Why Most Fractional Ownership Platforms Are Just Digitized Scrip

Platforms like Lofty.ai or RealT hold the underlying asset in an LLC. Your token is a claim on a legal entity, not the asset itself. This reintroduces counterparty risk and regulatory opacity.

• Single Point of Failure: The custodian's solvency dictates your asset's existence.
• Off-Chain Enforcement: Rights are enforced via traditional law, not smart contract code.
• ~$1B+ Market: A significant liability pool held in opaque legal wrappers.

Secondary markets on platforms like Fractional.art (now Tesserart) are often shallow, centralized order books. The promise of 24/7 liquidity collapses during volatility, as seen with high-profile NFT fractionalizations.

• Synthetic Depth: Liquidity is often provided by the platform itself, not organic markets.
• Price Oracle Risk: Valuation relies on thin, manipulable trading data.
• <1% Daily Volume: Typical illiquidity for all but the blue-chip fractions.

Voting rights for fractional holders are typically cosmetic. A 51% token vote cannot force a property sale or change a fund's mandate; the legal entity's manager retains ultimate discretion, making DAO-like governance a theater.

• Illusion of Control: Token votes are advisory, not executable.
• Legal Supremacy: The operating agreement, not the smart contract, is the source of truth.
• 0 Major Asset Sales: Driven purely by on-chain governance votes.

These tokens fail the fundamental DeFi test. You cannot natively use a RealT token as collateral on Aave or in a Uniswap v3 pool without wrapping it in another custodial layer. They are data silos, not financial primitives.

• DeFi Incompatible: Not recognized by major money legos due to off-chain settlement.
• Double Custody: To use in DeFi, you often must lock it with another intermediary.
• ~0 Integrations: With top-tier lending or DEX protocols.

By issuing profit-sharing tokens tied to an LLC, platforms are creating unregistered securities by the Howey Test standard. This creates existential risk for holders, as seen with SEC actions against LBRY and similar asset-backed schemes.

• Inherent Security: Profit expectation from a common enterprise managed by others.
• Enforcement Risk: Platform shutdown could freeze all assets and redemptions.
• 100% of Platforms: Currently operating in a regulatory gray area.

True ownership requires the asset's legal and economic rights to be encoded and enforced on-chain. Projects like Tangible (real estate) and NFTX (NFTs) point the way by using direct custody via vaults and redeemability for the underlying asset.

• Redeemability Guarantee: 1 token = 1 claim to a specific, verifiable underlying.
• Smart Contract Enforcement: Ownership rights are programmatic, not legal.
• Native DeFi Asset: The token itself is the collateral, not a claim on it.

Users buy a token representing a claim on an asset held by a central entity, not direct property rights. This creates a single point of failure and regulatory arbitrage.

• Legal Title: Held by an offshore SPV, not the token holder.
• Redemption Risk: Dependent on the issuer's solvency and willingness to honor claims.
• Enforcement: Token holders have no direct legal recourse against the underlying asset.

Platforms structure offerings to avoid securities laws, often by using utility tokens or membership agreements. This leaves investors unprotected and platforms vulnerable to enforcement actions like those seen with SEC v. Ripple.

• Classification Dodge: Assets are framed as 'utility' or 'collectibles' to bypass the Howey Test.
• Investor Exclusion: Often limited to accredited investors, defeating the 'democratization' narrative.
• Enforcement Sword: Constant threat of action creates existential platform risk.

Secondary market trading is promised but often illiquid and dependent on the platform's internal market maker. This creates a false sense of exit liquidity, reminiscent of problems in private equity.

• Thin Order Books: Low trading volume leads to high slippage, eroding value on exit.
• Platform Control: The entity can halt trading or withdrawals during stress (see FTX collapse).
• Valuation Opacity: Prices are not set by a deep, independent market.

Projects like Maple Finance or Centrifuge tokenize debt, not ownership, creating a securitization product. The link to the physical asset is often several legal layers removed, introducing chain-of-title risk.

• Asset-Backed Security: Token represents a debt position, not fractional equity.
• Oracle Risk: Off-chain asset valuation depends on trusted data feeds.
• Legal On/Off Ramps: Settlement requires centralized custodians and courts, breaking the crypto-native promise.

Token holders are given voting rights over trivial parameters (e.g., fee changes) but have zero say over the core custodial structure or dissolution of the holding entity. This is governance washing.

• Sovereignty Illusion: Votes are suggestions to a centralized operator, not on-chain execution.
• Critical Decisions: Asset custody, legal structure, and profit distribution are off-limits.
• Precedent: Mirrors the limited governance of traditional fund LP agreements.

Genuine fractional ownership requires the asset's legal title to be held by a decentralized, on-chain entity like a DAO using a legal wrapper (e.g., Delaware LLC). Smart contracts must directly govern asset control, as pioneered by ConstitutionDAO and CityDAO.

• Direct Ownership: DAO members hold legal membership interests via the wrapper.
• On-Chain Execution: Asset sales or usage are triggered by DAO vote, not a central party.
• Transparent Custody: Assets are held in a multi-sig wallet controlled by the DAO's designated signers.

Secondary markets on fragmented platforms are ghost towns. A 1% stake in a Bored Ape is illiquid because the buyer pool is limited to users of that specific platform, not the global market.

• Platform-specific order books create captive, shallow liquidity.
• Real liquidity requires composability with DEXs like Uniswap or Blur's marketplace.
• Without it, fractional tokens trade at steep discounts, destroying value.

The 'NFT in a multi-sig' model centralizes custody and legal liability. The platform or a DAO holds the underlying asset, creating a single point of failure and regulatory scrutiny.

• Users own a claim on a balance sheet, not the asset itself.
• Defeats the core Web3 promise of self-custody and verifiable ownership.
• Platforms like Fractional.art (now Tessera) exemplify this custodial wrapper model.

Fractional governance for physical assets is a legal and operational nightmare. Voting on loan terms or sale decisions is slow, non-binding, and exposes holders to securities laws.

• On-chain votes lack legal enforceability for off-chain actions.
• Creates deadlock risk and paralyzes asset management.
• True utility requires a legal wrapper (like an LLC) for each asset, negating scalability.

The future is on-chain assets with built-in fractional ownership and legal clarity. Look to protocols that bake rights into the token itself or use enforceable legal structures.

• ERC-721C allows royalty enforcement at the token level, a model for encoding rights.
• RWA protocols like Centrifuge tokenize real debt with clear, off-chain legal recourse.
• Tangible links real-world asset tokens (like gold) directly to redeemable physical vaults.

Enable frictionless recombination. The endgame is a system where fragmented tokens can be instantly and trustlessly recombined into the whole asset, restoring liquidity and utility.

• Atomic swap mechanisms allow N fractional holders to collectively swap for the underlying NFT in one transaction.
• This creates a dynamic liquidity floor: the fractional price cannot fall below (Full NFT Price / N).
• Projects exploring this include NFTX and Sudoswap's AMM models for basket redemption.

Investors must scrutinize the stack: custody, liquidity, and legal enforceability. Avoid platforms that are merely digitizing scrip.

• Red Flag: Vague 'legal framework' promises without on-chain verification or licensed partners.
• Green Flag: Direct claim on an on-chain asset (via ERC-1155 or ERC-6960) or a legally recognized SPV.
• The metric that matters: Can a holder exit directly to the base asset or a deep, composable market?