A new age of decentralized and open asset ownership has arrived with the advent of non-fungible tokens, or NFTs. Exclusive ownership is one of the most distinguishing characteristics of NFTs. An NFT is a one-of-a-kind token that cannot be reproduced or faked.
Owners of NFTs are highly restricted in their use of their assets because of this exclusivity. These developments have sparked a new wave of NFT innovation, including the possibility of fractional ownership.
Investing in a portion of a large market helps crypto investors minimize their risk of being duped. It’s a lot like holding stock in a corporation. For the first time, investors of various sizes may participate in the ownership of NFTs rather than merely the wealthiest individuals.
Then, what precisely are fractional NFTs, how do they function, and the advantages do they provide to investors? Find out more by reading on.
What Is a Fractional NFT?
NFT fractions are just NFTs split into smaller fractions, enabling multiple parties to claim ownership over a portion of the same NFT. Smart contracts are used to divide the NFT into fractional units. Each unit is tied to the original indivisible unit. On secondary marketplaces, these fractional tokens may be traded or swapped for a portion of an NFT.
An indivisible smart contract on the Ethereum blockchain creates ERC-721, known as non-fungible tokens (NFTs). Tokens are ideal for tracking individual intellectual property since they cannot be divided or replicated.
Record-breaking auctions of NFT projects in 2021 boosted NFT assets to a new high. Everything from digital art to in-game goods to virtual real estate is included in these virtual assets.
The most expensive auction to date was Christie’s February 2021 sale of digital artist Beeple’s work Everyday: The First 5000 Days, which brought in $69 million. NFT avatars by CryptoPunks and Bored Ape Yacht Club, some of which are currently selling for millions of dollars on secondary markets, were made possible by that historic auction.
Increasing Access to NFT Ownership
NFTs are becoming more popular as an emerging asset class. Certain collections have grown so valuable that the cost of purchasing a single NFT is prohibitive. Even though not all NFT collections have the notoriety of Beeple’s paintings or cartoon ape avatars from Bored Ape Yacht Club, the ones worth collecting may still be fairly expensive. Adding to the difficulty of getting NFTs on the crypto exchanges is that they are one-of-a-kind tokens, which makes it tough to acquire them.
Fractionalization might be a solution to all of these issues due to the high hurdles to entry. By breaking down an NFT into smaller parts, this new market becomes more accessible to those with little financial resources. As a result, investors and NFTs profit from the increased market liquidity. Tokens that give a portion of ownership in popular NFTs have been injected into the market via fractional NFTs.
Fractional NFTs allow investors with tight budgets to participate in the market by paying a tiny percentage of the entire market value. Multi-investor ownership of the same asset is now possible.
Fractionalization is a straightforward process: Create a preset number of shares (1,000, 10,000, or even 10 billion) and sell them at a fixed price for the whole NFT. The value of the original NFT will not be affected by the sale of these shares on the secondary market. For example, in July 2021, a piece of NFT art by singer Grimes named Newborn 1 & 3 was auctioned on Otis for prices beginning at $10 per share.
NFT sale of the “Doge” meme, which led to the establishment of the Dogecoin meme cryptocurrency, is another well-known example. In June 2021, an NFT of the meme sold for $4 million (now worth several hundred million dollars). The buyer, PleasrDAO, fractionalized the NFT 17 billion times, making it possible for everyone to hold a piece of it for only pennies.
Having a stake in a company’s assets is nothing new. Many businesses, from real estate to fashion, and for all sorts of tangible assets, such as stock, designer items, and luxury goods like yachts and private aircraft, have found success with the notion.
Groups of individuals widely employ fractionalization in the real estate market to acquire holiday properties at a reasonable price. Owners who acquire fractional ownership of property get a deed representing their portion of the property, unlike a timeshare, which only promises a fixed period at a property every year.
All of the advantages and disadvantages that come with owning real estate are shared by fractional owners. Income, rights to use, and access to the shared property are distributed proportionately among the co-owners according to their ownership. Over a decade, if the overall value of the vacation house increases, the value of the individual shares will rise as well. As a result, if the property’s value decreases, so will the value of the company’s stock, which has an impact on the company’s profitability.
What Is the Process of NFT Fractionation?
When it comes to it, an NFT is nothing more than an ERC-721 token. Smart contracts, which are programs that are recorded on the blockchain and may automatically run when certain criteria are satisfied, are the first step before the NFT can be fractionalized.
The smart contract then follows the NFT owner’s instructions and divides the ERC-721 token into various fractions in the form of ERC-20 tokens. An ERC-20 token’s creator describes the number of tokens that will be issued and their price, information, and other features. Each fraction or ERC-20 token represents part ownership of the total NFT. After that, the fractions are sold at a defined price for a certain time or until they are all gone.
