The NFT space is ever-expanding and growing exponentially day by day. Everyone wants to bag some NFT collectibles, but sometimes an NFT collection can be so valuable (and so pricey) it's hard to get your hands on it.
The NFT community is roaring non-stop about NFT art and play-to-earn crypto games that reward users with crypto rewards and NFTs. Everybody wants a piece of the NFT pie, but until now, you could only buy an entire original NFT, so the most popular NFTs were pretty much outside of an average person's budget.
The winds of change are bringing NFT fractionalization that will allow NFT holders to own just a tiny chunk of the much-coveted pie, so even expensive NFTs will become accessible.
Let's learn more about fractional NFTs and how they work.
What is a fractional NFT?
Non-fungible tokens revolutionized the crypto world by allowing NFT holders to have digital asset ownership of the collectibles they would acquire. Owning digital collectibles became similar to owning physical assets. Your NFT would be yours and yours alone.
Wealthy investors could invest their money in multiple NFT projects and have full ownership of an expensive NFT such as the Bored Ape Yacht Club collection. On the other hand, smaller investors can't really approach these prohibitively expensive NFTs and would have to settle for the more affordable tokens.
That's where NFT fractionalization comes in, allowing users to buy NFT fractions instead of a whole NFT. The ownership of the NFT can be divided into smaller fractions, making it possible for several people to own a single NFT.
A fractional NFT or F-NFT is an NFT that has been divided into fractions and sold separately. Fractionalized NFTs use smart contracts that generate a set number of fractional tokens linked to the indivisible original. These fractional tokens, which can be sold or exchanged on secondary markets, grant each holder a portion of ownership of an NFT.
Fractional ownership on the NFT market
If you're scratching your head wondering how does NFT fractionalization work exactly, read this following chapter carefully. We'll explain it using the most popular token standards from the Ethereum blockchain: the ERC-20 and ERC-721 token standards.
The ERC-20 tokens are the standard for creating fungible tokens, while ERC-721 are used for creating non-fungible tokens.
A smart contract can be used to create ERC-20 tokens connected to an indivisible ERC-721 NFT since fungible tokens are adaptable enough to be traded for another of their kind without losing value. Anyone with any ERC-20 tokens generated by the smart contract can obtain a fraction of the unique and expensive NFT.
A fractional NFT can be formed this way, and the smart contract can safeguard the information that sets it apart from other NFTs.
Fractional NFTs use cases
Fractionalized NFTs can have different use cases in the crypto space. From fractional art to play-to-earn games, let's explore how fractional NFTs can improve the NFT space.
F-NFTs in gaming
You can buy, sell, and own numerous in-game items in most play-to-earn cryptocurrency games. F-NFTs can be used in these blockchain games to let players pool their resources and trade valuable in-game assets by investing in their fractionalized shares.
For example, Axie Infinity is already testing out F-NFT trading by selling fractionalized ownership of very rare Axies, their in-game NFTs.
F-NFTs in the metaverse
The metaverse is entering the mainstream slowly but surely, and as a result, we should expect a large rush of funding into metaverse-related projects. Businesses like Sandbox and Decentraland have already entered this market.
F-NFTs can enable conglomerates, individual investors, and even small organizations to gather together and purchase an NFT representing virtual land, for example, or other NFT collections and digital assets within the virtual world.
F-NFTs in the real estate industry
NFTs have also found application in real estate, as they speed up the purchasing process by substituting intermediaries with smart contracts to facilitate a quick and secure transfer of ownership. Imagine real estate assets like vacation homes and luxury assets like private jets transformed into NFTs. They would benefit from immediate ownership settlement and a streamlined transaction process. Additionally, verifying transaction information would be quick and straightforward because the ownership and intellectual property rights history can be directly recorded on a blockchain.
With F-NFTs, owning shares of the same asset becomes possible. Introducing the fractionalization process in real estate and enabling numerous parties to share multiple fractions of the whole NFT can attract buyers.
The fixed price can be shared between the fractional owners, making it easier to buy in.
What are the benefits of fractionalized NFTs?
The most obvious benefit that fractional NFTs can bring to an NFT owner is that they own a percentage of a more extensive and expensive original NFT. The idea of fractionalizing NFTs allows anyone with limited funds to own a fractional NFT instead of pricey non-fungible tokens. Other benefits include:
Efficient price discovery: F-NFTs enable effective price discovery for NFTs. A market finds the right price for an asset through a process known as price discovery. Since newly created non-fungible tokens have no transaction history, it's rather hard to establish a price for them. Fractional NFTs are easier to price, as the fractions can be released on the NFT market to be bid on. The cost of the whole NFT can be estimated based on market demand.
High liquidity: NFTs draw their value from their rarity, among other things. This can affect liquidity compared to other tradable collections of digital assets. F-NFTs solve the liquidity problem in the NFT ecosystem by allowing smaller investors to own assets collectively.
A collector with an extremely expensive token in their NFT portfolio can attract more buyers by fractionalizing the non-fungible token in as many parts as needed to achieve a lower price, affordable for most people.
Curator incentives: The NFT marketplace of the NFT owner's choice will pay them a curator fee if they divide their asset into fractions. Although the owner is free to decide and alter this fee's amount, there is a cap on it to prevent overcharging.
Popular fractional NFT platforms
There are a few NFT marketplaces where you can find and buy fractional NFTs:
This popular platform allows users to connect their wallet to create fungible uTokens, ERC-20 tokens that represent fractional ownership in a single NFT or a collection of NFTs. Users can either trade those tokens or bid on the fractionalized asset directly on Unic.ly.
Similar to how liquidity pools and yield farming operate in decentralized finance, the platform provides guaranteed liquidity through liquidity pools where investors can contribute liquidity and stake tokens to receive yields.
Fractional.art is another well-known platform that enables NFT holders to fractionalize their assets and redeem ETH in return. The platform gives developers additional flexibility while lacking Unic.ly's bidding and staking possibilities. This is due to the platform's simple and permissionless protocol design. The Fractional protocol allows anyone to build on top of it, but Unic.ly's more complicated smart contract system places additional restrictions on developers.
The NFTX platform enables index funds to be created by pooling NFTs of identical value - for example, NFTs with similar rarity sitting at the floor price. When NFT holders add an NFT to an index or purchase a portion of the index, they receive ERC-20 tokens in return.
Otis is essentially an NFT investing platform that encourages purchases of NFT artwork and collectibles. It also offers the option to purchase fractionalized proprietary rights in cryptocurrency assets combined with effective portfolio management.
Most of the blue-chip NFTs we find today in online marketplaces are crazy expensive and beyond the average person's reach. These prohibitive prices restrict access to the NFT space only to investors with enough crypto to spare.
Fractional NFTs are an exciting solution to increase opportunities for the general public to dive into the world of NFTs. This way, you could finally afford to own a share of that Bored Ape card you've been dreaming of for so long.
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