometimes send a serious tweet. I try to have a bit of a balance between the two. But it was definitely not something I expected to have happen.

Tom (00:56):

It’s kind of wild, right? I look for founders in crypto that own the community. That are well-known, that people like, that people love. It’s just so different from the old world where you want to invest in a CEO who wears a suit and a tie. It’s great to have somebody as plugged in as you. I think it’s a pretty big competitive advantage actually.

Andy (01:16):

Yeah. I mean, it’s definitely something I’m really thankful for. And a lot of it kind of just, I never, when getting into being more involved, had the intention of, “Oh, I want to get a lot of Twitter followers and stuff like that.” A lot of it just kind of like, it’s like, “Wait, share, why do I have this many followers?” It doesn’t really make any sense. And I still don’t really get it. I think there are definitely better people to follow on Twitter than me, but I’m thankful for it’s a lot of fun.

Tom (01:44):

I know, man. I love it. Keep it up. I love it. Andy, you have a pretty storied past in crypto, right? I mean, give us your story. I mean, you were at MakerDAO, then you were pretty big in the Top Shots world. Give us your overview.

Andy (01:58):

Yeah. So I got into crypto a while ago. And I mean, I feel like everyone has their story of what initially got them excited about cryptocurrency in general, and mine is not that exciting, but it is a little funny. It was early 2017, probably March or so. And I wanted to put money on an offshore sports gambling website and I didn’t want to give them my credit card. And so, I was like, “Oh, they accept Bitcoin. Let me look into this.” And I downloaded Coinbase and then saw what Ethereum, you could buy Ethereum on there. And I was like, “Hmm, I wonder what this is?” And started researching it. And I was like,” Oh, this is really sick. This is something I would love to learn more about.” And just went downhill from there, which is funny. But definitely lost all the money I put on that sports gambling site.

Tom (02:51):

Jesus, bad picks.

Andy (02:53):

Yeah. I’m not a good sports gambler. I’m a sports gambler for fun.

Tom (02:58):

Oh, yeah. It’s kind of funny, then you go to NBA Top Shots down the line years later, and it’s such a success.

Andy (03:05):

Yeah. I’ll get into that a little bit, but it’s been very funny, a weird intersection of things I’m interested in with Top Shot. A lot of daily fantasy people who I’ve gotten to know in real life now that I used to read their analysis and stuff. I used to play relatively serious daily fantasy. But yeah, after I graduated from school, I was working just a normal FinTech company. And then I was there for about a year. And during that time, I had started to get pretty into crypto. And so, I left that job in the summer of 2017 and I found my way to a FinTech startup in Flatiron District of New York called Hedgeable that no one has ever heard of.

I was lucky enough that when I got the job there, I knew they were interested in crypto and I made it very clear with them that I was very interested in crypto at that point. I was trying to get a foot in the door. And it’s funny, I had interviewed at Paxos, I think, at the same time. And it was so over my head. They were talking about stuff I just did not understand at all because I was just super, super new to it. And I just got really lucky and found a place where I was able to learn on the job. And we started building smart contract stuff into an API that we were making and got to just do some full stack development work around solidity and stuff. And we ended up also getting really lucky with hiring. And so, the second person we hired to our blockchain team was Noah Zinsmeister, who’s the head of engineering at Uniswap. We hired him right out of getting his PhD and working at the Fed, which was funny. So we’ve known each other for a long time.

And so yeah, I worked there for about a year and it was just a really, really good learning experience. I didn’t really know what I was doing for most of the time. And then, I was lucky enough to get a job at Maker right at the start of 2019. And so then I worked there for about two years and that was definitely the most influential part of my time in crypto because there’s just so many massively brained people who were working on Maker and have worked on Maker and work on it currently. And I learned so much. When I joined MCD was pretty close to feature complete, if not already feature complete.

So I got to spend a lot of time learning formal verification and building out the testing suites and all that kind of stuff. And then Black Thursday happened. And then it was a really, really good learning experience of crisis management and dealing with large systems that are already deployed on main net and all the intricacies and complications that come along with that. And then spent some time working on the new Liquidation 2.0 Systems, which were tested pretty heavily yesterday and seemed to be working pretty well up to this point. And then after that, I left Maker back in, I guess it was early November of last year.

And I spent some time with a project called Element Finance, who you guys may or may not have seen on Twitter recently. They should be launching. I think they had said they pushed back their launch date to sometime in June. But it’s a yield protocol where you can split up your yield into principal and yield tokens and do lots of fun stuff with that. I got involved with that. I knew some of the guys who were doing that and had some ex-Maker people introduced me to it. And that’s one of the great things about working at Maker too, is that there were so many people who were so connected everywhere. A lot of really good opportunities have come up just from the network of people that I got to know there.

And so I started working there because I was also pretty active in [Yearn 00:07:07] strategies at the time. And so I was able to help a lot with building a lot of their mechanism design of, do we make our own strategies? Do we just integrate with Yearn? And I pushed pretty hard that we did integrate with Yearn because building strategies in crypto is really hard and Yearn knows how to do it really well. And so, you can just offload all of that to Yearn and focus on building everything else really well. And so then after I worked there through February of this year, helped them get pretty close to being ready for audit and everything. And then I started getting that same time working on Fractional which is what I’m working on now and hopefully launching pretty soon, which is a Fractional NFTs. That’s the fastest possible journey of four and a half years at this point.

