Anyone who has been following the NFT craze knows their main feature is their guaranteed exclusive ownership. With NFTs booming, there is no shortage of headlines covering what they are, not to mention their crazy valuation even as the mainstream adopts the idea.
As new waves of NFTs emerge almost every day, innovators in the space continue to push the boundaries of what is possible in NFTs. Adding to the fun and simplicity that most NFT innovations espouse, a new frontier of fractional ownership of NFTs is emerging.
It seems NFT 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.
What is a Fractionalized NFT?
Fractionalized NFTs are forging the next chapter of this fast-growing sector in crypto, blockchains, and decentralization. NFT fractionalization is simply the act of dividing the ownership of an NFT into smaller fractions. This makes it possible for several people to own a single NFT.
Given that an NFT, unlike a cryptocurrency, is a non-fungible token, meaning it cannot be exchanged for any other asset of its likeness, fractional NFTs push the boundaries by making it possible to divide ownership of an NFT. For instance, if you have the original painting of the famous Mona Lisa, not only is it impossible to exchange that painting for another type of painting, but it is also impossible to divide that painting into smaller pieces.
With fractionalized NFTs however, several people can own a piece of the same rare item. Here is how it works.
Fractionalized NFT Overview
Fractionalized NFTs are forging the next chapter of this fast-growing sector in crypto, blockchains, and decentralization. NFT fractionalization is simply the act of dividing the ownership of an NFT into smaller fractions. This makes it possible for several people to own a single NFT.
Given that an NFT, unlike a cryptocurrency, is a non-fungible token, meaning it cannot be exchanged for any other asset of its likeness, fractional NFTs push the boundaries by making it possible to divide ownership of an NFT. For instance, if you have the original painting of the famous Mona Lisa, not only is it impossible to exchange that painting for another type of painting, but it is also impossible to divide that painting into smaller pieces.
With fractionalized NFTs however, several people can own a piece of the same rare item. Here is how it works.
How Do Fractionalized NFTs work?
Fractionalized NFTs are the new sensation and they are enabled by smart contracts.
We will 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, and the ERC20 standard is used to create fungible tokens. A fungible token could be created to represent fungible items such as gold, money, or any other commodity in the physical world. A non-fungible token on the other hand can be used to represent any rare item such as a collectible game card, a trophy, or a house.
Given that a fungible token is flexible such that it 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 of an NFT can be created, and the smart contract can secure the data that differentiates the fractional NFT from other NFTs. This idea can also be applied on any blockchain network that supports smart contracts and NFTs such that the NFT is locked in a smart contract on the blockchain and ownership of the NFT is represented by multiple fungible tokens whose supply is governed by the smart contract.
Are Fractionalized NFTs necessary?
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, not all NFTs can attract the level of market excitement and activity that was realized by 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. Even if one of the owners of that NFT decides to sell, their move won’t affect the overall value held by other stakeholders.
Fractional NFTs also bring about a great deal of liquidity to the NFT marketplace. While NFTs are hot right now, their non-fungibility will ultimately lead to a lack of liquidity on most of the NFT marketplaces popping up right now. With fractional NFTs, liquidity can be sustained whereby smaller investors can participate as opposed to only having the participation of a few deep-pocketed collectors. The fungible tokens created by the smart contract to represent ownership in the NFT can be traded on other secondary platforms to further add liquidity.
Lastly, NFTs are necessary as they enable price discovery of NFTs. Price discovery is the process through which a market goes through to set the proper price of an asset.
Where Can You Buy Fractionalized NFTs?
Several platforms have emerged to enabled 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).
Risks Involved in Fractional Ownership of NFTs?
Fractional NFTs are helping increase inclusion and participation in the booming NFT space; however, fractionalized NFTs bring to the fore several legal issues.
These include rights of publicity, IP (Intellectual Property) issues as well as contract issues. Financial regulators may deem the fungible tokens fractionalizing an NFT as securities.
