Alexis Kestler
Hey there! Have you heard about fractional NFTs? As a blockchain enthusiast myself, I think they are one of the most exciting innovations in the NFT space recently.
In this guide, I‘ll explain everything you need to know about fractional NFTs—what they are, how they work, benefits, use cases, challenges, and top platforms. My goal is to help you gain a solid understanding of this emerging technology.
So let‘s get started!
What are Fractional NFTs?
First, a quick primer on NFTs.
Non-fungible tokens (NFTs) are cryptographic assets that represent ownership of unique digital or physical items like art, collectibles, real estate etc. Each NFT is individually distinct (non-fungible) and recorded on a blockchain ledger.
Now, on to fractional NFTs!
Fractional NFTs refer to owning only a portion of an NFT‘s value rather than the entire thing. The NFT is split into small fractions or shares.
For example, suppose a rare CryptoPunk NFT is valued at $100,000. Instead of requiring a single buyer to own it entirely, it can be divided into 10,000 fractions worth $10 each. Multiple investors can buy these affordable fractions to collectively own the NFT.
According to market data site DappRadar, the fractional NFT market recently surged to around $32 million in sales. The most expensive fractionalized NFT collection currently is Doge NFT based on the popular Doge meme.
| Fractional NFT Collection | Market Cap |
|---|---|
| Doge NFT | $11.5 million |
| CryptoPunks | $5.5 million |
| Bored Ape Yacht Club | $4.2 million |
| Cool Cats | $2.1 million |
As you can see, fractionalization is breathing new life into the NFT market by improving accessibility. But how does it actually work under the hood? Let‘s find out.
How Fractional NFTs Work
The blockchain magic enabling fractionalization relies on smart contracts.
Original NFTs follow the ERC-721 standard on Ethereum. These tokens are non-fungible by design – they cannot be subdivided or split into fractions.
Fractionalization works by locking the NFT in a smart contract. This contract splits the ERC-721 into fractions represented as ERC-20 tokens.
ERC-20 is a fungible token standard supporting divisibility. So the fractional NFT shares become regular ERC-20 tokens that can be traded freely.
The NFT owner specifies the fractionalization parameters like number of fractions and price per fraction.
For example, 10,000 fractions at $10 each for a $100,000 NFT. The fractional tokens are then minted by the smart contract.
These fractions can be recombined in the future through another smart contract operation if desired. Burning the fractional tokens reconstitutes the original NFT.
So in summary, smart contracts enable fractionalizing NFTs into tradeable ERC-20 tokens that represent fractional ownership. Pretty neat!
Now that you know how fractionalization works technically, let‘s compare it to regular NFT ownership.
Fractional NFTs vs Full NFT Ownership
The core innovation of fractional NFTs is the concept of partial ownership. Some key differences versus full ownership:
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A standard NFT has only one owner who controls the entire asset. Fractional NFTs enable shared ownership by splitting into portions.
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Each fractional owner possesses a percentage stake in the NFT‘s total value based on their share holdings. Full NFT owners have complete claim.
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Trading whole NFTs suffers from illiquidity due to high value. Fractional shares unlock liquidity by allowing smaller traders.
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Fractionalization helps determine fair valuation through market pricing of shares. Full ownership relies on speculative pricing.
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Owning fractions across different NFTs provides portfolio diversification. Complete ownership concentrates risk in a single NFT.
In essence, fractional NFTs lower barriers, improve liquidity, enable shared ownership and aid price discovery compared to full ownership.
This innovation unlocks some compelling benefits which we will examine next.
Benefits of Fractional NFT Ownership
Here are some of the major advantages fractionalization introduces:
Increased Liquidity
Illiquidity is a huge pain point for large NFTs. Finding buyers for expensive assets often takes a lot of time and effort.
Fractional NFTs fix this by splitting ownership into affordable shares that attract a much wider pool of investors.
Smaller fractional owners are more active in trading their portions as entry and exit requires lower capital. This results in rapid turnover and improved liquidity.
