What are Fractional NFTs: A Complete Guide
Have you ever thought that this non-fungible token (NFT) is too expensive, it would be great if I could buy just a small piece of it for rather a small amount of money.
This is where fractional NFTs come into play. As the name implies, fractional NFTs are non-fungible tokens that have been divided into fragments.
In this article, we will take a deep dive into fractional NFTs, explaining what they are and where you can purchase some.
What Is a Fractional NFT?
A fractional NFT is simply a whole NFT that has been divided into smaller fractions, allowing different numbers of people to claim ownership of a piece of the same NFT.
The NFT is fractionalized using a smart contract that generates a set number of tokens linked to the indivisible original. These fractional tokens give each holder a percentage of ownership of an NFT, and can be traded or exchanged on secondary markets.
NFTs are ERC-721 tokens created by an indivisible smart contract on the Ethereum blockchain. Since the tokens are indivisible and impossible to replicate, they are the perfect medium for individual intellectual property tracing.
NFT assets experienced a meteoric rise in 2021 thanks to multiple record-setting auctions of NFT projects. These virtual assets run the gamut from digital art, in-game items, virtual real estate and countless others.
So far, the largest was the auction of digital artist Beeple’s work Everydays: The First 5000 Days, which sold for $69 million at Christie’s auction house in February 2021.
That historic sale opened the door for several more NFT projects, including NFT avatars by CryptoPunks and Bored Ape Yacht Club, some of which are now trading for millions of dollars on secondary markets.
How Do Fractional NFTs Work?
In its bare-bone state, an NFT is a token that implements a particular standard. Two examples are Ethereum’s ERC-721 and BNB Chain’s BEP-721 standards, and both are used to regulate NFTs on various networks.
Before the process of fractionalizing an NFT, the tokens must first be locked in a smart contract. Smart contracts are programs on a blockchain that can automatically execute functions when someone fulfills the predetermined conditions.
Once the original NFT is locked in the smart contract and the predetermined rules are met, the contract splits the token into smaller fractions – represented by fungible tokens – based on the instructions specified in the smart contract.
The number of pieces is specified by the NFT’s owner, along with the price, metadata, and other properties of the newly created fractions.
Each of the fractions, or tokens, then represents partial ownership of the entire original NFT and can be put up for sale over a set period or until they are sold out. The number of fractions can vary depending on the owner of the original NFT.
As such, it’s possible to divide an NFT into 1,000, 10,000, or even 10 million individual shares. All shares or fragments can then be sold on secondary markets, and it won’t directly influence the value of the original NFT.
This suggests that, in practice, it would be possible to tokenize a valuable painting, such as Vincent van Gogh’s “The Starry Night”, which is valued at over $100 million.
Once tokenized, it would further be possible to fractionalize the NFT and split it into thousands or even hundreds of thousands of fractions. As a result, the average person would be able to buy parts of the artwork since it would make each share more affordable.
Benefits of Fractional NFTs
Fractional NFTs are democratizing ownership of NFTs. As the popularity of NFTs continues, the price of owning a single NFT is increasingly becoming expensive.
For instance, not all NFTs can attract the level of market excitement and activity that was realized by Beeple’s collection of 5,000 NFT pieces of artwork that sold for $69 million.
With fractional NFTs, democratized ownership is a possibility such that even as the bidding price of NFTs increases, market activity around that NFT remains relatively high as more people can participate at lower prices.
Even if one of the owners of that NFT decides to sell, their move won’t affect the overall value held by other stakeholders.
Fractional NFTs also bring about a great deal of liquidity to the NFT marketplace. While NFTs are hot right now, their non-fungibility will ultimately lead to a lack of liquidity on most of the NFT marketplaces popping up right now.
With fractional NFTs, liquidity can be sustained whereby smaller investors can participate as opposed to only having the participation of a few deep-pocketed collectors. The fungible tokens created by the smart contract to represent ownership in the NFT can be traded on other secondary platforms to further add liquidity.
Lastly, NFTs are necessary as they enable the price discovery of NFTs. Price discovery is the process through which a market goes through to set the proper price of an asset.
