NFT Fractionalization System

[IMPACT] Please describe your proposed solution.

DAO NFT Fractionalization

Introduction

Being able to directly own DAO treasury NFT assets is a challenge that requires a system that enables members to participate in a fair and representative distribution mechanism. The challenge of appropriately fractionalizing, calculating, and distributing NFTs is one that this document attempts to solve. Fractionalization process will utilize code developed by ADAO.

THE MECHANISM

NFT fractionalization will be defined in several steps, Approval, Fractionalization, and Distribution. We will define each in their own sub-sections.

Approval

For an NFT from the DAO treasury to undergo fractionalization, approval of this action must occur through a governance process. This process entails submitting an NFT fractionalization proposal. This proposal must detail the following criteria:

1. NFT to be fractionalized (Format ex. Spacebud #3760)
2. NFT Appraised value (ex. 20,000 ADA)
3. Bonding period (ex. 30, 60, 90 days, etc…)
4. Bonding pool preparation time allowed (ex. 7, 10, 14 days, etc…)

These proposal parameters will be explained for why they’re necessary in the sections to follow.

After the proposal is submitted it will go through the DAO’s approval process. If the proposal is approved by the community then it will move into the next phase of the process Fractionalization.

Fractionalization

With an NFT fractionalization proposal approved, the NFT can then undergo the actual fractionalization process. The questions that we are answering in this section are:

What token will represent these fractions?

What are the elements of this native token?

How many fractions do we generate from the NFT?

What token will represent the fractions of the NFT?

The token that represents the fractioned NFT will be identified as a derivative token (let's call it DERIV for the sake of the rest of this document) of that DAO's primary governance token (let's call this PRIME for the sake of the rest of this document). When an NFT is fractionalized the NFT is locked and vaulted under a smart contract that can only be unlocked by transacting (burning) the total amount of that derivative token that was generated by that NFT when it underwent fractionalization.

What are the elements of this native token?

While the generated DERIV will represent the fractionalized NFT it will also represent the total pool of fractionalized NFTs from the DAO's treasury. Therefore, every time an NFT from the DAO's treasury is fractionalized, the total supply of DERIV in circulation increases by the amount of determined DERIV to be distributed. If an individual acquires an amount of DERIV that is equal to the total amount of fractions for an NFT, then that individual can transact (burn) their DERIV to acquire that specific NFT from the DAO's fractionalized NFT vault.

How many fractions do we generate from the NFT?

The amount of fractions will be based on the appraised value from the approved fractionalization proposal multiplied by two (2), For example, if an NFT fractionalization proposal was approved with the NFT value appraised at 25,000 ADA then the amount of fractions to generate and distribute from that NFT will equal 50,000. The appraised NFT value is determined by the DAO's proposal author.

Distribution

With the method of fractionalization established, there needs to be a way to fairly and appropriately distribute the initially generated DERIV from a fractionalized NFT. This distribution process will be defined by the following formula:

x = ((R / Su) × n) / t

Where:

x = Amount of DERIV received per day

R = Member’s amount of PRIME token locked in bonding contract

Su = Total supply of PRIME locked in the distribution bonding pool

n = Supply of DERIV to be distributed

t = Time of locked bonding period (in days)

As an example, Let’s say that the DAO approved a proposal to fractionalize a SpaceBud and the appraised amount of that SpaceBud was 25,000 ADA. Therefore, the amount of DERIV to be distributed is 50,000. Let’s also say the member had 3,500 PRIME to lock to this pool for distribution, the total amount of PRIME that was locked into this bonding pool was 700,000, and the lock period was 90 days. The equation would then look like:

x = ((3500 / 700000) × 50000) / 90

x = 2.778 DERIV / day

Bonded PRIME token will be locked into a pool contract for the specified amount of time and then burnt back to the DAO treasury. In essence, the member is performing a transaction of PRIME tokens for DERIV tokens over a determined amount of time. 

Every bonding distribution pool will have a “bonding pool preparation time” which is defined in the original fractionalization proposal. This is the amount of time members have to lock their PRIME tokens into the bonding distribution pool to receive DERIV. Once that time has expired. The contract is locked and begins to execute the formula given above.

Conclusion

We believe that this mechanism is a large step forward in both directly connecting the value of DAO governance tokens to their treasury and also creating a novel and fair method of representing fractionalized NFTs. Once DERIV tokens are in the hands of members, their value is determined by that individual and the free market. You will be able to buy/sell DERIV tokens on DEXes in order to create value for yourself or will be able to acquire DERIV tokens to unlock blue chip NFTs.