Tom (08:00):

No, it’s a great summation. It’s kind of funny, we had, or I had Rune on from MakerDAO as one of our first guests on the podcast, two and a half or three years ago back when it was called 51%, he crushed it. But it’s kind of funny you were there because those early days of MakerDAO, we didn’t have any of the DeFi apps we have today. It was all just an idea.

Andy (08:23):

Yeah, it was really interesting. And I think even when I joined Maker, I didn’t really understand just how expansive everything in DeFi was going to get and what it was, between that and Uniswap, and then the money markets we have. All the insane stuff that was going to be built on top of that, it didn’t really fully registered to me at the time. But it is cool how much of Maker was a vision that… I mean, Maker started in 2015 being built on BitShares. Maker’s ancient.

Tom (08:58):

[crosstalk 00:08:58].

Andy (08:59):

It is the oldest crypto project outside of Ethereum and Bitcoin basically.

Tom (09:02):

Do you remember the… I mean, those weekly interest rate calls for the most happening thing in crypto back then?

Andy (09:11):

Yeah. I mean, it’s really, it’s insane how far it’s come and just how resilient it has been. But yeah, it was definitely a very different time. I would say it was hard at times because you’re building all the stuff that you think is really cool, but really the only thing anyone ever does with it is go DJ and leverage long on Ethereum. So there were times where that was a little bit demoralizing as there wasn’t as much [inaudible 00:09:38] supply as you thought there could be and all these other things, but it all worked out in the end.

Tom (09:43):

Yeah, no, it definitely did. So I guess, let’s focus it on the NFT side of things. Tell us a bit about Top Shots and what you did there.

Andy (09:51):

Yeah. So I’m a huge basketball fan. I’ve spent some time, I was never very good, but I would play pretty serious daily fantasy sports for a while. I was doing that before COVID, I was doing that a lot. And then when basketball stopped for COVID and stuff, I just fell off of doing it. I know it wasn’t incredibly profitable anyway, so it’s not like I was making a ton of money. But I’m a huge basketball fan. Obviously, I’m very crypto-native and I had signed up for Top Shot whenever you could possibly sign up for it, probably a couple of years ago and had just forgotten about it. And then in late September of last year, I just noticed an email from them. And I was like, “Oh crap, I totally forgot about Top Shot. I should go check that out.”

And I saw that I had, in August, been added to the closed beta, which at that time wasn’t very closed. If you signed up you could get in in a week. But so then, essentially I just aped in really hard. For me, what was cool about it was, that was the first NFT experience where it clicked to me of why someone would want to buy one of these digital collectibles and own it, not just for the potential price appreciation, but also because it was cool and it meant something to them and they just want to hold it. And that’s true for a lot of the stuff that I have now with NFTs in general, but that was the first time where it really made sense to me where, obviously, I thought it was a very good product and I felt like the prices were low and they could appreciate in value, but at the same time, there were times where I was just like, “I really want this particular moment because I really like it. And I really like this player and it’s cool.”

And so at the time I was basically just doing all the DJ and yield farming stuff and taking all the profits in USDC and putting them into Top Shot. And so [crosstalk 00:11:58]-

Tom (11:58):

And was Top Shot competitive then? Because it’s always had quite a buzz around it. I mean, were you getting into Top Shots before people knew about it, or was it, I feel like it’s always had a good amount of hype around it.

Andy (12:12):

There was a period of time where essentially, I don’t want to say number that’s too off, but they were probably five or six people that were making up 80% of the marketplace transactions. And it was myself and a couple of others who were just driving the on marketplace volume. So I think there was a lot of buzz around it because it was the first NFT with some really big IP that was in production and doing everything, but there weren’t that many users. I was in a group chat with two of the other and still am, with two of the other largest accounts. One of them who is the second largest single person account and the other guy is, he’s in the top 10 as well.

And we would track the active users. And even in December, as things are starting to grow a little bit, I think they were at 1,000 active users over the course of a week or something, or every day, I don’t remember the exact timeframes, but there weren’t that many people on the platform.

Tom (13:30):

Yeah. It’s early stages. I mean, that was on Flow, and you were kind of ETH-native. Did that turn you off at all, or it was just kind of just like, didn’t focus too much on that or?

Andy (13:41):

I try really hard to not put myself in the echo chamber of being ETH-native and letting that cloud my judgment too much. That being said, Flow is really the first and only non-ETH thing that I’ve done other than buy and hold Bitcoin. But I tried pretty hard to be open-minded with that stuff. And I’m definitely still very much ETH Maxi for the most part.

Tom (14:12):

Oh, no. I’m totally with you, man. I view crypto as one giant movement. Bitcoin is first, ETh was better. If there’s something better, I’ll move out. I mean, you got to evolve. So I totally get where you’re coming.

Andy (14:25):

Yeah. So that’s been my general feeling, and if Flow has a lot of interesting things about it, there’s a lot of, I think very fair knocks against Flow, but to me, when I tried Top Shot, the user experience and that whole, just the whole site and everything and how clean it was and how easy it was for people to use was just undeniable to me. And so, I didn’t really care what platform it was on, it just worked really well and it felt really nice to use. And to me, with the idea of digital trading cards, the most important thing, even more so, I mean, obviously this kind of stuff matters because in the long-term you want to make sure that everything is secure, but the being able to actually have a ledger of how many are printed and stuff is a total game changer for sports cards in particular.

And so the knocks against Flow’s security or whether the NFTs are custodial and all that is fair and something that I would love to see change in the future, but at the same time, it was just such a clear upgrade from normal sports cards that it kind of was an easy thing for me to jump into.