According to fractionalization platform PartyBid, liquidity for fractionalized NFTs can be 40X higher than whole NFTs. Trading volume surges because small buyers can participate.
This ease of entering and exiting positions benefits both buyers who enjoy flexibility and sellers who can exit quicker.
In summary, fractionalization may be the antidote needed to cure NFT illiquidity by opening the floodgates to smaller traders.
Improved Price Discovery
Another major advantage of fractional NFTs is efficient price discovery. Determining true valuation is hugely problematic for new NFT projects.
Instead of blindly guessing an initial price, creators can first fractionalize a portion of their NFT collection and let the market decide.
Selling 10% fractional supply provides a strong signal of what people are willing to pay. This data anchors pricing strategy for the full collection.
Additionally, fractionalization also enables better ongoing valuation for existing NFTs. Projects can periodically sell fractions to gauge the current market.
Overall, fractional shares serve as a valuable market testing mechanism for both new and existing NFTs. This results in prices better reflecting true demand.
Diversification
Fractionalization also allows smaller investors to enjoy the diversification benefits of NFTs.
Earlier, everyday investors could only own lower priced full NFTs. But now, fractions provide exposure to expensive blue chip NFTs.
With a $1000 budget, you could either:
- Buy one $1000 NFT
Or
- Buy ten $100 fractional shares across different NFTs
The second strategy offers superior diversification. Even if some fractions drop in value, the overall portfolio risk is reduced significantly.
Diversification is a proven investing strategy used by the ultra wealthy. Now fractional NFTs finally make it accessible to regular crypto enthusiasts.
Use Cases for Fractional NFTs
The benefits of fractionalization span across many industries. Here are some major use cases:
Gaming
Play-to-earn blockchain games like Axie Infinity gained immense popularity in 2021. These games reward players with NFTs that can be traded or sold.
But the rarest NFT gear and characters can be extremely expensive for most gamers.
Fractionalization solves this by allowing developers to distribute fractions of these rare items to users. Players also find it easier to own fractions of desired gaming NFTs.
For instance, Axie Infinity is experimenting with fractionalizing its ultra rare Axis NFT to improve accessibility across its playerbase.
By expanding ownership, fractionalization has the power to supercharge adoption of NFT gaming.
Metaverse Virtual Worlds
Metaverse refers to vision of interconnected virtual worlds combining digital and physical realities.
Blockchain-based metaverse environments like Decentraland and The Sandbox rely heavily on using NFTs to represent virtual assets.
For example, in Decentraland, users can buy virtual land parcels as NFTs and monetize them. But the most sought after land parcels can trade for astronomical prices.
Again, fractionalization allows smaller investors to own a slice by distributing land NFT fractions. This results in more inclusive participation and ownership within metaverse worlds.
Similarly, The Sandbox sells virtual land and assets as NFTs. Fractionalization makes these more accessible as well.
By enhancing access to virtual worlds, fractional NFTs have become key to strengthening metaverse adoption.
Physical Asset Ownership
NFT fractionalization also extends to physical assets like real estate.
For instance, platforms like Lofty AI and RealT tokenize real estate properties as NFTs on blockchain. Investors can buy fractional shares starting as low as $50.
This provides an opportunity to co-own assets like vacation homes and apartment buildings at reasonable investment levels.
Additionally, fractional ownership of physical assets unlocks global exposure. It also provides instant liquidity versus traditional illiquid real estate.
While still early, fractional NFTs show promise for revolutionizing investment access across both digital and physical asset categories.
Now that we‘ve seen the benefits, let‘s also examine some challenges.
Challenges Facing Fractional NFTs
As with any new technology, there are some limitations to consider:
Market Volatility
Recall that increased liquidity can be a double-edged sword. When sell-offs happen, fractional NFT markets can face severe volatility.
Since fractional shares are easy to trade, investor panic may trigger cascading waves of selling. Prices can spiral downward rapidly during such liquidity crises.
