Fractionalized NFTs are NFTs split into smaller pieces under the permission of their original owners. Therefore, people are enabled to own part of an NFT that would otherwise be unaffordable. On the other hand, fractionalized NFTs enables the owner to release some of the value in their NFT without selling it fully.
As you already may know, NFTs, also known as non-fungible tokens, are unique digital assets built on a blockchain like Ethereum. Every item in the real life can be turned into an NFT, including art, in-game items, physical items, and domain names; some cheaper and some very expensive. Some of the most popular NFTs like CryptoPunks cost millions of dollars. And for most people, this makes them inaccessible to own. Fractionalized NFTs could be a solution to the problem.
What is a Fractionalized NFT (F-NFTs)?
NFTs are unique and have only a single owner at a time. Fractionalized NFTs were suggested to allow NFT owners to mint tokenized fractional NFTs and share the ownership of the asset with others. At times, assets like real estate or a luxury yacht with high values could not be owned by only one person. Fractional NFTs may play a massive role to solve the problem and allow people to invest a small sum of money to gain fractional ownership of a high-priced asset.
Fractional NFTs provides the opportunity to everyone to own a high-value asset at a low cost. For example, on Ethereum, owner of an NFT fractionalizes it by dividing the ERC-721 token into multiple ERC-20 tokens. Hence, each ERC-20 token becomes a fractional NFT of the asset. Therefore, it would be possible for anyone to partially own iconic NFTs like CryptoPunks (one of the most expensive NFTs sold).
How Does NFT Fractionalization Work?
As you know, NFTs are Non-Fungible tokens that are made to be indivisible. They use Ethereum’s ERC-721 standard. For an NFT to become fractionalized, it must first be locked in a smart contract, a program stored on the blockchain. The smart contract is coded to execute automatically when predetermined conditions are met. Therefore, fractionalization is only possible if a number of ERC-20 fungible tokens are linked to a single NFT. Notice that ERC-20 tokens are fungible Ethereum tokens that can be exchanged for another of their kind without losing value, like ETH cryptocurrency.
The NFT owner outlines all instructions about the number of ERC-20 tokens to be created, their price, metadata, and other properties. Thus, each fraction, or ERC-20 token, represents partial ownership of the entire NFT. The owner can put these fractions for sale at a fixed price for a set period, or until they are sold out. Doge NFT is an excellent example of this.
Note that NFTs and fractionalized NFTs are not just limited to the Ethereum blockchain. Fractionalization is possible in any blockchain network that supports smart contracts and NFTs. Networks such as Polygon (MATIC), Cardano (ADA) and Solana (SOL) all support smart contracts and support fractionalization.
What are the benefits of NFT fractionalization?
Fractional ownership led to a revolution and opened up new horizons in the NFT realm, and allowed more people to invest in NFTs. However, there are more benefits to NFT fractionalization:
- Price Discovery: One of the most significant advantages of F-NFTs is to help you assess the market value of the NFT easier. Therefore, if you have digital artwork and need to understand the market value, you just need to fractionalize the NFT and sell 10–20% on the market.
- Enhanced Liquidity: Fractionalization seems to answer liquidity issues that come with NFTs. When you are selling a high-priced NFT, you need to wait for a longer time to get offers from the investors who can afford to buy a high-value asset. But with F-NFTs, you can divide the ERC-721 token into multiple ERC-20 tokens and, then, sell each token individually. Hence, one can generate a lot of interest for the asset and address the liquidity issue to a large extent.
- Democratizing Investment: The NFT market has largely intimidated small and medium investors from participating in high value NFT trades. As NFT assets are mainly high-priced and high-valued items, most normal investors do not get the chance to offer to buy such assets and only a few investors can afford to buy them. To solve the problem factionalized NFTs was developed to provide more opportunities for small and medium investors in the NFT market, which were previously exclusive to a small set of people.
- Curator Fees: The original NFT owner who divides the NFT into fractional NFTs stand to receive a curator fee annually. While the curator fee can be set and updated by the NFT owner, the cost is capped at a maximum price set by the governance to prevent high fees.