Tom (15:43):

No. Makes a lot of sense. I mean, I had shared a tweet thread a while ago, just doesn’t like Netflix movies. I would share to get people to understand NFTs, and I’m going to blank on the name, but I don’t know if you saw it, remember the top, I think it was Top Shots or [inaudible 00:15:56], but it was the baseball one where the Ken Griffey’s rookie card was just over printed and the guy’s dad’s business was just destroyed over it. It was pretty wild.

Andy (16:07):

I don’t think I’m familiar with that, but yeah. And so that, to me, it’s just like, it’s such an obvious use case for blockchain where you can actually verify that Flow isn’t lying that there are 49 LeBron James Cosmic Moments. And you could strip away everything else that comes with the benefits of blockchain. And if you just said, “Here’s a written normal sports cards, or a totally custodial version of sports cards,” but you have the verifiable ledger of who owns those cards, how many exist and all that, it’s already an upgrade. And so, everything else to me is awesome and I hope it happens, but it’s also just gravy compared to its current competition.

Tom (16:51):

Do you think most people understand that in the real world? I mean, I feel like it’s not that hard to get. I feel like traditional collectors understand that, but I think when you go into the technicals of it, like, “Hey, there’s only X amount of punks. There from this original contract. And yes, somebody can go create a new one, but it won’t be from the original contract.” Do you think people understand the technicals of it yet, or do you think we’re still a ways away?

Andy (17:17):

I think we’re a bit of a ways away from that. It kind of depends too. I think at a really high level, normal people understand. Blockchain allows for a more nuanced version of collecting where you have more proof of things, but I bet they can’t get really into the details of what does that mean? What does it mean that you can prove that it’s original and all these different things? And I think that’s where lot of the misconceptions in mainstream articles and stuff about blockchain and NFTs can get lost is they don’t totally understand why is this actually important? And so then they start just speculating and saying dumb stuff, or just misunderstanding what’s actually happening and why is it valuable to be able to verify authenticity and stuff like that.

Tom (18:14):

I’m totally with you. And I guess the idea of Fractional is awesome. When I started to look at fractionalization plays, I looked at the market landscape. I looked a lot of your competitors, but you and your idea here and the technicals of it really sold me, but before we get into that-

Andy (18:33):

Thank you.

Tom (18:35):

And just full disclosure, we’re investors in Fractional for those listening, proud investors. Glad you guys have us. But to get into Fractional, I guess it begins with Top Shot. Did you have the idea of Fractional with Top Shot or did it come up?

Andy (18:50):

So I think a lot of my thinking around fractionalization started with Top Shot because that was the NFT platform that I was most involved in. I granted, I own punks. I own a lot of random NFTs that I just buy because I think they look cool. But Top Shot was, I was grinding the Top Shot marketplace. I was very, very active. It was nearly a full-time job for me. And so it was just what I was thinking about all the time. So that was where the thoughts started. And so a lot of it came from conversations I was having with the same collectors, where we would talk about strategy and stuff. And there were particular times where you’d see a moment and be like, “Okay, this is worth, it’s listed for $10,000 and I think it’s worth a half a million dollars, but who is the addressable marketplace of people that have half a million dollars and want to buy this gift from me?”

And clearly, my numbers of what people would be willing to spend was way off, thankfully, but the question still stands, but now it’s, “I can buy this thing for $200,000 or a million dollars. And I think it’s worth $50 million, and who are the people who can and want to buy this thing for $50 million.” And so that was where I first started thinking about it. And then there were a lot of people from outside the crypto space coming in and buying Top Shot Moments as a group. So Top Shot, when it got really propelled into the mainstream was from, this article by a guy named Jonathan Bales. He’s a really smart dude. He was one of the founders of FantasyLabs, which is a daily fantasy sports site, not for actually playing, but analytics and stuff like that.

And he’s a successful daily fantasy sports player himself. And so he and some friends bought one particular moment for $35,000, which at the time was crazy. It was a lot of money for a Top Shot Moment at the time. And he wrote a really awesome article about it and that really kicked things off, but that purchase was made by six or so guys who all pulled together capital and bought it. And since then, a lot of the big purchases have been two or three people or even larger groups buying these big moments. And that just made it even more clear to me, there’s serious demand for this. And also there’s demand for it outside of just crypto-natives.

I’ve found myself in a very fortunate position now where I’m friends with a lot of these guys and some of them were even investors in Fractional, and they’re not crypto-native. They have gotten into crypto through NFTs. And they’re just another group of people who are interested in alternative investments and are open to crypto and NFTs. And there was real demand for this to them. And so that to me was very interesting because it made it seem like there was a serious product market fit for people who aren’t just diehard ETH DeFi nerds who are doing all this other crazy on-chain stuff.

Tom (22:15):

It’s kind of crazy that you bring up people coming together to buy NFTs, and basically escrowing money. It’s kind of the reverse of what you want to do in a way. These people are like escrowing their funds together then by one unit or one NFT, whereas through Fractional, you’re going to break up that NFT so these guys don’t really have to go through that or even organize.

Andy (22:37):

Yeah, exactly. And so, it really, it’s just taking what they’re doing and deconstructing it into a trustless and cleaner version of what they want to do. And it makes sense to me in that sense.

Tom (22:56):

No, no, it totally does. And I want to go into the specifics of the platform, but just at a higher level, what are the main benefits of fractionalizing an NFT? There’s a lot of answers to this. In my mind, I guess, you obviously allow more people to buy in, you have more price discovery, things like that, but I guess it gets a little murky when you have different forms of NFTs, right? If you have a piece of artwork, I guess it’s relatively easier. If you have something like an [Axe 00:23:23] that you want to battle with, I guess it becomes a little bit harder. How do you think through the benefits and I guess the differences for different types of NFTs?

