Table of Contents
Main Points:
- A fractional NFT is a whole NFT that has been partitioned into smaller portions.
- Fractional NFTs are assisting in increasing NFT inclusion and involvement.
- In addition to making NFTs more accessible, fractional NFTs have the potential to improve market liquidity, give better price appraisals, and facilitate democratization.
- Want to buy a popular NFT collection but think it’s out of your price range? Fractional NFTs could be an option.
As the popularity of various NFT collections grows, so do their floor values, which is wonderful for early investors, collectors, and artists. But what about those looking to enter the market right now? Most people cannot afford the more expensive NFTs, but they may surely investigate the possibilities afforded by fractionalized NFTs. The concept of fractionalization is analogous to owning stock in a corporation. It allows numerous collectors to own NFTs, making them available to everyone rather than just NFT whales.
In this post, we will look at what fractionalized NFTs are, how they work, the benefits they provide, and much more!
What Exactly Are Fractional NFTs?
A fractional NFT is just a full NFT that has been broken into smaller portions, allowing multiple people to claim ownership of the same NFT. Consider it similar to a cake, where a full cake can be sliced to feed numerous people. Given that an NFT is unique and cannot be reproduced, fractional NFTs push the envelope by allowing co-ownership.
What Is the Process of NFT Fractionalization?
One of the most frequent protocols for establishing NFTs on the Ethereum blockchain is the ERC-721 token standard (along with the ERC-1155). While these two standards can generate non-fungible tokens that are unique, the ERC-20 standard is used to create cryptocurrencies and other fungible tokens. Because fungible tokens are interchangeable, each unit has the same utility and intrinsic value. As a result, you can use a smart contract to issue many ERC-20 tokens that are tied to a single ERC-721 NFT. As a result, everybody who holds any of the ERC-20 tokens generated will own a portion of the associated NFT.
Is it possible to reverse fractional NFTs?
It is feasible to revert the fractionalization process and convert a fractional NFT to a complete NFT. Typically, the smart contract that fractionalizes an NFT includes a buyout option that allows the holder of a Fractional NFT to acquire all of the fractions in order to unlock the original NFT.
A Fractional NFT holder can often begin the buyout option by transferring a particular number of ERC-20 tokens back to the smart contract. This will launch a sort of buyback auction for a set period of time. The other Fractional NFT holders will then have some time to decide. If the buyout is successful, the fractions are automatically returned to the smart contract, and the buyer acquires complete ownership of the NFT.
What Advantages Do Fractional NFTs Offer?
Democratization
Many people are unable to afford the rising high prices of some of the most popular NFTs, preventing smaller investors or collectors from engaging in the NFT arena. Fractionalizing a costly NFT reduces expenses and makes it more accessible to a wider range of individuals.
Increased Liquidity
Popular collections tend to skyrocket in price as the popularity of NFTs grows. As a result, certain NFTs are only available to a few affluent investors. You can divide ownership of ERC-721 or ERC-1155 tokens into numerous ERC-20 tokens using fractional NFTs, making them more inexpensive.
Price Determination
With little or no transaction history, determining the proper pricing for a more expensive NFT can be challenging.
Making the NFT more inexpensive and allowing more people to trade the asset makes it easier for buyers to determine the NFT’s true value.
Creators’ Exposure Increased
Because fractionalization allows digital creators to reach a larger audience in a more liquid market, they can gain even more online exposure.
What Advantages Do Fractional NFT Holders Have?
The major advantage for fractional NFT holders is the opportunity to purchase a portion of a larger and more expensive entire NFT. Depending on the NFT and the platform from which the Fractional NFT was purchased, the holder may be granted exclusive access to the NFT community as well as other perks such as voting rights.
Some Fractionalized NFT projects also offer staking, allowing holders to deposit their Fractional NFT on a platform or protocol in exchange for staking incentives and other benefits.
What Are the Consequences of Fractional NFTs?
The security of fractionalized NFTs is dependent on the quality of the programming that underpins them. However, in some situations, a potential buyer or part-owner of an NFT might initiate a buyout auction by transferring the whole value of all fractionalized parts to the smart contract.
If the other fraction holders outbid the person who started the auction, they will be able to maintain their part, albeit at a higher price. If the person successfully outbids the other fraction holders, their payment will be divided to the owners in proportion to their holdings. While they are still compensated for their portion, this may cause you to sell your fraction even if you do not want to.
Conclusion
Fractional NFTs may be the next trend to look out for as the NFT world becomes more accessible. So, if you’ve been chasing a specific NFT collection but didn’t want to commit due to the exorbitant price, Fractional NFTs are an option. That being stated, remember to DYOR before investing in a digital asset.
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