- Easy Monetization: Artists and NFT owners can easily monetize their assets through fractionalized NFTs.
- Blends NFTs with DeFi: If an NFT can be fractionalized in a liquid market, then they can also be used as collateral for a loan.
‘Feisty Doge’ NFT was one of the early successes of fractionalization. This is an image of the famous Shiba Inu showing the face of the Doge meme and Dogecoin. Initially, the NFT was bought in June 2021 for 13 ETH or around $35,000 at the time. Two months later, the NFT was fractionalized, and its value leveled up to over $80m in just a couple of days. Fractionalization of NFTs sure provides advantages for both original owners and share holders.
What NFTs are being fractionalized?
All NFTs can be functionalized on the Fractional website. Here are a few examples of famous NFTs being fractionalized:
- Cryptopunks: 10,000 unique 8-bit characters with randomly generated features
- Meebits: The 3D avatar successor to Cryptopunks designed for the metaverse
- Fidenzas: 999 unique generative art pieces
Where to buy fractionalized NFTs?
Several platforms are there to enable the fractionalization of NFTs. These include Niftex, which was one of the first NFT projects to allow users to launch fractional 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).
How to fractionalize an NFT?
Fractionalization makes it possible to split the ownership of the NFT, not the NFT itself. Imagine two people who own a building without the building itself being physically divideed in half. F-NFTs also work like that. As we already discussed, ERC-721 tokens are locked up in a smart contract, and ERC-20 fungible tokens are provided to make fractionalization possible.
There are some marketplaces that allow the fractionalization of NFTs. One of these leading marketplaces is fractional.art, also known as Fractional. It is a decentralized protocol that enables NFT holders to fractionalize tokens individually or on a pooled basis. Here are the steps to fractionalize an NFT on fractional.art.
- Go to fractional.art, connect your Web3 wallet, like MetaMask; click on the “Fractionalize” button at the top of the website.
- A new window pops up that requires you to choose the NFT or NFTs you want to fractionalize. Here the NFT(s) will lock in something called a “vault.” Knowing your vault’s name, you can decide about token supply, token symbol, reserve price, and management fee.
- Setting the details mentioned, press “Continue” to approve Fractional to transfer the given NFT(s). Confirm the approvals in your wallet and then make the transfers as needed.
- When the transfer is completed, press the “Fractionalize” button and confirm your final mint(s).
- Keep in mind that for baskets, every NFT will need to be approved and transferred separately before you can mint your ERC-20 tokens.
- Once your vault is live, go to “Settings & Actions” dashboard to edit its description, update its auction parameters, set the reserve price, even redeem the NFT, etc.
Fractional.art also considers certain rights reserved for buyers. For example, buyers can vote on the reserve price of the token(s) they own or use their fractional shares as they wish; they may gift their tokens, share their ownership with friends, or even airdrop them to members of their preferred NFT communities.
Future of Fractionalized NFTs
although the liquidity to ERC-20 and ERC-721 tokens are promised with many exchange systems, a new exchange needs to be developed for F-NFTs to validate the NFTs that need to be fractionalized. A new exchange created specifically for F-NFTs could help in asset authentication, smart contract fractionalization, and listing on the exchange.
As already mentioned, F-NFTs emerged to help solve the problem of small group investors since NFTs were selling for vast sums of money. Hence, the fractional NFT is created to offer more liquidity and allow small and medium investors to buy fractional NFTs of high-valued assets. But still, there is a lot of debate going on about the future of NFT.
The concept of fractional ownership is not entirely new. Complete ownership of high-value tangible assets such as real estate, private jets, etc., is next to impossible for retail investors without taking out a massive portion of their life savings. Fractional ownership of assets has made this more accessible, as now even small-time investors can get a piece of the asset that has the potential to provide many-fold returns in the near future.
Similarly, in the DeFi world, the ownership of NFT-based assets has remained as a whole until now. Fractionalized NFTs help solve this problem and provide investors with numerous benefits, as discussed in this article. Besides, it will encourage more people to start their NFT investment journey, as now they need not have thousands or millions lying around to invest in a popular NFT piece.