Andy (23:31):

Yeah. I think that’s a really good question. And I think you really, to me, and in my opinion, there’s going to be in the long-term, two primary ways that people go about fractionalizing things. And one of them is going to be full-on [DAO 00:23:50] governed NFTs that are fractionalized and owned by a DAO, and maybe they’re holding multiple NFTs. So say they’re buying Axes and they’re using them and playing with them and earning. And then I think there’s going to be another version of fractionalization, which is just the really, really basic, easy to use version where you just lock up an NFT and turn it into ERC-20 tokens, and then say, “Have fun with these.” If someone buys it out, you get your Ethereum back.

And so, I think that different NFTs are going to lend themselves to different versions of fractionalization. And so, I do think there are particular things that require serious overhead that probably are better suited to be in a DAO, like an Axe or something, where it there’s a lot of different moving parts with an Axe. And so putting that into a lazy version of fractionalization, outside of, if you want to be doing all those moving parts, it might not really work out very well, or maybe not work out very well, you’re not going to be maximizing what you can do with it. So the benefit there is when you fractionalize through a DAO style thing.

So there’s a few different interesting things. One, you can really separate duties. And so if you think about like a Zed Run, I know that better than Axes, so I’ll talk about that, but you can have different people in the DAO who own Fractional shares breeding horses and racing horses and managing sales and all of that. And it’s a full-time job to manage a large stable in Zed. It’s a lot of work. And so stuff like that is really valuable. And then, when you get to the less, I don’t want to say less useful assets, but more static NFTs. I think that the cool thing with fractionalization, if done in a way that feels right, is you can really have a feeling of shared ownership where you can feel like you can own an NFT that you otherwise could not own.

I have a lot of people who I’ve spoken to who would really love to own one tenth of a LeBron James Cosmic, or one hundredth of an Alien CryptoPunk. But they could never own a full one. And so, I think as long as you build it the right way and make sure you’re aligning incentives, that ownership of these really important assets to people, because I think over time, cultural importance of things is going to continue to be more and more digital. And so being able to be a part of those things is really valuable to a lot of people.

Tom (26:35):

It’s kind of a tangential question. And I love your answer, but a lot of the cool things about rare NFTs, having a very rare punk, having a very meaningful Top Shop Moment is the ability for one person to display it. Like, “Hey, here are my NFTs. Hey, [inaudible 00:26:53] museum, or check my wallet, yada, yada.” When you own part of it, how do you think people are going to be able to share that? Are people going to share the entire punk and say, “Hey, I own 1% of this,” or how do you think people are going to go about that aspect of it?

Andy (27:06):

Yeah. I think that’s actually, outside of the mechanism design of fractionalization, which obviously is very important, I think that’s probably the most important problem space with fractionalization is making sure that people do really feel like they have ownership of these assets because you do, but you own 3%, are you on 5% or something. I’ve been actively talking with a few of the different people who are building either NFT social platforms or different types of curation platforms, and I think trying to figure out ways for more off-chain style, less, you have to do this, but more opt-in style governance over these fractional NFTs where you can maybe put up a snapshot vote to let that NFTE be displayed in a CryptoVoxel museum or something.

And then at that point, a lot of that is just going to end up being more social contracts than anything, but that’s the case with NFTs in general. An NFT on a digital museum can display whatever NFTs they want. For the most part, it’s mostly just you’ve agreed to the social contract of what you’re building. But I think stuff like that will be really interesting. And then also I think, trying to figure out a way for wallets to display these things as NFTs and not as ERC-20 tokens, will be really valuable there. And whether that’s just collaborating with wallets to do that, or figuring out some interesting on-chain mechanisms for that, I think that’ll be really cool is being able to see those things as NFTs that you own, and not just as another ERC-20 token that you own.

Tom (28:53):

No, I’m totally with you there. And the sense of community and ownership you got is pretty wild. I mean, everyone loves CryptoPunks, but there’s only, what? 10,000 owners. I mean having, well, I guess 10,000 on-chain owners, I guess if they all come together off-chains, might be more partial owners. But I guess that sense of community is really hard. I would love for, if I could go to the Delphi guys and say, “Hey, guys, want to go in on a punk?” It’s such an easy decision for everyone to just say yes to.

Andy (29:21):

Yeah. Yeah, totally. And I saw a really interesting question the other day on Twitter, I think from [inaudible 00:29:28] who’s big NFT collector. And they were talking about, if you had a fractionalized punk, are you allowed to set it as your profile picture? And that was really funny for me to read that because it’s like, “You’re allowed to set whatever you want as your profile picture. That’s not how this works. That’s not how Twitter works.” But it’s interesting, that’s the way that the conversations around ownership and all of that goes is, there’s such a strong social contract, especially in CryptoPunks, but I think in NFTs in general.

And it’ll be very interesting to see how people end up and how the community has a feeling about fractionalized assets because they’re coming. There’s going to be a lot of them. But are you allowed, if you own a basket, if you own 10% of a basket of 15 CryptoPunks, is the social consensus of Twitter going to be fine with you setting your avatar to one of those CryptoPunks? It’s such a weird, and there’s no real answer. It’ll just be interesting to see how that all plays out.

Tom (30:37):

Like, “Hey bro, do you know you’re using my punk as your picture, proven on-chain?” Kind of thing.

