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What is a Fractional NFT and How is it Different?

Fractional NFT
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Do you want to own a part of an expensive NFT? Then, fractional NFT will do the trick for you.

The crypto industry is expanding faster, and non-fungible tokens (NFTs) play a prominent role. These tokens are used to represent a physical asset. Converting an asset to NFT helps to prove the ownership of that asset.

Popular NFTs available on the marketplaces are expensive. As a result, only wealthy investors buy such assets. Don’t worry; you can own a part of it with the help of fractional NFTs.

The market cap of fractional NFTs is around $32 million. The Doge NFT is the most expensive one, with a market value of more than $11.5 million.

First, let’s have a look at fractional NFT.

What is a Fractional NFT?

Fractional NFTs or F-NFTs are the smaller divisions of an entire NFT. Here, one NFT is divided into many parts. This division will allow more people to gain ownership instead of a single person.

Consider buying pizza with your friends, where each of you has an equal share. Here, the whole pizza can be considered a complete NFT. At the same time, each slice of the pizza represents the fractional NFTs.

You might know about the expensive NFTs available in the marketplace. Therefore, it is only feasible for a few people to own a single expensive NFT. As a result, fractional NFTs were introduced to solve this issue.

Sounds interesting, right?

Each owner of fractional NFTs receives ownership of their piece of NFT. The value of an NFT piece is calculated by dividing the total value of the complete NFT by the total number of divisions.

image-60
Source: Binance

In most cases, highly valuable NFTs have a higher number of divisions. These large numbers of divisions help to obtain more owners in a limited period.

In addition, it is easy for owners to trade their fractional NFTs as the price is low. Moreover, F-NFTs have higher liquidity and can be exchanged or traded on all major secondary marketplaces.

The Fractionalization of NFT helped the Doge NFT meme sell for nearly $4 million. In this case, this NFT was split into 16,969,696,969 parts.

As you know about fractional NFTs, let’s check how they work.

How Do Fractional NFTs Work?

NFTs are built using Ethereum’s ERC-721 standard. These tokens are non-fungible, and they cannot be divided.

Now you might think, how are fractional NFTs created? Let’s get straight into that!

First, the NFT that needs to be fractionalized is locked using a smart contract. These smart contracts then split the ERC-721 tokens into fractions of tokens that follow the ERC-20 standard.

The owner of the initial ERC-721 token provides the instructions related to the token fractionalization. The major instruction includes the price of each ERC-20 token, the number of tokens required, and other properties.

image-59
Source: fractional.art

Suppose an NFT art has a price of $1 million. In this case, only a few potential buyers will be available. To increase the probability of the sale, fractional NFTs can help.

So instead of finding a single buyer for a huge price, you can sell the NFTs in smaller parts. For example, you can divide that NFT into 1,000 ERC-20 tokens and sell them for $1,000 apart. At the end of the sale, you will be able to collect the required $1 million.

NFT fractionalization can sometimes result in the formation of millions of smaller parts. In this case, you can own an NFT part for as little as $1.

In addition, fractional NFTs create high liquidity in the marketplace. Moreover, now small and medium investors can also buy expensive NFTs.

Regular Vs. Fractional NFTs

The fractionalized NFTs allow you to own a small part of NFT. Here the major difference is the ownership criteria.

In the case of regular or traditional NFTs, you can only buy NFTs as a whole. Also, there will be only one owner for an NFT. In contrast, fractional NFTs allow multiple ownerships for a single NFT.

What if you want to reverse the F-NFTs back to the whole NFT? Don’t worry, it is possible. The NFT owner can choose the buyout option to convert their F-NFTs to the whole original NFT.

The buyout process is conducted through a buyback auction. Here, the fractional NFT owners are provided a limited time to decide and sell their ERC-20 tokens.

Benefits of Fractional NFTs

The benefits of fractional NFTs are as follows:

High Liquidity

The fractional NFTs come in handy for small investors. As a result, there will be many buyers and sellers.

In the case of a complete NFT, selling it is a big deal. Whereas the price is comparatively lower for F-NFTs, you don’t need to wait for a potential buyer. Here, you can trade your pieces of NFTs similar to trading cryptocurrencies.

buy-sell

Earlier, it took expensive NFTs days or even weeks to sell. With the introduction of fractional NFTs, the time duration is reduced to minutes.

Price Discovery

You can use fractional NFTs to determine the total worth of your whole NFT. That, too, without completely selling your NFT. Sounds interesting, right?

Suppose you are planning to find the price buyers are willing to pay for your NFT. In that case, you can fractionalize your NFT and sell 5% of it. Once sold, you can calculate the value of your whole NFT.

Price discovery helps NFT creators understand the demand in the NFT marketplace. Moreover, they can also try and test various NFT marketing based on price discovery.

Diversification

Diversification is considered one of the golden rules in the case of any valuable asset. It is commonly used in the stock market, real estate, and trading-related activities. Nowadays, this concept is also widely used in crypto-based assets.

Diversification

NFT diversification seemed to be an expensive deal before fractionalization. You can now use fractional NFTs as a tool for diversification.

For instance, suppose you are planning to allocate $1000 to buy an NFT. In this case, you have two options.

  1. Buy an NFT worth $1000.
  2. Buy ten different fractional NFTs for $100 each.

Which option will you choose? If you choose the second option, then that is a great choice. I’ll tell you why.

The second option provides good diversification for your NFT assets. Even if the value of one or two fractional NFTs goes to zero, you won’t be much affected. That’s the beauty of NFT diversification.

Now that we have discussed the advantages of F-NFTs let’s check their use cases in the real world.

