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Fractional NFTs are tokenized forms of NFTs fragmented and shared between several people.
Fractionalized NFTs reduce the entry barriers and allows average collectors to own high-value NFTs, like luxury yachts and real estate, through fractional ownership.
Fractional NFTs enable owners to gain access to market liquidity without selling the entire piece, although reconstitution may be a challenge.
Non-Fungible Tokens (NFTs) facilitate digital ownership with the benefits of transparency and decentralization. One of the primary NFT features is the assurance of limited ownership of an asset. Importantly, NFTs are indivisible and, as the name suggests, non-fungible, as it’s meant to be impossible to forge or replicate them on the blockchain. So, what’s all the talk about fractional NFTs? Do they even exist?
Well, NFT benefits present some critical restrictions for their functionalities. As such, NFT developers and artists have innovated new techniques of embracing fractional ownership in NFTs without negating the primary function of NFTs. To some extent, the concept is similar to splitting company ownership into stock shares. This way, owners can access liquidity without necessarily selling their entire piece. At the same time, the piece becomes more accessible to average collectors.
Let’s find out what fractional NFTs are, how to enable accessibility through fractional NFT investing, how to turn a Non-Fungible Token fungible, the advantages and disadvantages of fractional NFTs, and where to buy fractional NFTs.
What are Fractional NFTs?
A fractional NFT (F-NFT) is a whole NFT fragmented into smaller pieces, enabling different investors to enjoy partial ownership of a high-value NFT, like a luxury yacht or real estate. You can think of it like a birthday cake – where the cake is cut into small slices to serve their guests. By fractionalizing the cake, the owner can serve all their guests instead of buying individual cakes for every guest. Considering NFTs have unique features and can’t be duplicated, fractional NFTs stretch the limits by enabling fractional ownership.
The smaller fractions of the NFT enable more investors to own a share in the ownership of the same piece alongside others. Smart contracts play an essential role in fractionalizing an NFT. They facilitate the creation of a certain number of ownership tokens linked to the original NFT. Fractional tokens guarantee the token investors a share in the ownership of the NFT. Anyone can trade their fractional tokens on various secondary marketplaces.
Suppose you want to purchase a $3 million Bored Ape. A fractional NFT platform, like Fractional.art, might hold a Bored Ape and issue 3 million ERC20 tokens worth $1 per fraction. After connecting your web wallet, you can buy 300 of the Bored Ape’s ERC20 tokens for $300, handing you 0.01% ownership rights in the NFT. Besides, if the value of the Bored Apes appreciates, you can seamlessly sell your tokens in secondary marketplaces where they are listed.
Enabling Accessibility Through Fractional NFT Ownership
As some NFT collections become more popular, so do their floor prices, which is good for artists, developers, and collectors who invested in them early. But what about people trying to get into the NFT space now? The majority cannot afford to purchase the most expensive NFTs, but they could definitely consider fractional ownership possibilities. Besides, NFTs are an exclusive asset class, and purchasing them on crypto exchanges can be challenging because of the lack of liquidity.
With such entry barriers, fractional ownership of NFTs is a game changer. Dividing an NFT piece into smaller fragments democratizes the NFT market, enabling interested investors with low or average purchasing power to board the train. Apart from benefiting investors, fractionalized NFTs bring much-needed liquidity to the NFT market. F-NFTs offer market participants affordable fractions of the whole NFT.
How Do You Turn a Non-Fungible Token Fungible?
The ERC721 token standard is the oldest and most popular NFT standard on the Ethereum network (along with ERC1155). Though these two standards facilitate the creation of unique NFTs, the ERC20 standard, in contrast, enables the minting of altcoins and fungible tokens. Fungible tokens are easily interchangeable, implying each unit has the same utility and value. Moreover, you can use smart contracts to issue several ERC20 tokens associated with an indivisible ERC721 NFT. Here is a step-by-step guide on how to turn a Non-Fungible Token fungible:
An issuer mints an NFT as an ERC721 token and locks it in a vault or smart contract.
