NFT Wrapper

The core mechanism that converts a unique NFT into a standardized fungible token (usually an ERC-20). This process, often called sharding or fractionalization, allows a single NFT to be owned by multiple parties. Each wrapped token represents a fractional claim on the underlying asset, enabling:

• Fractional ownership of high-value assets.
• Price discovery through liquid markets.
• Increased accessibility for smaller investors.

By wrapping an NFT into a standard token format, it becomes compatible with the broader DeFi ecosystem. This unlocks utility within:

• Decentralized Exchanges (DEXs) for trading fractions.
• Lending protocols where the wrapped tokens can be used as collateral.
• Yield farming strategies and liquidity pools.
• Cross-chain bridges to move NFT value between different blockchains (e.g., wrapping an Ethereum NFT for use on Solana).

Wrappers employ specific custody models for the underlying NFT:

• Custodial Wrapping: The NFT is locked in a secure, audited escrow smart contract (vault). This is the most common model, requiring trust in the contract's code.
• Non-Custodial Wrapping: Uses mechanisms like dual ownership or multi-signature schemes without a single vault, potentially reducing smart contract risk.
• The wrapper contract acts as the canonical owner on-chain, minting and burning wrapped tokens based on deposit/withdrawal actions.

A critical feature that ensures the wrapped tokens are redeemable for the original asset. The process typically requires:

• Burning the required amount of wrapped tokens.
• If fractionalized, often needing a supermajority or full set of fractions to initiate redemption.
• Executing a withdrawal function from the escrow contract.
• This mechanism anchors the value of the wrapped tokens to the underlying NFT, preventing the wrapper from becoming a purely speculative derivative.

Wrapped NFTs can encode additional functionality beyond simple ownership:

• Governance Rights: Fraction owners may vote on decisions related to the underlying asset (e.g., how to use a virtual land parcel).
• Revenue Sharing: Wrapper contracts can distribute proceeds (e.g., rental income, royalties) to fractional holders.
• Dynamic Metadata: The wrapper can reference or update metadata, linking to external data oracles for real-world asset tracking.
• This transforms static NFTs into interactive, revenue-generating financial instruments.

Wrappers solve specific liquidity and utility problems:

• High-Value NFTs: Wrapping a CryptoPunk or Bored Ape to enable fractional trading (e.g., NFTX, Fractional.art).
• Cross-Chain NFTs: Using a wrapper as a bridge to represent an NFT on another chain (e.g., Wormhole NFT Bridge).
• Liquidity for Illiquid Assets: Wrapping in-game items, domain names, or real-world asset NFTs to use in DeFi.
• Wrapper Standards: Emerging standards like ERC-6956 (Asset-Bound NFTs) aim to formalize the relationship between the wrapper and the underlying collateral.

The primary function is to lock an NFT (like a CryptoPunk or Bored Ape) into a vault contract. In return, the wrapper mints a fungible ERC-20 token (e.g., a Wrapped Punk) or a set of fractionalized ERC-20 tokens (ERC-1155/ERC-20). This process creates a liquid, divisible representation of the illiquid, whole NFT, unlocking its collateral value.

• Fungible Wrappers: 1 NFT = 1 Wrapped NFT (wNFT), which is tradeable on DEXs.
• Fractional Wrappers: 1 NFT = X supply of fractional tokens (e.g., PUNK-20), enabling shared ownership.

Wrappers solve NFT illiquidity by allowing them to be used as collateral for loans in DeFi protocols. A user can wrap their NFT, deposit the resulting fungible tokens into a lending market like Aave or a specialized NFT lending platform, and borrow stablecoins or other assets against it. This creates a capital efficiency loop where static blue-chip NFTs can generate yield or provide leverage without being sold.

By converting unique NFTs into standard token formats (ERC-20/ERC-1155), wrappers make them composable with the broader DeFi ecosystem. Wrapped NFTs can be:

• Traded on automated market makers (AMMs) like Uniswap.
• Used as liquidity in yield farming pools.
• Integrated into index funds or baskets.
• Bridged across different blockchain networks via cross-chain bridges that support the token standard.

Several protocols have pioneered NFT wrapping with different technical approaches:

• NFTX & Fractional.art (tessera): Create fungible vault tokens (ERC-20) for NFT collections, allowing for index-like exposure.
• Wrapped Cryptopunks: The canonical example, where each Punk is custodied to mint a unique ERC-721 and a corresponding ERC-20 token.
• ERC-1155: This token standard natively supports semi-fungible tokens, acting as a built-in wrapper for creating batches of fungible items from a single contract.

Using wrappers introduces specific risks beyond standard DeFi smart contract vulnerabilities:

• Custodial Risk: The wrapper contract holds the original NFT, creating a single point of failure.
• Oracle Risk: Price feeds for wrapped/fractionalized NFTs can be manipulated, affecting loan collateralization ratios.
• Liquidity Fragmentation: Wrapping can split liquidity between the original NFT market and the wrapper token market.
• Governance Risk: In fractionalization protocols, token holders may vote to redeem the underlying NFT, forcing a sale.

NFT wrappers are a foundational primitive for the NFT-fi (NFT finance) sector. They are closely related to, but distinct from, peer-to-peer and peer-to-protocol NFT lending platforms like:

• Blend (Blur): A peer-to-peer lending protocol that often uses wrapped NFTs as the collateral asset.
• Arcade: Facilitates loans using bundled, wrapped NFTs as collateral.
• BendDAO: A peer-to-pool lending protocol where users deposit wrapped NFTs (like Wrapped Bored Apes) to borrow ETH.