Andy (30:42):

Yeah. I’ve actually been talking to someone about the idea of making like a Chrome plugin called proof of punk or something where you could sign a message and proof that you own the punk that’s in your Twitter profile picture or something. And you could just like, almost like a blue check mark, but for actually owning your NFT avatar. Something like that’d be pretty cool.

Tom (31:03):

Yeah, no, it totally would. And especially as everyone goes online. Andy, I want to focus a bit, some more focused questions just on Fractional itself. Let’s say somebody logs onto the site, connects their wallet, and let’s say they have, let’s just use a punk for example, because they’re pretty well known or a Top Shot, or whatever you want. Could you just walk me through the process of how somebody would fractionalize it? And then I guess after you answer, we could go to the user side of it.

Andy (31:32):

Yeah, for sure. So one of the things that we’re focusing on a lot is being very unopinionated as far as what you should do when you come and fractionalize. I think it’s important letting people really build on top of what we’re making. So when you come to the site and you want to fractionalize something, you’re going to, let’s say it’s CryptoPunk, you’d have to wrap that CryptoPunk into a wrapped CryptoPunk. So it’s a ERC-721, but that’s just kind of semantics. And so then from there, you would mint what we call a vault, and that vault would transfer, it would do a transfer of your punk, into the vault and then give you back ERC-20 tokens. And when you do that mint process, you can set the name of the tokens and the symbol and total supply and all that stuff.

And you also are going to set what we call a curator fee. And so, this fee is paid in the form of total supply inflation. So say you set a 5% curator fee, then over the course of the year, 5% of the token supply would be minted and sent to your wallet. And so, initially, I think this is an interesting way to incentivize fractionalization if there’s a really high demand to buy fractional assets, say a fractionalized Alien punk. There’s no reason that the person who’s providing that punk shouldn’t be seeing some type of payment for that outside of just selling the fractional shares.

And then in the long-term, it’ll be very interesting to see where the market settles on curator fees and what that plays out like, but I do think there’s some interesting applications around artists directly launching with curator fees and having that as a form of secondary market sales, as opposed to actual secondary market sales, different things like that. But essentially, it’s an asset under management fee that you set for yourself. And so at that point, you would get all of the ERC-20 tokens. The protocol itself does not care what you do with them. At that point, you now have all the tokens, you can do with them whatever you want. There’s a million different ways that you can sell a token.

And so maybe you want to go onto, maybe you have a bunch of friends who you want to share ownership of punk with, and one person buys it, and then they put it in Fractional, they set all the fees zero, and then you just sends it out to all your friends, and now you all fractionally are on a punk in a trustless way. Alternatively, we’ll be able to guide you and write up lots of guides on doing Dutch auctions or going to SUSHI and using their new MISA platform or providing a limit order on Uniswap, all that stuff. But the site itself isn’t going to end up, the protocol itself isn’t going to force you to do anything with those tokens. So that’s essentially the minting process.

Tom (34:38):

Makes a lot of sense. I have a bunch of questions here. I got to play the dumb host again, as I normally have to do, but it’s just to make sure the story gets across. But so the curation fee is pretty interesting. So if I’m understanding correctly, what you do is whoever wants to fractionalize their NFT or basket of NFTs, they have a fee every year, and basically it’s just diluting everyone else’s ownership so that they get more, but it also allows more units to go out in existence to help increase the amount of fractionalization, and yet owners, I guess?

Andy (35:14):

Yeah. So there’s a million different things you can do with this, which is what I think is exciting about it. One, if people have no stomach for a curator fee maybe you set one to 10% and people are not buying this thing for 10% annual inflation, “I’m just not going to buy it.” And then you can set it to zero and say, “Okay, fine, no curator fee.” The other thing that’s interesting is, so the fee is initially rooted to the address that initially locks up the NFT, but that doesn’t have to be the case. You can also change that.

I was talking with someone who has a really valuable Meebit that they’re thinking about fractionalizing, and they were talking about changing that fee to be paid to MeebitsDAO. And so then they would fractionally sell the Meebit and then MeebitsDAO would basically have reoccurring income. And so then you’re incentivizing a community to maintain the fractionalization of this thing. And it then becomes a revenue stream for them. Or alternatively, what you could do is you could take that curator fee and you could route it to a liquidity mining contract.

Tom (36:26):

I was just going to ask that. That’s a good idea.

Andy (36:28):

That’s what I’m actually most excited for. And so basically, if you are providing liquidity for that token and Dai or Ethereum or whatever you want, you could then have liquidity mining where you would earn more of the token and dilute people who are not providing liquidity. And I think that’s extremely interesting and something that I’m really excited to see play out in the wild at some point.

Tom (36:51):

Frankly, I mean, you could even let people, I mean, if they come to Fractional, I mean, you could even let them choose the curation fee and then let them choose a Uniswap or SushiSwap ongoing fee for liquidity mining and set that at 1%. I mean, that would be super interesting, just automate the incentives around trading.

Andy (37:09):

Yeah. Yeah, for sure. It’s something that I’m… I’m actually working through a pretty intense version of this that would… So, and maybe this is getting a little bit too into the weeds, but essentially what it would do is, one of the hardest parts with Fractional NFTs is liquidity and general large trades, just because they’re not insanely high, most of them, are not going to be insanely high market cap things. And so just on a normal [inaudible 00:37:42], and like SushiSwap or something, you’re going to have a lot of slippage when you’re trying to trade these things for more than a couple of thousand bucks.

