What are Fractional NFTs And How They Work

Non-fungible tokens (NFTs) have signaled the beginning of a new era of digital asset ownership with the advantages of transparency and decentralization. One of the most significant highlights of NFTs points to the guarantee of exclusive ownership of an asset. Most important of all, NFTs are indivisible, and it is impossible to forge or replicate them. So, what is all the talk about fractional NFTs? Are they even a thing? 

Well, the strengths of non-fungible tokens actually present some critical limitations for their functionalities. As a result, innovators in the NFT space have come up with new approaches for defining fractional ownership of non-fungible tokens. Doesn’t fractionalization negate the basic purpose of NFTs? The following discussion presents the answer with an introductory overview of fractional non-fungible tokens.

What Are Fractional NFTs?

One of the first questions in any discussion about fractional non-fungible tokens or F-NFT would revolve around its definition. Interestingly, you can understand fractional non-fungible tokens with a basic idea regarding the fractionalization of assets. Fractionalization basically implies that you can own a share of the big NFT pie. It is more or less the same as holding shares of a company. As a result, fractionalization serves an innovative answer for opening up NFTs to small-scale and medium-tier investors. 

With the basic idea of fractionalization of assets, let us reflect on “What are fractional NFTs?” and the answer for understanding their role in the burgeoning NFT ecosystem. Fractional NFTs are not different from the regular NFTs in their technical design. However, the striking difference with fractional non-fungible tokens is the division of the NFT into smaller pieces or fractions. 

The smaller fractions of the NFT allow any individual to hold a share in the ownership of the same NFT alongside many others. One of the primary highlights of fractionalized non-fungible tokens refers to smart contracts, which help in creating a specific quantity of ownership tokens associated with the original NFT. Fractional tokens offer a share in the ownership of the NFT to every token holder. Interestingly, anyone can exchange or trade their fractional tokens on different secondary marketplaces. 

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The Popularity of NFTs and Barriers to Access

Non-fungible tokens are ERC-721 tokens based on the Ethereum blockchain, associated with a unique, immutable smart contract. The indivisibility of NFTs offers a promising feature for tracing the intellectual property of individuals. Non-fungible assets showcased meteoric growth in 2021 with many record-breaking million-dollar sales of NFT projects. 

As a matter of fact, non-fungible tokens are everywhere, starting from digital art and virtual real estate to in-game collectibles and the metaverse. However, the growing popularity of NFTs has fuelled unreal growth in their pricing, thereby making them expensive for average buyers. Therefore, fractional art NFTs and similar use cases can resolve the concerns of accessibility to NFTs. 

Fractionalization presents a credible solution to many problems, such as entry barriers for accessing NFTs. The division of an NFT into smaller pieces can introduce a democratic approach in the market by allowing many investors with limited funds to gain a share of the NFTs. Interestingly, the benefits of fractional NFTs not only remove the barriers to access to NFTs but also improve liquidity in the NFT market. Fractional non-fungible tokens can introduce many affordable tokens in the market for offering a share of ownership in renowned NFTs. 

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Foundations of Fractionalization

The popular examples of fractional NFT on OpenSea and other secondary marketplaces started off with inspiration from the fractionalization of assets. You must note that fractionalization of assets is not a new technique, as many sectors have utilized the method. For example, fractional ownership of stocks and luxury assets such as private jets and yachts is a favorable example of the fractionalization of non-fungible tokens. Another notable example of fractionalization of assets is evident in the real estate industry, where people purchase vacation homes together. In such cases, each buyer would receive a deed showcasing their share of ownership in the property. 

Working of Fractionalization in NFTs

The feasibility of fractionalization for other types of assets provides a viable platform for implementing it in NFTs. Many people with doubts about fractional NFT ownership must be worried about the authenticity of fractional non-fungible tokens. However, you can find a suitable answer by reflecting on how fractionalization works with non-fungible tokens. 

Before you can fractionalize an NFT, you must lock it in a smart contract. The smart contract works on dividing the token into multiple fractions according to the specified instructions. Interestingly, the fractionalized non-fungible tokens are ERC-20 tokens in comparison to the ERC-721 token standard of the original NFT. Every fraction of the original NFT or the ERC-20 tokens indicates partial ownership of the original non-fungible token. 

In simple terms, you can think of fractionalization as taking one NFT and dividing it into multiple shares of your choice. Now, you have to set the fixed price for the ERC-20 fractional tokens, which can be traded on secondary markets without any impact on the value of original NFTs.

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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. 

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How Are Fractional NFTs Different from Regular NFTs?

Fractional NFTs (F-NFTs) basically bring a tweak in NFTs to ensure their accessibility. The difference between the F-NFTs and regular NFTs is clearly evident in the fact that the latter are whole entities. On the other hand, fractional non-fungible tokens are just smaller shares of the original NFT. 

In addition, you must also note that it is possible to reverse the fractionalization process. Therefore, you can turn the fractional non-fungible tokens into one whole NFT. How? The smart contract used for fractionalization of NFTs offers a buyout option. Any investor can use the option of purchasing all fractions to return back the original NFT. 

Popular Fractional NFT Marketplaces

While OpenSea is obviously one of the favorites to shop for fractional non-fungible tokens, you can find many other fractional NFT marketplace options, such as the following.

• Unicly

Unicly is a reliable marketplace for any investor seeking new ways to transform their NFT collections into tradable assets. The platform helps in the tokenization of NFTs alongside creating tradable collections of the desired size. 

• Fractional.art

Fractional.art is another reliable platform investors can look up for minting or trading fractional NFTs. The platform offers the facility for creating NFT fractions alongside purchasing ownership of fractionalized NFTs.

• Otis

The most popular alternative for fractional art OpenSea has to offer would point you towards Otis. It is basically an NFT investment platform that supports investments in NFT collectibles and art. In addition, Otis also supports effective management of your NFT portfolio alongside the facility for buying fractional ownership in crypto assets. 

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Is Fractional NFTs Safe?

The basic overview of fractionalized non-fungible tokens alongside their working and some notable examples show their benefits clearly. However, you must also keep an eye out for risks associated with fractionalized NFTs before investing anything in them. Fractionalized NFTs introduce liquidity, democratization, and accurate price discovery in the NFT ecosystem. 

On the other hand, they also encounter critical issues pertaining to publicity rights, intellectual property rights, and smart contract vulnerabilities. For example, regulators can perceive fractionalized NFTs as unauthorized Initial Coin Offerings or ICOs. As fractional NFTs are still in the early stages, regulators have not issued any clear guidelines on them. Therefore, you need to be careful of the potential legal implications of fractionalized NFTs before betting your money on them. 

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Bottom Line

The important highlights in the discussion on fractionalized assets extend beyond the scope of “What are fractional NFTs?” and provide an overview of their significance. Fractional non-fungible tokens are an interesting solution to increase opportunities for the general public to dive into the world of NFTs. Most of the popular, blue-chip NFTs you see today are unreasonably expensive and beyond the reach of a common man. 

On the other hand, fractionalized NFTs can help you become an owner of a specific share of the NFT. Fractionalization enables the prospects for using NFTs in many interesting ways. For example, fractional tokens can be traded on secondary markets for interest, thereby presenting the scope for improved liquidity. Learn more about fractionalized NFTs and how they will influence the future of non-fungible tokens right now.

*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!