Understanding Fractional NFTs: What They Are and How They Function

Fractional NFT
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Non-fungible tokens are one-of-a-kind digital assets that are created on a blockchain network. NFTs are highly popular because of their unique nature, resulting in high prices for exclusive NFTs, making their accessibility largely exclusive to high-net-worth investors. However, as blockchain technology symbolizes innovation, a new type of NFT, or Fractional NFTs has made it easier for everyone to get access to NFTs. 

Fractional NFTs represent a part of a larger NFT and offer small and mid-tier investors the chance to own a piece of a popular NFT collection, similar to owning a company share. Today, we will talk about Fractional NFTs, their benefits, and how to access a Fraction NFT.

What is a Fractional NFT? 

Before diving into the benefits of fractional NFTs, let’s first understand what exactly a fractional NFT is. A fractional NFT represents smaller fragments of an entire NFT, that allows several people to buy partial ownership of a larger NFT. This fragmentation takes place using a smart contract programmed to generate a predefined number of tokens that are linked back to the original indivisible NFT. Each f-NFT represents a percentage of ownership in the larger NFT, and the f-NFT holder has ownership rights equivalent to that percentage. Let’s dive in little deeper into how fractional NFT works.

The majority of NFTs currently exist on the Ethereum network using the ERC-721 standard. The first step of the process of fractionalizing an NFT is to lock it in a smart contract, which is a script on the blockchain programmed to automatically perform a task when predetermined conditions are met. The smart contract then splits the NFT token into multiple fragments as ERC-20 tokens depending on the present conditions.

The smart contract also determined the total number of ERC-20 tokens, their attributes, metadata, price, and other crucial properties. These ERC-20 tokens represent partial ownership of the ERC-721 NFT. These ERC-20 tokens then can be sold individually on a marketplace. For example, an NFT associated with an iconic painting with a price of $100 M can be fractionalized into small 20,000 ERC-20 tokens. As the price of the original NFT was $100 M, the ERC-20 token will be priced at just $5000 for each token, which is much more affordable. Additionally, investors can purchase more than one ERC-20 token to increase their investment and stake in the painting.

While we took an example of ERC-721 standard NFTs, the fractionalization of NFTs is not limited to the Ethereum blockchain. It can be achieved on any blockchain that supports NFTs and smart contracts. For instance, blockchain networks such as Polygon, Solana, and Cardano, all support the creation of NFTs and offer lower gas fees and transaction speeds. NFTs on these networks can also be fractionalized to be sold on an NFT marketplace

Additionally, there are fractional NFT marketplaces designed to offer investors a range of f-NFTs. For instance, Ommniverse is a fractional NFT marketplace that allows users to own a piece of unique digital art. The project allows everyone to participate and invest in NFTs developed on ERC-721 and ERC-1155 standards. 

Difference Between Fractional NFTs and Traditional NFTs

Now that we have a better understanding of fractional NFTs, let’s understand the difference between fractional NFTs and traditional NFTs. Fractionalized NFTs offer investors fractional ownership of a whole NFT. While the traditional NFT is a complete piece, fractional NFTs are pieces of this complete NFT.

Fractional NFT ownership can be reversed and converted back into a whole NFT. Smart contracts used to fractionalize NFTs have a buyout option giving the original owner of the NFT or fractionalized NFT owner investor to invest and purchase all smaller fractional NFTs and combine them to get back the original NFT.

Buyouts are done through a buyout auction which can be triggered by transferring a predetermined number of f-NFTs back to the original smart contract. The auction will run for a specific period in which other investors of f-NFTs can decide whether to hold the f-NFT or sell it. To keep the f-NFT the holder must outbid the potential buyer’s bid. If the buyout is successful, all f-NFTs will be automatically sent back to the smart contract, and the buyer will get full custody of the NFT.

How to Access a Fractional NFT?

As briefly mentioned above, f-NFTs are sold on dedicated platforms allowing investors to purchase and create f-NFTs. These are the top f-NFT marketplaces.

  • Ommniverse: Ommniverse is a fractional NFT marketplace that offers a user-friendly website to buy, sell, or trade digital art f-NFTs. The project deals with ERC-721 and ERC-1155 standard NFTs.
  • Otis: Otis allows investors to purchase f-NFTs and other digital assets. Investors can also manage their portfolios and trade their assets in real time using the platform.
  • Fractional: Fractional allows investors and NFT holders to buy, sell, and mint a fraction of NFTS. The project offers ownership of popular and in-demand NFTs and promotes community building.

Benefits of Fractional NFTs

From the information given above, it is pretty evident what fractional NFTs are. They are a smaller part of a bigger original NFT associated with a piece of art, digital painting, real estate, collectibles, etc. These original NFTs are divided into smaller equal parts representing a percentage of the original NFT and its subsequent price. 

The benefits of fractional NFTs lie in the process itself. A popular NFT can be priced at millions at a time. For example, The Merge is the most expensive NFT sold ever, which was sold at over $91 million. While some investors can purchase this NFT as a great investment, not every investor has the resources to do that, creating unfair practices.

F-NFTs can help solve this problem by dividing any high-value NFT into smaller pieces and allowing medium to small-scale investors to invest in this lucrative opportunity. Additionally, an investor can over time purchase multiple f-NFTs from the same original NFTs to have a higher stake in the original NFT and then initiate the buyout auction to own the entire original NFT. So here are a few of the benefits of f-NFTs

  • Improving Accessibility: f-NFTs help in balancing the outrageous prices of some NFTs and offering all-scale investors to afford them. Fractionalization lowers the cost of ownership making NFTs more accessible to a wider range of investors. Additionally, investors can benefit from the rise of price in an NFT as this price boost is automatically represented in all fractions proportionally. 
  • Price Discovery: Price discovery helps the market determine the asset’s optimal price. Usually, pricing new NFTs can be challenging as they have little transaction history. By fractionalizing them, the price can be discovered relatively easily as multiple fractions can be launched into the market for bidding. 
  • Enhanced Liquidity: NFTs are one-of-a-kind and this uniqueness impacts access to the NFTs, especially the popular ones. F-NFTs can solve this challenge using ERC-20 tokens that can be easily traded on secondary markets. Investors can invest in multiple fractions and trade them immediately on a marketplace for increased price, resulting in better liquidity of the NFT.

Conclusion

F-NFTs are leveling the NFT playing field by making them accessible to a wider range of investors. As investors can purchase as little as one-tenth of an NFT, it will also help the investor diversify their portfolio and mitigate risks. 

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