The industry's innovators have pushed beyond the limits of what's possible for NFTs, including chances for fractional ownership.
Non-fungible tokens, or NFTs, mark the next phase of decentralized and asset ownership. Although NFTs are one-of-a-kind tokens that cannot be duplicated, this exclusivity significantly restricts what NFT holders can do with their holdings. As a result, the industry's innovators have pushed beyond the limits of what's possible for NFTs, including chances for fractional ownership.
What is a fractional NFT?
The term "fractional NFT" (F-NFT) refers to a single NFT that has been divided into smaller pieces, enabling various investors to acquire a part of its ownership.
For example, one of the most popular fractional NFTs is the Doge NFT, which portrays Kabosu, a rescued Shiba Inu. Atsuko Sato, the owner of Kabosu, did not plan for her pet's pictures to become popular when she took them. But, those pictures led to the creation of dogecoin, a cryptocurrency featuring the face of a dog as its symbol, by software engineers Billy Markus and Jackson Palmer.
Her pet meme became well-known as well. Atsuko Sato sold the meme as an NFT in June 2021 at an auction for a record-breaking $4 million. The NFT was later fractionalized into 17 billion "$DOG" tokens. This helps interested collectors to easily acquire a portion of the Doge NFT.
Fractional NFTs vs Traditional NFTs?
Simply explained, a regular NFT is a whole thing, whereas an F-NFT only reflects a piece of the original NFT asset.
Traditional NFTs are often owned by a single buyer or a group of NFT collectors. F-NFTs, on the other hand, are owned jointly by a number of investors.
NFT fractionalization has removed entrance barriers and increased accessibility for enthusiastic users in the NFT sector. This method of investing is also employed in the metaverse and in non-traditional investment fields like real estate and fine art.
It is crucial to highlight that the fractionalization process can be reversed, and F-NFTs can be converted back into a complete NFT. The smart contract that fractionalizes an NFT often includes a buyout option which enables an F-NFT investor to buy all of the fractions and recover the original NFT.
An F-NFT holder can start the buyout option by transferring a particular number of ERC-20 tokens from a collection back to the smart contract, which will begin a buyback auction for a predetermined period of time. This allows the remaining F-NFT holders time to decide. When the buyout finishes, the fractions are immediately returned to the smart contract, and the buyer obtains full ownership of the NFT.
How do fractional NFTs work?
An NFT is simply a token that follows Ethereum's ERC-721 standard. Before the NFT can be fractionalized, it must first be locked in a smart contract, which is just a program stored on the blockchain and coded to execute automatically when certain conditions are satisfied.
The smart contract then divides the ERC-721 token into numerous fractions in the form of ERC-20 tokens based on the instructions provided by the NFT owner. The owner specifies the number of ERC-20 tokens that will be produced, as well as their price, metadata, and other features. Each fraction, or ERC-20 token, represents a portion of ownership in the whole NFT. The fractions are then put available for sale at a preset price for a specified length of time, or until they are sold out.
Assume we could fractionalize Edvard Munch's well-known piece The Scream, which sold for almost $120 million at Sotheby's in 2011. Due to the extraordinarily high cost, only a small group of extremely wealthy investors would be able to bid on an NFT representing the piece of art. If an NFT of The Scream were fractionalized into 10,000 ERC-20 tokens using a smart contract, it would be possible to purchase a portion of the famous artwork for just $12,000 each, which is substantially less expensive and would attract purchasers more easily.
Keep in mind that NFTs and fractionalized NFTs aren't exclusive to the Ethereum network. Fractionalization can be implemented on any blockchain network that supports NFTs and smart contracts.
Why are fractional NFTs useful?
Democratization
Smaller investors may be unable to join because of the exorbitant costs of some NFTs. By fractionalizing a costly NFT, it can be made more affordable and accessible to a broader range of investors. It is critical to remember that when the price of an NFT rises, so do the values of all of its fractions. Each fraction's value drops if its value falls unexpectedly, which occurs regularly in the crypto market.
Price discovery
Fractionalized NFTs can provide solutions to identifying the value of a specific NFT. Because fractionalized ERC-20 tokens are publicly traded, their prices can be used to approximate the cost of a tokenized item.
Liquidity
The main characteristic that distinguishes NFTs is that each token is unique and cannot be duplicated or divided. NFTs, particularly the more valuable ones, are only available to a small number of affluent investors because of their scarcity. F-NFTs mitigate this lack of liquidity because ERC-20 tokens can be easily swapped in secondary marketplaces. Many investors may be keener to buy fractions of an NFT right away, at a reduced price, relieving market liquidity concerns, rather than waiting weeks or months for a single NFT to sell.
To conclude, the concept of fractional NFTs is still in its early stages, but it appears to be the next big thing in the ever-expanding crypto sector. It opens up the market to a much larger pool of investors, ensuring that F-NFTs will drive the next wave of asset ownership. The NFT industry continues to grow in popularity and demand, and we can expect to see more intriguing breakthroughs and use cases as blockchain technology matures further.
Disclaimer: The information herein is for reference purposes only and should not be considered financial, investment, or trading advice. Please conduct your own research and due diligence before making investment decisions. You understand that you are using the Information provided at your own risk.