And so one of the things that I’m interested in trying is basically using a smart LP Vault on Uniswap v3, so you can have a very a much tighter liquidity pairing and potentially a lot more depth in your trades. And then having all of the curator fees routed to that vault as liquidity mining rewards. And so then you could have potentially some really deep liquidity for an NFT that isn’t actually, it doesn’t have to be a hundred million dollar NFT for there to be really deep trade liquidity at that point. And so, that’s something that I’ve been experimenting with for, not really like a v2, but a later rollout version of this.

Tom (38:37):

That’s incredible. So much we could jam on there, but just to zone back in on the creation. So when somebody comes to you and they want to, I guess, get the NFT out there, you said that they could basically do whatever they want with the different shards. What do you think will probably be the easiest way for people to get their shards out there, outside of the more private aspects where somebody just sends to a group of friends?

Andy (39:02):

Yeah. Now, I feel like a lot of people do the Balancer Liquidity Bootstrapping Pools. Actually, I see a lot of projects do those these days. I wouldn’t be shocked to see though that be a popular way to do things, especially with Balancer V2. To be honest, I’m a little bit uneducated on some of the complexities there. There is something that I need to spend some more time researching. I think that the new MISO platform for a SushiSwap could be really valuable here. I wouldn’t be shocked to see that continue to gain adoption because it is essentially doing exactly what you’d want here, is you just go there and decide exactly what type of sale you want and then just deposit however many of the tokens you want and it could handle it for you and see the liquidity pool.

And then lastly, I think, the more basic, but I wouldn’t be shocked to see this pop up just because Uniswap is so massive is just doing it. You can do arranged liquidity order on Uniswap and just only provide that asset. And then just let the market trade in and then you’ll start earning your other, whatever you pair it with.

Tom (40:19):

Yeah. That’s a great idea. I mean, the LB people could be pretty interesting too, especially because there’s no reason to ape into it to start. But yeah, definitely more a jam on there.

Andy (40:30):

Yeah. I think the space for launching these things, there’s a lot that’s possible. And really a lot of it comes down to just, what’s going to get the most eyes on these things? Especially, there’s going to be some really high profile stuff that’s fractionalized over the next couple of years, and it doesn’t matter where they launch, there’s going to be people who want to buy it and people are going to figure out how to buy it. And that won’t be an issue. But if you’re just someone who has a CryptoPunk and you decide you want to fractionalize it, that’s significantly harder if you’re just some random guy who has one CryptoPunk. And how do you get the eyes on there to know that it’s even happening and to have there be some demand for it? That’ll be the interesting side of things, I think, where there’s a lot of room for some ideation around what’s best.

Tom (41:22):

Yeah, no, I’m totally with you there. I mean, just thinking out loud, I mean, doing something like, I don’t know, which is best here, the bootstrapping pool or you and your SUSHI, just off the top of my head, but if you’re able to link that curation fee, or to wherever you do the primary issuance, that would be awesome because you just, instead of having two fragmented primary, secondary venues, you basically just tie it all into one, I guess.

Andy (41:44):

Yeah. Yeah, for sure. And that’s one of the things that we’re trying to with our-

Tom (41:48):

But I’m not totally sure the best route. I’m sorry, I lost you there.

Andy (41:52):

No, that’s all right. I think that’s one of the things we’re trying to be pretty open-minded with too on our platform is we want to make sure that people can swap these assets on the platform, but we’re not integrating with one particular thing, we’re going to just integrate with 0x API or something and make sure that you can, hopefully in the long-term we can just have really give people a suite of options where they can do whatever they want and we’ll be able to support all of those things natively. I think that’s really the best way to go is give people a lot of optionality.

Tom (42:24):

Yeah, no, I totally agree. And one of the things I loved about Fractional was putting all the pieces back together. You don’t want these, I guess, Zombie Shards or anything like that. And the way you guys handle it versus your competitors, I’d rather focus on the specifics around what you guys are doing. Your buyout mechanism is very, very straightforward. Could you dive into how the pieces get put back together? Because it starts with the initial reserve price to begin with.

Andy (42:55):

Yeah. Yeah, for sure. I think, one of the things that we’ve really been focusing on, as I said earlier, I think there’s going to be two forms of fractionalization and that’s going to be really intense DAOs that own assets and use them and do all this other stuff. And then, I feel very strongly that the other version that’s going to be popular is what I call lazy fractionalization or just, something that really doesn’t require a ton of end user input. And so that’s something that’s been a big focus of ours up to this point.

And so the way that we have the buyout structure right now is through an auction, and the reserve price for that auction is initially set by the curator, what you were calling the NFT originator. The curator when they come and they mint this thing, they set a reserve price. And that is the price in Ethereum that you would need to be paid to trigger an auction. Essentially, if you’ve done an auction on Foundation or any of these other NFT native auction sites, you’ve probably seen something similar. And so, the reserve price is voted on by all of the token holders. You don’t have to vote, but you always have the option to. We have a quorum of, at least this many people have to be voting. So you can’t have some crazy outliers or something by a couple of people voting and no one else participating.

And then at that point we just take a weighted average of everyone’s votes. Ideally, in the long-term, I think we might want to try to move to a median, but it’s a significantly more complex on-chain calculation than an average. And then, we don’t allow you to have some crazy outlier votes. And then at that point we have a constantly calculated reserve price where at any time someone who has enough Ethereum can come in and trigger a buyout. But yeah, that’s kind of how our recapitalizing an NFT works. I think one of the things that I feel pretty confident on is it as important to make sure that having buyouts and having NFTs taken out of the system, I think is really healthy. And it’s something that should definitely be possible and not a thing where it’s like, “Oh, theoretically, it could be bought out, but it probably never will.” I think that that’s unhealthy for the system. I think, people want to know that when you’re buying into these things there is the chance that someone’s going to buy the whole one.

