What are Fractional NFTs and How Do They Work?

by Oct 8, 2023NFTS Metaverse0 comments

Non-fungible tokens (NFTs) have taken the world by storm, creating a new paradigm for digital ownership and creativity. NFTs are unique and indivisible digital assets that are stored on a blockchain, such as Ethereum. They can represent anything from art, music, games, collectibles, and more. However, NFTs also have some limitations that prevent them from reaching their full potential. One of these limitations is the high cost of acquiring and owning an NFT. Some NFTs are worth millions of dollars, making them inaccessible to most people. Another limitation is the lack of liquidity and divisibility of NFTs. Once you buy an NFT, you can only sell it as a whole, which may not be desirable or feasible for some owners. This is where fractional NFTs come in. Fractional NFTs are a new innovation that aims to solve these problems by breaking down an NFT into smaller pieces, allowing multiple people to own a share of the same NFT. In this article, we will explain what fractional NFTs are, how they work, what are their benefits and challenges, and where you can buy them.

What are Fractional NFTs?

Fractional NFTs

A fractional NFT (F-NFT) is an entire NFT broken into smaller fragments, allowing several people to claim ownership of a piece of the same NFT. For example, imagine an NFT that represents a painting by a famous artist. Instead of buying the whole painting for a huge amount of money, you can buy a fraction of it for a much lower price. This way, you can own a piece of the painting without spending a fortune.

Fractionalizing an NFT is done using a smart contract that generates a predefined number of tokens linked to the original indivisible NFT. These tokens are called fractional tokens or F-Tokens. They are fungible tokens that follow the ERC-20 standard or other similar standards on different blockchains. F-Tokens can be traded on various platforms and marketplaces, just like any other cryptocurrency.

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The original NFT is stored in a vault or a trustless escrow that is controlled by the smart contract. The smart contract ensures that the ownership rights and governance rules of the fractionalized NFT are respected and enforced. For example, the smart contract can determine how fractional owners can vote on certain decisions regarding the NFT, such as selling it, lending it, or displaying it.

How do Fractional NFTs Work?

Fractional NFTs

The process of fractionalizing an NFT involves several steps:

  1. The owner of an NFT decides to fractionalize it and sets the parameters for the fractionalization, such as the number of F-Tokens to create, the price per F-Token, the minimum and maximum purchase amount, the duration of the sale, and the governance rules.
  2. The owner transfers the NFT to a vault or an escrow that is controlled by a smart contract. The smart contract verifies the authenticity and ownership of the NFT and locks it in the vault.
  3. The smart contract creates and distributes the F-Tokens according to the parameters set by the owner. The F-Tokens are sold to interested buyers who want to own a share of the NFT.
  4. The buyers receive their F-Tokens in their wallets and become fractional owners of the NFT. They can trade their F-Tokens on various platforms and marketplaces or hold them for future appreciation.
  5. The fractional owners can exercise their rights and responsibilities regarding the NFT through the smart contract. For example, they can vote on whether to sell the NFT or not, or they can lend or borrow their F-Tokens to earn interest or access liquidity.

What are the Benefits and Challenges of Fractional NFTs?

Fractionalizing an NFT has several benefits and challenges for both the original owner and the fractional owners:

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Benefits

  • Accessibility: Fractionalizing an NFT lowers the entry barrier for owning an NFT by making it more affordable and attainable for average collectors. For example, instead of paying $69 million for Beeple’s Everydays: The First 5000 Days, you can pay a fraction of that amount and own a piece of it.
  • Liquidity: Fractionalizing an NFT increases its liquidity by creating a larger and more diverse market. Instead of selling the whole NFT at once, which may be difficult or undesirable, you can sell your F-Tokens anytime you want at your preferred price.
  • Diversification: Fractionalizing an NFT allows you to diversify your portfolio by owning multiple pieces of different NFTs instead of one single NFT. This way, you can reduce your risk exposure and benefit from different market trends.
  • Community: Fractionalizing an NFT creates a community of like-minded collectors who share a common interest and passion for the same NFT. You can interact with other fractional owners, exchange ideas, and collaborate on various projects related to the NFT.

Challenges

Fractionalizing an NFT also has some challenges and drawbacks that need to be considered:

  • Complexity: Fractionalizing an NFT involves a complex and technical process that requires a good understanding of smart contracts, blockchain, and cryptography. You also need to trust the smart contract and the platform that handles the fractionalization, as they may have bugs, vulnerabilities, or malicious intentions.
  • Regulation: Fractionalizing an NFT may raise some legal and regulatory issues, such as taxation, securities laws, intellectual property rights, and consumer protection. Depending on the jurisdiction and the nature of the NFT and the F-Tokens, you may need to comply with different rules and regulations that may affect your rights and obligations as a fractional owner.
  • Reconstitution: Fractionalizing an NFT may make it difficult or impossible to reconstitute it back to its original form. For example, if you want to sell or redeem your F-Tokens for the whole NFT, you may need to buy back all the F-Tokens from other fractional owners, which may be costly or impractical. Alternatively, you may need to convince them to agree to sell or burn their F-Tokens, which may not be easy or feasible.
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Where Can You Buy Fractional NFTs?

There are several platforms and marketplaces that allow you to buy and sell fractional NFTs. Some of the most popular ones are:

  • Fractional.art: A platform that enables anyone to create and trade fractionalized NFTs. It supports various types of NFTs, such as art, music, gaming, and sports. It also has a governance system that allows fractional owners to vote on certain actions regarding the NFT.
fractional.art
  • NIFTEX: A platform that allows you to create and trade shards of NFTs. Shards are ERC-20 tokens that represent fractions of an NFT. You can also create liquidity pools for your shards and earn fees from trading.
niftex
  • DAOfi: A platform that leverages decentralized autonomous organizations (DAOs) to manage fractionalized NFTs. Each DAO is composed of fractional owners who can vote on various proposals related to the NFT, such as selling it, lending it, or displaying it.
DAOfi
  • Unicly: A platform that allows you to create and trade collections of fractionalized NFTs. You can combine multiple NFTs into a single collection and issue uTokens that represent fractions of the collection. You can also stake your uTokens to earn rewards.
Unicly

Conclusion

Fractional NFTs represent a groundbreaking solution to the challenges faced by traditional NFT ownership. By dividing NFTs into smaller, tradable fractions, they enhance accessibility, liquidity, and portfolio diversification. Through smart contracts, fractional owners can actively participate in NFT governance. However, this innovative concept also brings complexity and regulatory considerations. Careful assessment and compliance are essential for potential investors. As fractional NFT platforms continue to evolve, they hold the potential to reshape the NFT landscape, fostering a more inclusive and dynamic NFT ecosystem.

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