The issuer decides how many units they want to divide the NFT into and specifies its price and metadata.
The smart contract fractionalizes the ERC721 NFT into programmed units of interchangeable ERC20 tokens.
The ERC20 tokens now represent fragments of the original ERC721 NFT; the issue can sell them at a fixed price.
Interested investors buy F-NFTs and can exchange them with other digital assets on secondary marketplaces without affecting the value of the underlying NFT.
Visual representation of turning a non-fungible token fungible.
It’s important to note that issuers can fractionalize their NFTs into as many units as possible, be it 1, 100, 10,000, or even 10 billion. For Example, the most iconic meme in the crypto space, the original Doge by Atsuko Sato, is now fractionalized and available for more people to own. Atsuko sold the NFT to PleasrDAO – a decentralized autonomous organization consisting of DeFi leaders, early NFT collectors, and digital artists – for almost $4 million in June 2021. The DAO fractionalized it into nearly 17 billion fractions. So far, over 10,000 wallets hold F-NFTs of the Doge NFT. After the purchase, each investor received ERC20 tokens worth their share of the NFT, under the ticker (DOG), which they could exchange for other digital assets as they wished.
Benefits of Fractional NFT Ownership
One of the major limitations of NFTs is that collectors must have total ownership of the pieces. For some collections like Bored Apes and CryptoPunks with skyrocketing prices, F-NFTs solve this issue and offer more benefits to issuers and investors.
Skyrocketing NFT prices of some collections have blocked most investors from participating in the NFT market. Fractionalizing an NFT reduces the entry barrier to investment and allows all types of investors to own a portion of high-end and blue-chip NFTs.
More liquidity is closely related to democratization. A limited number of investors because of high prices implies that highly-valued NFTs can be listed for auction for several months before they find a potential buyer. But when these NFTs are fractionalized, tokens can be bought on exchanges by a broad group investor base, with minimal risk than spending a lot of money on one piece that might be overpriced.
It’s challenging to establish a fair price for an NFT with little or no transaction history. Through fractionalization, many investors bid on NFT fractions, allowing the market to understand the NFT’s fair price better.
Better for Artists
The above benefits have touched mostly on investors. For artists, F-NFTs bring more rewards by exposing them to a broader investor base in a more liquid market.
Challenges Facing F-NFTs
Like anything else in this world, fractional NFTs also have their drawbacks. These are the challenges of F-NFTs to consider before jumping in:
Concerning owning a fragment of an NFT, especially a piece of artwork, yacht, or real estate, reconstitution can be challenging. If you own the entire piece, things are straightforward. You enjoy sole ownership; therefore, you can sell it as and when you want. On the contrary, when you own a fraction of an asset, you may find problems using a portion of the asset in another name.
For creators, if you sell fractions of your NFT (say 60%) and the buyers refuse to sell it back, you will find it tough to decide solely the fate of that piece. As such, fractionalization protocols must create a way to reconstruct portions into the original NFT.
F-NFTs as Securities
The Securities and Exchange Commission (SEC) is concerned about F-NFTs. Commissioner Hester Peirce, popularly known as the CryptoMom, has previously aired her sentiments about F-NFTs as securities. She warned that F-NFT creators should be careful not to mint tokens that could be considered an investment vehicle or security.
Securities are fungible and exchangeable financial instruments used for fundraising purposes. Unlike NFTs, they are easily interchangeable. Since F-NFTs offer fractional ownership of an NFT, the SEC can consider them fungible securities to a large extent. The US Security Law requires such securities to be registered with the SEC, with detailed seller information and the offering made to investors. This is indisputably a big demand for participants in a space that champions decentralization and anonymity.
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.
F-NFTs may be the next big thing to happen to the NFT space as they remove the entry barriers to investment and inject more liquidity. If you have been eyeing a certain NFT collection but didn’t manage to meet its floor price, you may soon partially own it through fractional ownership. With that in mind, don’t forget to do your own research (DYOR) before investing in any digital artwork.