Projects must take countermeasures like trading limits or holder incentives to prevent and recover from volatility episodes.
Regulatory Uncertainty
Like broader crypto, regulatory treatment of NFTs remains unclear. How they will be classified has major implications.
If deemed securities, fractional NFT platforms may need to adhere to strict compliance requirements like KYC rules, accredited investor criteria etc. This could hamper adoption until clearer guidelines emerge.
Additionally, tax policies regarding fractional NFT income and gains are still undefined. More regulatory clarity is needed to fully mainstream fractionalization.
Copyright Concerns
Easy NFT minting opens the door to intellectual property theft and fractionalization of unauthorized content.
For example, someone could steal digital art and produce fake fractional NFT shares. Or fractions may be overissued beyond total supply if coding is buggy.
Robust protections are required to maintain integrity. Investors should independently verify fractional NFTs for originality and authenticated supply before purchasing.
While obstacles exist, the overall trajectory of fractional NFTs remains exciting. Let‘s look at some leading platforms next.
Top Fractional NFT Marketplaces
Here are some of the top players in the fractionalization arena currently:
Otis
Otis is a platform for investing in fractional shares of alternative assets like NFTs, crypto, wine etc. The user-friendly mobile app makes getting started with fractional NFTs easy.
Everything is managed conveniently in one place. Key features include portfolio diversification, fractional ownership of expensive NFTs, and instant liquidity when selling assets.
Otis aims to open up alternative investing to wider audiences beyond just the ultra wealthy. Fractional NFTs are a core part of this mission.
Unicly
Unicly offers a protocol to fractionalize, combine and trade NFTs on Ethereum. Users can deposit existing NFTs into Unicly vaults to fractionalize them into tradeable ERC-20 tokens automatically.
Unicly also enables meta-governance capabilities like trustless NFT bundling. This allows pooling together and jointly managing different fractionalized NFTs.
The protocol has its own UNIC governance token that allows community voting on platform upgrades. Overall, Unicly brings advanced features to fractionalization.
Fractional.art
Fractional.art focuses specifically on fractionalizing sought after art NFT collections. It provides shared ownership and community governance of digital artworks.
The protocol incentivizes creators to fractionalize their art by rewarding them with a cut of the shared revenue. Curators can also earn yields for locking their art NFTs.
Fractional.art aims to be a next-gen marketplace for fractionalized rare digital art ownership and monetization.
Nftfy
Nftfy makes creating fractional NFTs easy through its "one click" solution. Users can stake ERC-20 tokens to generate fractionalized derivative NFTs of popular collections.
The fractionalization protocol is cross-chain compatible supporting networks like Ethereum, Polygon, Solana etc.
Nftfy aims for simplicity and flexibility. It allows new fractional NFTs to be spawned instantly without smart contract coding.
The Bright Future of Fractional NFTs
There is little doubt that fractionalization is opening up tremendous new possibilities in the NFT arena.
Lowering barriers to blue chip NFT investing provides clear utility to smaller traders. The ability to own fractions across diverse NFT categories also enables improved portfolio diversification.
And fractionalization unlocks latent value from existing NFTs by radically enhancing liquidity and enabling new shared ownership models.
This innovation is already demonstrating powerful benefits across digital collectibles, metaverse assets, blockchain gaming, physical real estate and more.
Adoption is still early but accelerating quickly. In 2022, more advanced applications will emerge across DeFi, DAOs, crowdsourcing etc.
While some challenges around volatility and regulations exist, the overall trajectory seems highly promising. NFT fractionalization may well become a dominant investment model in years to come.
So in summary, fractional NFTs have immense potential to usher in the next evolution of digital asset ownership! The opportunities are only limited by imagination.
I hope you found this deep dive on fractional NFTs valuable. Let me know if you have any other questions! I‘m always happy to chat more about blockchain innovations with fellow enthusiasts.
Have a great rest of your day!