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Examples of Fractional NFTs
The discussions on fractionalized NFTs would also involve top examples in fractional NFT marketplace entries. One of the most notable examples of fractional non-fungible tokens is the NFT sale by popular artist Grimes.
In addition, you cannot miss out on the ‘Doge’ meme NFT, which fetched almost $4 million. PleasrDAO, a collective, purchased the meme and divided the NFT into 17 billion shares. Now, anyone can own a share of the ‘Doge’ meme NFT for a minimal cost.
Similarly, you can think of possibilities for fractional art through the division of popular pieces such as The Scream by Edvard Munch. The masterpiece fetched almost $120 million at a Sotheby’s auction in 2011.
If you turned “The Scream” into an NFT, it would fetch an unreal valuation accessible only to investors with fat wallets. On the other hand, you can divide the NFT into multiple pieces and allow more buyers to own a piece of the NFT at a reasonable price.
Where to Buy Fractional NFTs
These are the top marketplaces where you can fractionalize and buy F-NFTs:
Fractional.art is a popular NFT marketplace and community for fractionalizing and trading NFTs. The platform is decentralized, permissionless, and governed by smart contracts -anyone can access it, but no one controls it. PeckShield and Harchi Audit have verified the protocol to help culture trust in the community.
Fractional.art has contracts for popular collections, such as Etherrock and CryptoPunks. It allows creators to fractionalize the whole NFT collection under the NFT basket feature. Moreover, the protocol mitigates unplanned NFT withdrawals by permitting F-NFT withdrawals after investors buy all the tokens or when a buyout is sold.
LIQNFT brands itself as the first community-based fractionalization and serialization marketplace in the Solana ecosystem. With serialization, you gain total control of a limited-edition NFT print. The concept resembles buying a limited high-end item. For instance, an automobile manufacturer can produce only 100 cars, each with a serial number. Therefore, you can purchase 1 of 100 or 67 of 100. Pledging your NFT into a smart contract with serialization lets you define features like print supply, ownership price, and more.
Nftfy claims to be a platform where NFT enthusiasts meet opportunities. You can buy NFTs collectively in a pool, buy fractions, or fractionalize your NFTs. Your offering is decentralized, secure, and stacked into a vault. You can unstack your NFT by paying its reserve price or incurring the total value. Besides, you can cancel or modify your offering before any buyer purchases your F-NFTs.
WithOtis is another popular marketplace where you can buy and fractionalize NFTs. One of the outstanding benefits of this platform is the availability of a free mobile app on AppStore and Google Play Store. WithOtis holds NFTs in secure vaults insured by Aspen American Insurance Company.
Can Fractional NFTs Be Reversed?
It’s possible to reverse the fractionalization process and turn a Fractional NFT back into a whole NFT. Typically, the smart contract that fractionalizes an NFT has a buyout option that lets a Fractional NFT holder purchase all the fractions to unlock the original NFT.
Typically, a Fractional NFT holder can initiate the buyout option by transferring a specific number of the corresponding ERC-20 tokens back to the smart contract. This will start a sort of buyback auction, which will run for a fixed timeframe.
The other Fractional NFT holders then have some time to make a decision. If the buyout is successful, the fractions are automatically returned to the smart contract, and the buyer gets full ownership of the NFT.
Disadvantages of Fractional NFTs
Fractionalized NFTs are as secure as the smart contracts they are built on, so it depends on the quality of the code. In some cases, however, a potential buyer or a part-owner of an NFT can trigger a buyout auction by sending the total amount of all fractionalized parts to the smart contract.
If the other fraction holders outbid the person who triggered the auction, they can keep control of their share, but at a higher price. If the person successfully outbids the other fraction holders, their payment will be distributed to each owner according to the size of their holdings.
While they still get paid for their share, this might cause you to sell your fraction even when you didn’t want to.
The Bottom Line
The NFT market continues to explode in popularity and demand and we are certain to see more interesting developments and use cases as blockchain technology evolves even further.
The concept of fractional NFTs is still nascent, but it looks like it’s going to be the next big trend in the ever-growing crypto industry. NFT fractionalization enables greater liquidity and by extension endless possibilities for investment strategies.
It opens up the market to a significantly wider pool of investors, ensuring that the next wave of monetization of digital assets will be powered by F-NFTs.
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