The Scream, a famous piece by Norwegian artist Edvard Munch, sold for about $120 million in 2011 at Sotheby’s. An NFT based on the artwork would be outrageously costly, and only a select few affluent investors would be able to bid for it. To make the artwork more accessible to customers, one NFT of The Scream might be divided into 10,000 ERC-20 tokens via a smart contract and sold for $12,000 each, a much more reasonable price point.
However, NFTs and fractionalized NFTs are not confined to the Ethereum blockchain. Any blockchain platform that supports smart contracts and non-fungible tokens (NFTs) may implement fractionalization. NFTs may be created and transferred more easily with the use of other networks such as Polygon (MATIC), Cardano (ADA), and Solana (SOL). With these networks, transactions are rapid, and there are no gas expenses.
When comparing F-NFTs with traditional NFTs, what are the main differences?
For example, a fraction of a full NFT is represented by an F-NFT or fractionalized NFT. Because of the evident disparity, As a whole, an NFT is distinct from an F-NFT, which is only a subset of it.
Fractionation may be reversed, and F-NFTs can be turned into a full NFT. This is crucial to note. An F-NFT investor may generally acquire all of the fractions of an NFT and unlock the original NFT using a smart contract that fractionalizes an NFT.
ERC-20 tokens from an F-NFT collection may be sent back to the smart contract to start a repurchase auction, which will run for a certain amount of time. Other F-NFT holders will have some breathing room. The fractions are immediately returned to the smart contract, and the buyer acquires full ownership of the NFT if the buyout is completed within this time.
Is There a Use for Fractional NFTs?
F-NFTs are required for three primary reasons:
Democratization: Smaller investors may be unable to participate because of the high costs of certain NFTs. When a costly NFT is broken down into smaller units, it decreases the cost of ownership and makes it more accessible to the public. When the price of an NFT grows, so does the value of all of its parts. This is vital to keep in mind. The value of all fractions will decrease if its value falls abruptly, as is usual in the crypto market.
Pricing mechanisms may be provided via fractionalized NFTs, which can offer price discovery methods. Since ERC-20 tokens are traded on the open market, the prices of fractionalized ERC-20 tokens may be used to estimate tokenized asset values.
NFTs provide more liquidity since each token is unique and cannot be duplicated or split. Only a few groups of very affluent investors have access to NFTs because of their rarity. When it comes to ERC-20 token trading in the secondary market, F-NFTs alleviate this lack of liquidity. Rather than waiting for weeks or months for a single NFT to be sold, many investors may be more eager to instantly purchase up fractions of an NFT at a lower price, thereby alleviating market liquidity concerns.
What Are the Advantages for Owners of Fractional NFTs?
Owners of fractional NFTs gain the most by owning a portion of a bigger, more costly entire NFT. The holder of a fractional NFT may be granted certain local governance powers on the platform about a specific fraction set, depending on the NFT and the platform where the fractional NFT was acquired.
For example, there are only 10,000 CryptoPunks NFTs in existence, and because of their high price tags, they have a very limited number of customers. CryptoPunks were split into 250 million tokens in April 2021, each representing a percentage of the collection.
In February 2022, these tokens, known as uPunk tokens, have a total market value of $12.9 million. You may bid on any CryptoPunk in the collection if you have uPunk tokens in your wallet. If 50% of the 250 million people vote to unlock the collection, each NFT will be given to the highest bidder.
Some F-NFT initiatives let holders earn a passive income in addition to their voting rights by staking their tokens in the project.
Is Investing in Fractional NFTs a Smart Move?
Investment in fractional NFTs is undeniable. As a result, NFTs are becoming more accessible and accessible to a broader range of people. They contribute liquidity, price discovery, and democratization to the NFT market.
Fractionalized NFTs, on the other hand, face the same issues as NFTs in general, including publicity rights, contracts, and intellectual property rights. For this reason, financial authorities may be wary of the selling and acquisition of F-NFTs as digital collectibles as their production might be seen as illegitimate initial coin offerings (ICOs).
SEC Commissioner Hester Peirce cautioned attendees at the Security Token Summit 2021 that the agency may treat fractional NFTs as securities. SEC (Securities and Exchange Commission) guidelines for NFTs have not yet been issued.
NFTs and F-NFTs will continue to increase in the market, and as a result, so will the rules regulating them. NFT-related businesses investors and owners should be aware of any potential legal difficulties.
NFT Fractionalization: The Bottom Line
The NFT industry continues to grow in popularity and demand, and as blockchain technology develops further, we can expect to see even more intriguing advancements and application cases.
It’s too early to tell if fractional NFTs will become the next big thing in the rapidly expanding crypto market, but it’s looking good. As a result, fractionalization of NFTs allows for infinite investment strategies. Due to the increased number of potential investors, F-NFTs are poised to lead the next phase in digital asset monetization.