Non-fungible tokens (NFTs) are unique digital assets that exist on a blockchain. The unique nature of NFTs makes the demand for them extremely high, resulting in increased prices for NFTs, making them accessible only to high net worth investors.
This is where fractional NFTs (F-NFTs) come in. Fractional NFTs are a great way to buy NFTs as they allow small to medium investors the opportunity to own a piece of an NFT. It is similar to owning shares in a company.
Here’s a look at fractional NFTs, how they work, and their benefits for investors.
What is a fractional NFT?
A fractional NFT (F-NFT) is an entire NFT broken into smaller chunks, allowing multiple people to claim ownership of a portion of the same NFT. NFTs are split using a smart contract programmed to generate a predefined number of tokens tied to the original indivisible NFT.
These fractional tokens represent a percentage of ownership for each NFT holder. Tokens can be traded or traded on NFT-supported exchanges.
How does NFT fractioning work?
Most NFTs currently exist on the Ethereum blockchain, using the Ethereum ERC-721 standard. The first step in splitting an NFT is to lock it into a smart contract, a script on the blockchain that is programmed to automatically produce a specific result when predetermined conditions are met.
The smart contract splits the ERC-721 NFT token into multiple shards in the form of ERC-20 tokens based on pre-set conditions. The smart contract describes the total number of ERC-20 tokens to be produced, their base price, attributes, metadata, and other unique properties. Each ERC-20 token represents a partial ownership interest in the entire NFT. Fractions are usually offered for sale at a fixed price for a period of time or sell out immediately after they are created.
Imagine an iconic painting that has become an NFT with a fixed price tag of $100 million. Only a few investors could afford it. Using a smart contract, the same NFT can be split into 20,000 ERC-20 tokens. This will make it possible to own a fraction of the iconic painting for just $5,000 a piece, which is much more affordable and will attract a larger group of investors.
Fractional NFTs are not just limited to the Ethereum blockchain. Fractionation can be done on any blockchain that supports NFTs and smart contracts. For example, blockchains like Solana (SOL), Polygon (MATIC), and Cardano (ADA) support NFT creation. These networks have the added benefit of lower gas fees and faster transaction speeds.
What is the difference between fractional NFTs and traditional NFTs?
Fractional NFTs provide investors with ownership of a fraction of a full NFT. The difference between a fractional NFT and a full NFT is clear: an NFT is a whole piece, while fractional NFTs are fractions of a full NFT.
It is key to note that the fractionation process can be reversed and a fractional NFT can be converted back to a full NFT. A call option is usually included in the smart contract that splits an NFT. This gives the original owner of the NFT or a fractionalized NFT investor the ability to purchase all of the fractionals and get the original NFT back.
Purchases are made through a buyback auction. This auction can be activated by transferring a specified number of ERC-20 tokens from a fractionalized NFT to the smart contract. This buyback auction runs for a fixed period, allowing other fractional NFT holders to make a decision. F-NFT holders will have to outbid the potential buyer to keep their fractions. If the purchase is successful, all fractions are automatically sent to the smart contract and the buyer gets full custody of the NFT.
How to access a fractional NFT?
The growing acceptance of F-NFTs has seen the rise of dedicated platforms where investors can buy and create fractional NFTS.
- otis allows individual investors to buy fractional ownership in NFTs and other digital assets. Investors can buy fractional NFTs, manage their portfolios, and trade their assets in real time through the platform.
- Only combines NFTs and decentralized finance (DeFi) to provide investors with an all-in-one platform to create, fractionate, and trade NFTs. Unicly claims to offer guaranteed liquidity for assets on its platform with the ability to own a share of multiple NFTs. The platform also supports different NFT standards. Investors can earn UNIC, the platform’s native token, by providing liquidity and staking their NFTs.
- Fractional allows investors to buy, sell and mint fractions of NFTs. It offers fractional ownership for some of the most in-demand NFTs. Fractional actively promotes NFT utility and community building around popular NFT collections.
Benefits of Fractional NFTs
One of the most beneficial aspects of F-NFTs is offering investors the opportunity to own a piece of a larger and more expensive NFT. F-NFTs provide a useful investment option, and in some cases holders can gain governance rights in the NFT platform. It also provides faster inclusion and active participation in the booming NFT industry.
Other benefits include:
- Making NFTs more accessible: The outrageous prices of some NFTs exclude most categories of investors from being able to afford them. Fractionation reduces ownership costs and makes NFTs accessible to a wide range of investors. In addition, investors can benefit from the price increases of an NFT, since this is automatically reflected in all its fractions in a proportional way.
- price discovery: Price discovery is how the market determines the optimal price of an asset. New NFTs are typically difficult to quote because they have little transaction history. Fractionation facilitates pricing, as multiple fractions can be put on the market for active bidding. This helps to set prices based on market demand quickly.
- Greater liquidity: The most defining characteristic of NFTs is their unique nature. This unique trait affects access to NFTs, especially prized ones. F-NFTs solve the NFT liquidity challenge through ERC-20 tokens, which can be easily traded on secondary markets. Investors can buy various fractions of an NFT immediately and trade them instead of waiting weeks or months to sell an entire NFT.
Fractional NFTs Level the NFT Playing Field
Non-Fungible Fractional Tokens (NFTs) are a great way to get started with NFTs because they are easy to understand, affordable, and exist on all major blockchains. You can buy as little as a tenth of an NFT, diversify your portfolio, and take advantage of the upside potential in the space.
The information on this website does not constitute financial, investment or business advice and should not be relied upon as such. MakeUseOf does not advise on any trading or investment matters and does not advise the buying or selling of any particular cryptocurrency. Always perform your own due diligence and consult a licensed financial adviser for investment advice.