Tom (45:27):

No, I mean, it’s super important. And I mean, the thing that I love about your buyout mechanism is you’re not using an arbitrary percent, like other projects. You’re not saying, “Hey, X percent is needed to vote, yes, on some buyout price.” Because the reality is, the way Fractional works is that, it doesn’t really what percent, it only really matters the people that are actually active in setting that reserve price. So, I mean, if only a certain number do that it matters, but the great thing is those that own more of the shards have obviously more of a say in the reserve price. Which is kind of genius.

Andy (46:03):

Yeah. I appreciate that. I think it’s definitely important to be able to allow people to have more of a say, but also, if you don’t feel like voting and that’s just not important to you and you just want to buy it and trust everyone else will do the right thing, you completely have that optionality.

Tom (46:21):

No, it makes so much sense. So just to recap, because I want to make sure everyone is following, and I understand it correctly. So every holder sets their reserve price. So let’s say there’s 100 holders, and everyone sets, let’s say they buy a punk or part of a punk, and let’s say they all think it’s worth a hundred grand, whatever that is in ETH. They’ll all set, let’s say different reserve prices. Some will set 90K, some will set 120, and based on their pro rata ownership, you get, basically, an average reserve price. And obviously, people don’t have to set a reserve price and then they’re just not counted in the average and larger holders of shards obviously have more say pro rata to move that reserve price. And then anyone can send that amount in ETH to start an auction to buy it out. And the option could obviously increase from there.

Andy (47:10):

Yeah. Yeah, exactly. And so, I definitely felt that having an auction there as opposed to an immediate buyout is important. I think it helps a lot with the game theory around trying to manipulate the reserve price and stuff because, end of the day, if you want to spend all the gas fees to buy a bunch of tokens and try to manipulate the reserve price, you might just get outbid in the auction anyways, and then you just wasted a bunch of money. And so, I think that was a key thing there to just make sure that there’s appropriate price discovery when the time comes for a buyout.

Tom (47:46):

And how does it work, I guess, let’s say somebody starts the auction. They have enough ETH, they want to buy this complete NFT or basket. They start an auction, and let’s say that person wins. How do people exchange their shards for, I guess, the amount of ETH that was won in the auction?

Andy (48:04):

Yeah. So we’ll just have that on our site, but it’s just a one contract call. So we just keep, once we get all the Ethereum, we map everyone’s tokens, their shares essentially, to their shares of Ethereum, and then you burn your tokens and you get that Ethereum sent to you. One of the things that was important there, we thought about making it so that anyone could burn for anyone at any given time to… I think it would somewhat help the user experience a bit to let someone else, or you could have some type of delegated redemption, but it would break a lot of composability in DeFi applications if you have all of a sudden the Uniswap pool just evaporated into thin air.

So we had to make the decision there to basically, that it was more important to maintain composability and require a few extra clicks by the end user. But so, yeah, essentially once the buyout is finished, all those tokens are directly pegged to an amount of Ethereum and those can be redeemed at any time. There’s no time frame or anything. You could wait three years to redeem if you wanted to.

Tom (49:10):

That’s awesome. I mean, the good part is that there’s an incentive for the buyer. They don’t have to wait for everyone to change, they get the NFT, and then whenever the old owners are ready, they could just exchange for their amount of ETH.

Andy (49:23):

Yeah. Yeah, exactly.

Tom (49:25):

That’s awesome. I like that. And I guess the other thing is just building the community around Fractional. Do you think that you’ll eventually have some type of governance token long-term, or do you think it’s more so a project you want to keep internal? I guess, what are the plans for the community on that side of things?

Andy (49:43):

There’s definitely plans for a Fractional governance token at some point. When and what that will look like is still something that we’re finalizing our thoughts on and our plans. But I think in the long-term, it’s been made pretty abundantly clear over the last year that having a governance token and building that community and aligning incentives that way is really important and also extremely valuable. But so yeah, so that’s definitely something that we plan on doing.

And then a little bit more about community in general. I think one of the things that we’re going to focus on a lot long-term is making sure that we’re building communities both within the individual token holders of particular Fractional things, whether that’s through Collab.Land, private Discord chats, where you can… Only the holders of this token can get in, and maybe if you’re an artist, you could use that as a way to build community through that or different things. And then also, the larger fractional community and what that would look like, it’s super important.

Tom (50:53):

Yeah, no, there’s a lot of ways you could do the token. I mean, you could do fees, it could be an index over, basically all the NFT shards, get some percent or baskets. There’s a lot of ways you can go about doing it. So I’m pretty excited about that. And I guess just timeline, Andy, what’s on the horizon for Fractional?

Andy (51:11):

Yeah. So we’re getting very close to launching. We’ve been on  Görli Testnet for a while now, about two and a half weeks, and things have been pretty good. We’ve got a lot of really solid user feedback, about around the different interactions with minting and all of that. And so we’re working on some small site upgrades to try to just finalize that whole, just all the user flows and make sure everything is really clean and straightforward. And then at that point, we have some, what I think are pretty exciting partners who are going to be launching some cool NFTs. The one that is public already is, if people have been following Beanie Maxi’s PUNK Comic, you’ll be able to earn some Fractional shares of the 16 punks that are in the PUNK Comic.

