Peeking into the Flooring Protocol reveals that fragmenting NFTs does not solve the pain points of the NFT market.

Exploring the Flooring Protocol Uncovers that Breaking Down NFTs Does Not Address the Challenges of the NFT Market.

LianGuai reporter Jessy

Recently, the quiet NFT market has seen a new disruptor, Flooring Protocol – an NFT fractionalization protocol platform. On this platform, it allows people to break down NFTs into μ-Tokens, which are ERC-20 tokens. In the past two days, it ranked third in trading volume on the platform, just behind Blur and Opensea.

As an NFT fractionalization protocol, it offers not only fractional services but also trading of related tokens.

The low liquidity of NFTs has always been a pain point in the industry. To solve the problem of low NFT liquidity, the industry has come up with various solutions, such as the previously popular exchange Blur, which adopted a model of placing orders and staking to provide airdrop rewards, to encourage people to trade NFTs. Another method in the industry is to directly tokenize low-liquidity blue-chip NFTs into ERC-20 tokens. Essentially, this involves sharing ownership of the NFT through a set of homogeneous tokens linked to the original NFT.

• Doge Uprising: Revolutionizing the Crypto World with Manga and Memes! 🚀
• Brawlers Wrestle Their Way to Epic Games Store
• Welcome to the latest edition of Cointelegraph’s Nifty Newsletter! Get ready to dive into the world of nonfungible tokens (NFTs) and enjoy some witty banter along the way. Every Wednesday, our Nifty Newsletter keeps you in the loop with the latest NFT

Users holding these NFT fractions, according to financial principles, own a portion of the NFT’s ownership and will receive dividends from the profits generated by the NFT in financial activities. This is similar to holding shares in a company.

LianGuai reporter believes that the key to determining the success of similar protocols lies in whether they can build a financial model that allows NFTs to create value in financial activities, rather than just being a game. If it is merely a financial game where NFTs are taken out and played around with, it is destined to be a short-lived project. Products that claim to improve NFT liquidity on such a basis cannot truly increase the turnover rate of NFTs or increase people’s demand for NFTs.

How does Flooring Protocol work?

The operating logic of Flooring Protocol is as follows: for users, if you hold the aforementioned types of NFTs with liquidity pools, you can exchange your NFT for 1,000,000 μ-Tokens, and you have two options for storing your NFT. One option is if you want to maintain ownership of your NFT, you can store it in a safebox by staking FLC tokens. The second option is if you no longer want to maintain ownership of your NFT, you can choose not to stake FLC tokens, and your NFT will be stored in a vault. The difference between these two options is that in the first option, you can redeem your own NFT later, while in the second option, when you redeem, you will randomly be assigned another NFT from the same series.

To maintain the smooth operation of this economic model, a key point is that the platform needs to have an adequate reserve of “NFTs” to ensure that when users want to redeem NFTs with μ-Tokens, they can do so. However, logically, the number of μ-Tokens on the market depends entirely on how many NFTs are stored for redemption.

Similar to most financial products, it stabilizes the value of μ-Tokens through arbitrage mechanisms.

One reality is that when the μ-Token market is hot, its price rises. When the market is hot, people have two ways to obtain μ-Tokens: one is to mortgage the corresponding NFT to obtain μ-Tokens, and the other is to buy them directly on the secondary market.

If I have an NFT at this time, and its value is lower than 1 million corresponding μ-Tokens, then I can obtain 1 million μ-Tokens by mortgaging that NFT, then sell them for profit, and buy 1 million μ-Tokens when the price of μ-Tokens relative to my NFT decreases, and then redeem my NFT. It is in this process that I complete the arbitrage. It is also in such an arbitrage process that a dynamic balance is maintained between μ-Tokens and NFTs.

Although the price of μ-Tokens may fluctuate in the dynamic exchange and circulation, we also need to realize that the core price movements are actually tied to the prices of the NFTs in this series.

According to the protocol, users generally do not need to pay when redeeming NFTs, but if the reserve rate in the Vault falls below 40%, a dynamic fee rate in FLC units will be charged. This fee will increase as the reserve rate decreases.

Flooring Protocol officially launched on the 15th and released the protocol token FLC. According to dextools data, after the token was launched, the lowest price was $0.001639, the highest price was $0.01625, and the maximum increase was nearly tenfold. However, after reaching the high point, it has been falling all the way, but it has now risen nearly twice from the low point.

With the help of FLC, an incentive model and economic model have been established within the protocol.

First, storing NFTs in the vault requires pledging FLC, and the longer the storage time, the more FLC is required. The user’s level is also related to the amount of FLC pledged. The user’s level also implies more exclusive benefits. In addition, the protocol will provide FLC as mining rewards to liquidity providers. Furthermore, when the reserve rate is low, FLC will be charged as redemption fees, as well as for launching auctions, lotteries, and other activities within the platform. Moreover, the official statement mentioned that there are rewards for liquidity mining, and Flooring Protocol stated that people participating in liquidity mining in November will receive a reward of 260 million FLC.

