Andy Chorlian, Fractionalizing NFT Ownership
Andy Chorlian is the founder of Fractional Art. He has been involved in the crypto space since 2017 and hasn’t looked back. In this episode, Nick and Andy discuss the legal aspects of fractionalizing NFTs and how his company is approaching the risks.
“Our main goal is to really nail down what fractionalization looks like and then from there you can build out so many interesting things, especially as you get out into the world of DeFi and real-world assets…” Timestamp: 4:26
“Up until now, there’s been little to no guidance from the SEC on any of this. No official or legal opinions yet. Timestamp 16:20
Starting out in crypto: In 2017, he started getting interested in Bitcoin and Etherium. Andy has a background in computer engineering and was looking for a job. He began working for a FinTech start-up in New York City. The company was interested in crypto and developed a new token. He Early learned more about Solidity there.
Investing in NFTs: In early 2019, Andy joined Maker DAO and developed smart contracts for their projects. After two years the company had grown and he craved smaller projects. He also began collecting NFTs. As a big NBA fan, Andy invested big into Top Shot pieces. This Spring he became involved with fractionals full time.
What is Fractional Art?
Fractional Art: Fractionalization of an NFT is taking an NFT is locking it up inside of a smart contract to issue ERC20 tokens in exchange. The tokens represent the ownership of the art piece. Andy’s company Fractional Art is focused on building the right mechanism for fractionalization so that people can make purchases.
The company’s philosophy: The company isn’t buying the items. They’re facilitating the ownership. Their core philosophy is to not provide opinions about what people do once the items are fractionalized. In the long term, they will offer more information to users about what it means to fractionalize. They hope to offer different ways of trading and selling the tokens.
Customizing the token: When users fractionalize their art, they can decide on a name and symbol and are told what the total supply of their shares are. You can move it to a decentralized ownership model. You can create a pool on Uniswap or Sushiswap. The vision is to integrate smart contracts on top that are plug-and-play.
Ownership models: When you do fractionalize you are transferring the NFT out of your wallet and into a smart contract. One option is to have 100% of the ownership. With this model, you split ownership with your friends. You can put all of the tokens back together, you take it out and sell it on Opensea.
The buy-out model: The other option is more common. This is the buy-out model. This works by having the fractional shareholders of the NFT vote on a reserve price. The smart contract is constantly calculating the current reserve prices based on everyone else’s vote. A buy-out can be triggered which would be done through an auction.
Similar to a DAO model: Andy says the goal is to make the buying and selling process seamless. They establish a quorum of 50% when it comes to voting on a reserve price. If a quorum isn’t met, the NFT cannot be sold. The protocol governance controls the price setting. In the case of a total drop-off of user engagement, there would be potential remedies.
Keeping users safe
Eliminating the third party: SEC regulations and KYC accreditations are things the company is taking seriously. Andy says there is little guidance from the SEC on fractalization. Having the process decentralized and non-custodial is the best approach. It eliminates the third-party valuing of assets. Everything is done through smart contracts.
Ensuring assets are secure: In terms of security, they’re doing what they can through audits and peer-reviews. In addition, they are ensuring there are no bugs in the code. It is difficult to put a value on what happens if an NFT were to get hacked or exploited. For that reason, insurance is not an easy solution.
Vision for the industry’s future: The infrastructure for NFTs is still at the beginning of what the industry will end up looking like. In the real world, there are fractionalized sports and art companies. There will be massive DeFi fractionalization with potential digital collectibles, structures products, and real-world assets and artwork.
The evolution of NFTs
Room to grow: The way people buy, sell, and trade NFTs continues to evolve. Andy says that there need to be better solutions than eBay. Crypto has many creative solutions out there that meet the needs better. There is still room to build as well.
Contacting Andy: You can follow him and DM him on Twitter @andy8052. You can learn more about Fractional Art here: @.fractional.art