Use Cases of Fractional NFTs

NFTs have a wide application in various crypto-based industries. The NFT represents a valuable crypto asset for its users. Let’s check the industries that will benefit from F-NFTs.

Gaming

NFTs have evolved into an important component of the gaming industry. Play-to-earn games reward their gamers in NFTs and cryptocurrencies.

gaming

The introduction of fractional NFTs helps developers to reward more gamers. Moreover, it’ll be easier for players to obtain a part of the highly valuable NFT.

Axie Infinity, a popular crypto gaming project, is also testing F-NFTs on their platform. They plan to provide fractional NFTs of their gaming asset, the ultra-rare Axis.

Metaverse

Metaverse has a high growth potential, and this virtual space and NFTs go hand in hand. Popular metaverse platforms like Decentraland and The Sandbox already benefit from implementing NFTs.

Metaverse-world

In Decentraland’s virtual platform, you can place your NFT and showcase it to others. With fractional NFTs, you can buy much more valuable assets with your friends or other community members.

The Sandbox platform sells its virtual LAND as NFTs. LANDs located in important areas are very expensive and unaffordable for small investors. The implementation of F-NFTs can attract more users to buy expensive virtual land.

Real Estate

Transforming physical real estate into NFTs can reduce the time it takes to sell a property or a piece of land. In addition, you don’t need to worry about the broker’s fees and commissions.

Real-Estate

The implementation of F-NFT allows the splitting of land among different owners. Moreover, users can benefit from the liquidity and diversification of their assets.

Now, let’s have a look at some fractional NFT marketplaces:

Top Fractional NFT Marketplaces

#1. Otis

Otis is a platform that allows users to invest in various fractional assets. The major assets supported by this platform include NFTs, cryptos, stocks, and digital collectibles.

The user-friendly platform of Otis makes buying fractional NFTs simple. Moreover, you can also sell your F-NFTs instantly.

You can use their mobile app for fast F-NFT transactions. Their apps are available on Google Play and App Store.

otis

Otis platform also provides its investors a facility to manage all their fractional NFTs in one place. Moreover, instant price information and news are updated for users. 

#2. Unicly

Unicly is a protocol developed to fractionalize, trade, and combine NFTs. This platform provides good liquidity to trade F-NFTs.

Unicly

You can also fractionalize your whole NFT with the help of the Unicly protocol. You only need to deposit your ERC-721 or ERC-1155 tokens into the vaults. After fractionalization, you’ll receive ERC-20 tokens.

The users of the Unicly platform can bid for the listed fractional NFTs. You will receive your F-NFT once your price matches the seller’s price.

Unicly also has a governance and native token, UNIC. You can use this token to vote and conduct staking activities within the Unicly ecosystem.

#3. Fractional.art

Fractional.art is a blockchain protocol that provides governance and collective ownership of NFTs. Here, you can use this protocol to buy a small percentage of listed NFTs.

YouTube video

Owners of NFTs are encouraged and rewarded to list their assets for sale. The increase in the number of assets provides higher liquidity for the platform.

Curators of NFTs receive a fee for locking their assets. Moreover, owners can list a small portion of their tokens to check the market value. This flexibility allows more participation for fractional NFTs.

#4. LIQNFT

LIQNFT is a Solana-based NFT marketplace. This marketplace is led by its community.

You can use LIQNFT to buy and sell fractional NFTs. Here, the ownership of a single whole NFT gets distributed into different F-NFTs. In addition, the token owner can set aside a certain portion with themself. 

LIQNFT

Users of this platform can purchase F-NFTs during primary sales. Once the listing is made, buyers and sellers transact the assets based on the market price.

If you are the owner of the original NFT, you can decide the number of fractional tokens. Moreover, you can also decide the price of each token.

#5. Nftfy

Nftfy simplifies the process of fractionalizing and buying fractions of NFTs. This protocol allows you to stake and generate one million NFT fractions.

YouTube video

Once the NFT fractionalization is complete, your wallet gets credited with F-NFTs. You can then use these assets to trade at the Nftfy marketplace.

The major advantage of Nftfy is that it supports multiple blockchain networks. This feature allows you to buy fractional NFT supported by your preferred network.

Challenges Faced by Fractional NFTs

As we have discussed the benefits and use cases of fractional NFTs, it’s also important to know about a few challenges associated with F-NFTs.

Market Volatility

Fractional NFTs are highly liquid, and this feature is also one of their major advantages. On the other hand, the market price can have highly volatile movements.

For example, if there is negative news related to an NFT project. In that case, people start selling their fractional NFTs. This selling pressure might result in a huge fall in price.

Regulatory Issues

The regulatory authorities still need to list NFTs under a proper category. The officials must still determine if NFTs are intellectual properties, securities, or commodities.

In the case of buying NFTs with huge capital, regulatory concerns can be an issue. These concerns will also have a negative impact on fractional NFTs.

Copyright Concerns

Today, it is easy to create an NFT on a minimal budget. Anyone can create an NFT in a few simple steps. As a result, it is also possible to create fake NFTs.

As fractional NFTs are gaining popularity, fraudsters tend to misuse this opportunity. So, before buying an F-NFT, ensure to verify the ownership.

Final Thoughts

Fractional NFTs have been crucial in attracting more small investors to the NFT space. With the emergence of crypto projects, the demand for F-NFT will increase.

While embracing the positive aspects, you must also consider the market volatility and regulatory issues related to F-NFTs. In addition, you can buy or sell fractional NFTs from the marketplaces listed in this article.

Next, check out the best platforms to mint and sell NFTs.

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