As new waves of NFTs emerge almost every day, innovators in the space continue to push the boundaries of what is possible. Now, a new frontier of fractional ownership of NFTs is emerging, which only adds to the fun.
It seems non-fungible collectors are coming to terms with the fact that it is not a bad idea to own a fraction of a big pie, as opposed to full ownership of a smaller one.
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What is a Fractionalized NFT?
Remember when you and your siblings used to combine your allowances to buy the newest video game or sound system that was simply too expensive to buy alone? That, my friend, is (sort of) how fractionalized NFTs work.
Fractionalized NFTs are forging the next chapter of this fast-growing sector in crypto, blockchains, and decentralization. Fractionalization is simply the act of dividing the ownership of a non-fungible token into smaller fractions. This makes it possible for several people to own a single NFT.
In essence, F-NFTs break up a larger and more expensive NFT into smaller shares, which can then be owned by different individuals.
F-NFTs vs. Traditional NFTs: How do they really compare?
The NFT craze has certainly taken the world by storm. However, the way that traditional NFTs are set up poses a number of challenges. By nature, they are designed to be a non-fungible token that cannot be exchanged for any other asset of its likeness. This ramps up the uniqueness and scarcity factors, but diminishes the tradability and liquidity of the market.
Fractionalization makes these assets much more accessible to a wider range of investors. Here’s how they really compare:
How Investors Are Buying Slices of High-Value NFTs
Fractionalized NFTs are enabled by smart contracts. To simplify things, we can use Ethereum’s ERC20 and ERC721 token development standards to illustrate how fractionalized NFTs work. As a reminder, ERC721 tokens are the set standard for creating non-fungible tokens on Ethereum’s blockchain (the ERC20 standard is used to create fungible tokens).
A non-fungible token often represents any rare item, such as a collectible game card, a trophy, or a house. Given that a fungible token is flexible and can be exchanged for another of its kind without losing value, a smart contract can be deployed to generate ERC20 tokens linked to an indivisible ERC721 NFT. This way, anyone who holds any of the ERC20 tokens generated, can own a percentage of the rare and valuable NFT.
This is how fractional ownership can be created, and the smart contract can secure the data that differentiates the fractional NFT from other NFTs. This idea can be applied on any blockchain network that supports smart contracts.
Real-world use cases for F-NFTs
We get it. Web3 finances can be a little tricky to wrap your head around. However, while fractionalized NFTs are a relatively “new” concept in the digital asset space, they are already being used across an array of industries to make investments more accessible. Some of the most common places where you might come across F-NFTs, include:
- In digital art – F-NFTs, like non-fractionalized counterparts, have close ties to the digital art world. In fact, many notable pieces, including the likes of Doge NFT, Harambe NFTs, and even the Wen project (a cryptocurrency, based on an F-NFT, based on a poem) have found their way into the modern art scene.
- In real estate – That’s right, you can even invest in the fractionalized ownership of a property. Platforms like Lofty allow buy-in with as little as $50, removing some of the traditional barriers to investment property ownership.
- In collectibles and sports memorabilia – Traditional favorites, like trading cards, first edition books, and even cars are all going digital. This market is growing so rapidly that the retail giant Amazon, jumped with a considerable investment in the fractionalized trading cards marketplace Dibbs, in 2021.
- In gaming – Popular metaverse games, like The Sandbox and Decentraland, have embraced a decentralized market, with players coming together to buy fractions of lands, custom games, experiences, and more.
Is Co-Owning Digital Assets a Game-Changer or Just Hype?
Fractional NFTs are democratizing ownership of NFTs. As the popularity of NFTs continues, the price of owning a single NFT is increasingly becoming expensive. For instance, Beeple’s collection of 5,000 NFT pieces of artwork that sold for $69 million. With fractional NFTs, democratized ownership is a possibility such that even as the bidding price of NFTs increases, market activity around that NFT remains relatively high as more people can participate at lower prices.
But, that doesn’t mean the system is perfect. Here’s a quick rundown of the benefits of fractional ownership of NFTs and the potential risks involved:
Pros
Very low cost of entry
More accessible for beginner investors who cannot afford multi-million dollar NFTs
Can be traded like regular fungible tokens
Allows for co-ownership within communities and other DAOs
Some F-NFTs offer the chance to earn royalties or engage in profit-sharing
Offers greater liquidity for high-value assets
More transparent ownership structure
Cons
Potential legal issues, centred on publicity, IP (Intellectual Property), as well as contract issues
Lots of regulatory uncertainty, with F-NFTs being considered securities in some jurisdictions
Owning a piece of an NFT does not guarantee full usage rights or decision-making power
Smart contracts are at risk of bugs, exploits, or rug pulls
Selling can be difficult when demand is low
Market value is highly subjective
Where Can You Safely Buy Fractionalized NFTs?