[IMPACT] Please describe how your proposed solution will address the Challenge that you have submitted it in.

According to this Challenge, one of the needs for the Cardano DAO ecosystem is providing a tool that gives the Cardano blockchain a distinct advantage. This tool would be that as there is no other such mechanism that exists that gives DAOs the ability to create their own derivative token asset that directly represents their treasury NFT assets.

[IMPACT] What are the main risks that could prevent you from delivering the project successfully and please explain how you will mitigate each risk?

Thanks to collaborative efforts the people who are working on this proposal have experience in Project Catalyst and have already delivered working products. So we feel confident in being able to deliver what is outlined herein. However, we have outlined a few of the main risks and how we plan to mitigate them.

1. Developers getting sick/injured: This proposal is for a tool after all, which requires developers to build it. If something were to happen to the ones who are leading and working on this project, then that would be a primary risk in its completion. However, ADAO has several qualified developers internally as well as from other development teams who are interested in working on and building this. If something unforeseen were to happen to one of them such as sickness, then the initial plan would be to wait until they get better and then continue the work but not hinder other developers on the project. If necessary or if it was something more permanent, then there are others who would be able to take their place.
2. Lack of Interest: We could build an excellent tool, add amazing features but if nobody is interested or cares to implement it, then it is equivalent to never completing it in the first place. In order to mitigate this risk, we intend to work on educating the community about this tool and why it is beneficial. This serves a dual purpose of making dev teams aware that this is an option for them to use and it also helps the community understand what the tool is and why it matters that teams are using it. In both cases, it makes it more likely for the tool to be utilized and integrated.

[FEASIBILITY] Please provide a detailed plan, including timeline and key milestones for delivering your proposal.

ADAO has put together an ever growing team of experts from within the Cardano community, with proven expertise in areas not limited to:

• Education with specialty and focus in decentralized governance,
• Research with focus on empirical studies decentralized governance and systems,
• Software engineering Full stack software development,
• Distributed data engineering,
• Sociotechnical Information Systems
• A couple bad ass Plutus pioneers.

ADAO will support this specialized team to work and collaborate closely with ADAO partners and new promising projects whos visions and missions align with ADAO and the Cardano community. ADAO will provide support and resources in order to advise new projects and help to guide development and implementation.

Estimated timeline for dapp development will be as followed:

• Collaborative Research ~ 1 Month
• SC Development ~ 1 - 2 weeks
• SC Testing / Auditing ~ 2 - 4 Weeks

[FEASIBILITY] Please provide a detailed budget breakdown.

SC Development - $10,000 - $20,000

System Design - $10,000 - $20,000

Figures will total to the $30,000 asking amount.

[FEASIBILITY] Please provide details of the people who will work on the project.

Bob Van Horne ($bob) is an engineer, project manager and experienced DAO contributor. DAO building includes providing guidance for RatsDAO on such topics such as governance, tokenomics, and DAO education to name a few.

AdaMinnow (aka TCT) is an entrepreneur and business founder owner/operator. He is a member of multiple DAOs on other blockchains including Ethereum and Harmony and has been one of the foremost community organizers bringing people together to form ₳DAO.

The smart contract development will incorporate several core contributors of the ADAO community that have extensive experience in SC code builds. These contributors have already provided the Cardano community with several innovative applications including a multi-signature wallet app, DAO incubator, and SC staking portal.

[FEASIBILITY] If you are funded, will you return to Catalyst in a later round for further funding? Please explain why / why not.

There is potential that this endeavor could lead to subsequent proposals for the purpose of additional funding. As it stands now, the initial amount proposed seems to be sufficient.

[FEASIBILITY] Are you or any member of your team working on any other proposals in this Fund9?

[FEASIBILITY] Are you or your team working on any other proposals from previous Funds?

[AUDITABILITY] Please describe what you will measure to track your project's progress, and how will you measure these?

Quantitative measures of success include:

Number of DAOs that utilize this application and system.

Number of entities (other than DAOs) that utilize this application and system.

[AUDITABILITY] What does success for this project look like?

Success can be measured by the number of decentralized projects successfully utilizing this application and generating valuable derivative tokens that represent their community treasuries.

[AUDITABILITY] Please provide information on whether this proposal is a continuation of a previously funded project in Catalyst or an entirely new one.

Entirely new proposal.