I’m very excited about that. I think the idea of baskets of NFTs that have a meaningful connection to each other is much more interesting to me than just 25 random punks that are thrown into a basket. And so I’m really excited to see how he and his team continue to build out that world and everything. And then we have some other exciting partners in the pipeline that we haven’t announced yet. But over the next couple of weeks, keep an eye out because we should definitely have some other cool NFTs that we’ll be launching.

Tom (52:36):

That’s awesome. And Andy, who else is working on Fractional with you?

Andy (52:40):

So right now I have a co-founder, his name is Nate, but you’ve probably have seen him on crypto Twitter as @CryptoSamurai. And he’s awesome. He does the website and all of our backend and stuff, and I’m just the solidity guy and been doing a lot of stuff like this and working with partners. And we are definitely pretty actively looking to hire a few more people. So if you were working in the crypto space and do something, I probably want to have a conversation with you. But right now, it’s the two of us. Hopefully, we’ll be expanding relatively soon.

Tom (53:17):

That’s awesome, man. You said just the solidity dev, like it’s so easy to hire. It’s so hard to hire for that role. That’s awesome, man. And I guess just last question for you zooming out, what are the biggest risks in your opinion to fractionalizing NFTs? I mean, I guess, uptake for the traditional world is probably one, maybe smart contract risks, maybe, there’s probably a slew of concerns, but I guess what are the ones that keep you up at night?

Andy (53:45):

Yeah. I definitely think that in the internet digital world, the ideas of ownership are constantly evolving and changing. And so making sure that you can keep up with that while also having fractionalization is really important. The idea of a metaverse native museum where you rent out your NFT to the museum was not something that people thought about a year ago or not many people were at least. And that’s something that seems like it’s going to be a real thing now. And so, who knows what’s going to be the next thing in a year and making sure that fractionalization can keep up with those things, and that can be agile and building new and exciting things around it to keep up with the crazy fast-paced, just like digital age, because fractionalization in and of itself is a very old school thing. It’s something that’s been around for a long time.

So that’s one thing. Obviously, people have talked to you about a lot of regulatory concerns especially in the US around, are there any potentially negative implications around fractionalization? And it’s just a lot of unknown right now, but obviously that’s something that needs to be sorted out and figured out, but that all the regulation will come. The way I feel about that is, in 2017, everyone was worried about what the regulations were on all these DeFi tokens and it all kind of worked out. So I feel pretty confident that in the long-term that’ll all be sorted out, but it definitely is something that at least right now is an unknown.

And then I think that lastly, I feel very happy with our mechanism design and how we do things, but also, it’s a very new and evolving space and just I think making sure that we can continue to iterate and build and make sure that we’re offering the best possible buyouts and experiences for end users and all of that. And keeping up with layer 2 development and everything that comes along with that is, I wouldn’t say it’s a risk, it’s more just something that we have to continue doing and keep building, but it’s not necessarily a risk.

Tom (56:06):

No, that’s fair concerns. And I guess just one last tangential question there, you obviously started your life on Ethereum with MakerDAO, you did a lot on NBA Top Shots with Flow. Now Fractional’s built on Ethereum. I guess, do you envision a world where different layer 1 blockchains have different types of NFTs? And I mean, I guess if so, or if not, do you think in a different sense that the fractionalized shards through Fractional will trade on other blockchains? It’s pretty clear to me that these will probably all go on L2 eventually because you don’t want to pay $100 to buy a $10 shard on ETH layer 1, but, I guess I’m wondering your take there.

Andy (56:45):

Yeah. I mean, I can promise you that these are going to be on L2. That is definitely going to happen. It’s something that I’ve been working through some potential, what I think are very elegant solutions to the transition from NFT on layer 1 to Fractional shares on layer 2, but that can be a podcast for another day. I think that could probably be a podcast in and of itself.

Tom (57:11):

Well, [crosstalk 00:57:12] as we hung up on this one.

Andy (57:14):

Sounds good. But yeah, I think, long-term, and I think this goes back to what I was talking about earlier, obviously I want to place my first and largest NFT bet on Ethereum. I’m very confident in Ethereum long-term and continue to want to build on it, but at the same time, I don’t think that Flow is going anywhere considering the Dapper Labs just raised on a million, billion dollar evaluation. I have a feeling that they’re going to have some staying power and NFTs are going to continue to be a thing there. And I think it would not be within our best interest to not at least be open-minded to building on Flow or building on Solana should NFTs become popular there or any of these other platforms. And I don’t really see a reason why it couldn’t be a multi-blockchain protocol, or a thing that we’re doing.

Tom (58:12):

Yeah, no, I’m totally with you there. It’s awesome, Andy. I’m so excited for you and Fractional. I can’t wait for it to launch after you allowed us to back you guys in part with all of your other incredible backers. And I’ll let them share themselves when they’re ready, but I’m really excited. I can’t wait to use the platform as well. And I can’t wait to have you on again soon, man. And just let people know where to follow you and learn more about Fractional.

Andy (58:39):

Awesome. Yeah. Thanks for having me. My username on basically everything is andy8052. The origin of that is not very exciting. It’s just four numbers that are in a vertical line on a phone keyboard. And otherwise, you could follow a Fractional, @fractional_art on Twitter, or is our website. And mostly, honestly, the best place to reach out to me if you ever need me is Twitter. I’m always on Twitter.

Tom (59:09):

I love it. Now I’m looking forward to it, man. And Andy, thanks so much for coming on, man. Really appreciate your time.

Andy (59:14):

Yeah, of course. Thanks for having me.