For ease of expression, we will use BAYC as our target NFT to be fractionalized. The following rules will apply to other NFT collections, such as CryptoPuns, Sandbox, and Otherdeed.

In the previous chapter, we have introduced the different NFT fractions of Fracton Protocol - Blind Box, People's BAYC and hiBAYC. More importantly, Fracton designed the Meta-Swap mechanism to support multi-way exchange in the system, which allows users to trade, arbitrage, and redeem in one stop.

What is Meta-Swap？

Meta-Swap is Fracton Protocol's NFT fraction exchange aggregator. Users can use Meta-Swap to convert various NFT fractions or blue-chip NFTs in their hands. The system also supports deposits of new NFTs to the existing vaults or the creation of new NFT vaults.

Token Hierarchy

To better understand Meta-Swap, let's sort out the various types of tokens in the Fracton Protocol.

There are three standards of tokens in the operation of Fracton Protocol. Among them, ERC721, that is, the BAYC NFT ranks the highest because it is a real asset in the BAYC vault, as well as the value foundation of the entire BAYC liquidity pool.

The ERC1155 tokens - Blind Box and People's BAYC - are middle-tier assets, connecting between the existing BAYC and the liquidity token hiBAYC in the system. The number of these erc1155 tokens is directly anchored to the number of BAYC, and the ETH raised by issuing the Blind Box will be used to acquire BAYC for the vault. Besides, People's BAYC can be directly used to redeem BAYC. Therefore, these ERC1155 tokens can be considered as ABS of BAYC.

Ps: ABS(asset-backed security): an asset-backed security (ABS) is a security whose income payments and hence value are derived from and collateralized (or "backed") by a specified pool of underlying assets. In our case, the BAYC vault is the pool.

The ERC20 token, or hiBAYC, ranks the lowest in the protocol hierarchy. They are anchored to the number of People's BAYC and Blind Box, however, they cannot be directly exchanged for BAYC. hiBAYC can be considered as ABS of the middle-tier assets - Blind Box/People's BAYC.

Swap Principle

Meta-Swap's exchange principle is to lock or unlock high-ranking tokens and mint or burn low-ranking tokens. This design aims to stabilize the value system of Fracton Protocol.

In the process of exchanging high-ranking tokens for low-ranking tokens, the high-ranking tokens will be locked in the Meta-Swap system, while the low-ranking tokens will be minted. For example, when People’s BAYC is converted to hiBAYC, People’s BAYC will be locked in the Meta-Swap pool and the newly minted hiBAYC will be distributed to users. In contrast, when exchanging from low-ranking to high-ranking tokens, such as People's BAYC to BAYC, the People's BAYC will be burnt, and the BAYC in the vault will be unlocked and distributed to users.

Such a mechanism can restrain the issuance of low-ranking tokens, ensuring that each lower-ranking token is backed by the corresponding higher-ranking token, and rigidly allows users to exchange fractions for BAYC in the vault that has the real value.

Factory Contract

The factory contract supports the fractionalization of any ERC-721 NFT to create fractions in ERC-1155 and ERC-20 standards and automatically generates an NFT vault without initial liquidity. This function brings robust scalability to Fracton, which will support more blue-chip NFT collections in the future. Furthermore, relying on this factory contract, the curator system will be launched in the v2 version, allowing external users to conduct NFT fundraising on Fracton Protocol in a more decentralized way.

Reverse Tax

The converting from low-ranking tokens to high-ranking tokens shrinks the overall liquidity of the system, the impact of which is similar to that of a contradictory monetary policy. Fracton Protocol will impose a 0.3% reverse tax on these contracting conversions. Specifically, users need to prepare 3 more hiBAYC for every 1000 hiBAYC exchanged for People's BAYC. Similarly, users will pay 1003 People's BAYC in total to redeem one BAYC from the vault. The reverse tax will flow into the treasury and be distributed through DAO governance.

Summary

In Fracton Protocol, this multi-hierarchy asset structure is integrated through Meta-Swap, allowing users to freely trade various fractions in a decentralized way. In actual situations, due to cross-market and other reasons, there will be a spread between different fractions. However, users can easily capture these profits if they are familiar with the Meta-Swap system. In the next chapter, we will delve into the arbitrage opportunities in Fracton Protocol based on Meta-Swap.

Next Chapter - Arbitrage

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