The total supply of this token is 25 billion, of which 40% is given to community supporters, 25% is stored in the national treasury, 20% is given to core contributors, 5% is given to strategic investors, 5% is allocated to the DEX AMM liquidity pool, and 5% is allocated to CEX market-making.

In summary, according to the economic model designed by the protocol, it can empower the FLC token and make FLC “useful” within the protocol. But currently, its core driving factor for the price increase is still the hot topic and the inflow of funds.

The question of where the money comes from has not been solved

We can see that FLC is the core of this project, and the way it was first introduced through the issuance of the token introduced externality, that is, the crowd participating in speculation, which brings liquidity to NFTs.

Although we can see that the economic model of the above project has its own logic to use the issued token FLC in various places of its protocol. It seems to generate value, create and satisfy needs. But upon closer examination, does this model really solve the pain points currently faced by NFTs?

First, let’s analyze the benefits of the protocol doing this from the perspective of NFT authors, artists, or owners. Part of the value of the NFT can be released without directly selling the NFT, and when the asset value is very high, it can be split into additional cash and used as collateral. And for those who hold fractional tokens, they actually acquire high-end assets at a lower cost, reducing the holding risk of the original NFT owner.

However, upon further investigation, both the protocol and NFT fractionalization itself have significant issues. Currently, the protocol only supports the fractionalization of three blue-chip NFTs. We can understand the reasoning behind this, after all, investors are generally not interested in non-blue-chip projects. But this actually exposes that this approach is not a universal solution to NFT liquidity.

Furthermore, if we dig deeper, there is a headache-inducing problem when using NFT fractionalization to enhance NFT liquidity. Although they belong to the same series, rare NFTs are actually much higher in value than floor-priced NFTs. At this point, users do not want their NFTs to be fragmented into μ-Tokens just like any other NFTs.

To address this problem, the official solution is for users to choose to store their rare NFTs in a safebox. In addition to receiving μ-Tokens, users will also receive the corresponding premium safebox key. For example, when the floor price of BAYC is 30 ETH and the user’s rare BAYC is worth 40 ETH, when the user decides to sell the NFT using the Safeboxes feature, they will receive one million µBAYC tokens and a key worth 10 ETH.

But what is the use of this 10 ETH key? It cannot be traded or circulated; it is simply labeled with a value of 10 ETH by the project. The key only serves a purpose when withdrawing one’s NFT and the labeled price does not reflect its actual value. Essentially, this is just a gimmick played by the project to deceive people.

In summary, first, in the process of fractionalization, it cannot address the problem of how to fractionalize rare NFTs differently from other NFTs due to their differences. It does not, like some RWA projects, determine the quantity and value of the issued tokens based on the real prices of real-world assets. Instead, it imposes a one-size-fits-all approach of 1 million μ-Tokens. How motivated would a rare blue-chip NFT holder be to fractionalize their NFTs?

Let’s take a look at the balance mechanism between the μ-Token and its corresponding NFT in this protocol. It uses an arbitrage pattern to maintain dynamic price balance between the μ-Token and NFT. This is actually similar to the price balance mechanism between stablecoins and another anchor currency with no value in algorithmic stablecoins. But what we need to understand is that, just like algorithmic stablecoins, this balance mechanism is a game of balancing on one foot and stepping on the other. The value of the μ-Token is determined by its corresponding NFT, and under such a mechanism, if extreme situations occur, such as a drastic drop in the price of the NFT, followed by a drastic drop in the price of the μ-Token, this mechanism set by the project actually does not do anything to increase the value of the NFT itself. It only provides space for arbitrage for some people as long as the project liquidity is still okay, and when no one is playing this game, this arbitrage space will no longer exist.

In fact, most of the investors in this project are Azuki, DeGods, and Penguin, as you can imagine, this is just a game for the whales in the NFT community. The whales can attract external funds through such a game and make a profit. The protocol does not enhance liquidity, make more people see the value of NFT, or encourage more people to participate. It simply completes a capital game of moving money from one hand to the other in the hands of the whales.

I hope everyone remembers the core of NFT, which is culture, community, and a symbol of identity. Going back to the original intention of NFT, it cannot be achieved just by holding an ERC-20 token that represents its NFT rights. What one can enjoy by holding this token are only some rights of NFT as a financial product. Unfortunately, even as a financial aspect, NFT fragmentation has not been achieved effectively because it does not bridge the gap between partial ownership rights and dividends from lending that are similar to NFT, only completes a token swap with fragmented tokens and protocol tokens. The fundamental question of “where does the money come from” has not been resolved. So, this project is destined to be a flash in the pan, and NFT fragmentation itself needs to solve the above-mentioned problem in order to truly realize the financial attributes of NFT and improve its liquidity.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!