Several platforms have emerged to enable the fractionalization of NFTs.
These include Niftex, which was one of the first NFT projects to allow users to launch fractionalized NFTs. You can also use DAOfi (a fork of Uniswap that allows for trading fractionalized NFTs) or Fractional (a platform that allows users to mind fractionalized NFTs).
More widely known platforms are also slowly starting to embrace this new type of token investment. KuCoin was closely involved with the hiBAYC project, and you can easily buy WEN tokens (linked to the “Wen” meme NFT) on Coinbase.
- International exchange with hundreds of different cryptos
- Extremely simple sign-up process
- Very high level of security
- Users can invest in the success of KuCoin through KuCoin Shares
Users can invest in the success of KuCoin through KuCoin Shares
Integration with Arwen allows users to trade without depositing their funds to a third party wallet
KuCoin’s dedication to quickly adding new, innovative crypto assets means users have access to a large number of trading pairs
Can be difficult to use for crypto newcomers as it is a Crypto-only exchange
KuCoin does not have the trading volumes found at some of the more established platforms
How to Fractionalize an NFT and Take Advantage of the Benefits
Fractionalizing an NFT means “splitting” it into smaller, tradable parts that multiple users can buy to own a piece of the whole. If you wanted to do this to an asset, you would first need to own the NFT. Then, lock it into a smart contract on one of the above-mentioned fractionalized platforms, where ERC-20 tokens can be issued to represent shares.
If you’re on the other end of the transaction, buying a F-NFT usually involves the following:
- Choose a decentralized NFT marketplace that supports fractionalized investment.
- Connect your wallet (CryptoVantage tip: Make sure you use a Web# wallet, like the Coinbase wallet for this step. Also, ensure that you have enough ETH to cover any gas fees that might come up).
- Browse the options and pick one that appeals to you (be sure to check the total supply, price per token, and underlying asset).
- Buy the fractionalized token.
From there, you can hold your tokens, trade them, or in some cases, resell them on a secondary market.
Is Shared NFT Ownership a Good Investment?
If you’re looking for an in with the expensive world of NFTs, fractionalization is definitely the option with the lowest barrier to entry, cost-wise. This type of investment is also a great option for crypto enthusiasts who want to broaden their portfolio with a brand new category of assets. Plus, in many cases, it gives you the chance to own a little bit of pop culture history. However, if you’re worried about regulatory compliance, long-term returns, or prefer more stable investments, it might be best to look elsewhere.
The Big Picture: How Digital Assets Are Becoming More Accessible
There you go, you should now know what is fractional NFT and how the process works to make NFT ownership and tradability a much more accessible and sustainable practice for investors around the globe. Just remember to do your research before you invest to ensure that your F-NFTs can properly bolster your portfolio. And, with the way that these spilt assets are finding their way into new industries every day, it might just be the ideal way for you to own your own little slice of the huge crypto pie.
Non-fungible tokens come in many different forms, but they can generally be broken down into three main categories: Collectible NFTs, Utility NFTs, and Tokenized NFTs. They can be categorized as follows:
- Collectible NFTs – these represent unique digital assets and are perhaps the most popular type of asset. Think Bored Ape Yacht Club or CryptoPunks
- Utility NFTs – these tokens offer benefits and features beyond just digital ownership. This includes things like play-to-earn rewards in games, some DeFi protocols, and more.
- Tokenized NFTs – these represent partial ownership of real-world financial assets, like digital art pieces, real-estate shares, or even music and poetry.
Fractional shares, similar to F-NFTs, allow you to buy a portion of a single share of a company. So, while Coinbase (the platform) does not yet support the purchases of fractionalized tokens, you can buy fractionalized shares in the company. COIN is a publicly traded company, and you can own a portion of the shares in this company via third-party platforms, like Robinhood, that allow for fractionalized investing.
In this context, the “f” usually stands for fractionalized”. A Fractionalized non-fungible token is an NFT that has been split into smaller, more affordable parts. Essentially, this turns a non-fungible token (one that is unique and not interchangeable) into a fungible token, which can be traded more easily.
Yes, many web3 platforms will allow you to purchase and trade fractionalized NFTs. This allows you to own a portion of a whole NFT, something like a famous piece of digital art, collectible game item, a virtual plot of land, digital music or video, or even trading cards.
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