A fractional NFT is an NFT divided into smaller parts, allowing multiple collectors to claim ownership of a fraction of the same NFT. NFTs are fractionalized through a smart contract that creates a set of ERC-20 tokens connected to the original NFT. This set of crypto tokens gives holders a percentage of ownership of an NFT. These tokens can be traded on secondary crypto markets.
What do NFTs mean?
NFTs stand for non-fungible tokens and are ERC-721 crypto tokens created by a smart contract on the Ethereum network. Since NFTs are impossible to replicate and are indivisible, they can be an innovative medium for tracing intellectual property. In 2021, NFTs experienced a meteoric rise because of multiple record-setting NFT auctions that year. These crypto assets are used in many applications, such as digital art, virtual real estate, and in-game items.
Can NFTs be divisible?
Technically, NFTs are non-fungible and so non-divisible. Just like you cannot have two original copies of the same artwork, you cannot divide an NFT into two. This is where fractionalized NFTs come in. NFTs cannot be divided into smaller parts, but fractionalized NFTs are a workaround where investors can get a fungible token to claim a share of the original NFT.
How to fractionalize an NFT?
NFTs are crypto tokens that use the ERC-721 standard of the Ethereum network. NFTs are first locked in a smart contract before the fractionalize process begins. Next, the Smart contract splits the original NFT into multiple parts into ERC-20 crypto tokens based on the NFT owner’s instructions. The instruction will specify the number of ERC-20 crypto tokens to be created, their metadata, price, and other properties. Each fraction or ERC-20 crypto token constitutes partial ownership of the original NFT. These fractions are on sale at a fixed price for a fixed period.
An NFT can be expensive, and only a few can bid for it. However, fractions of an entire NFT can be more affordable and attract investors more easily. NFTs and fractionalized NFTs are not limited to the Ethereum network. Fractionalization can run on blockchains that support smart contracts. Blockchain networks like Solana (SOL), Polygon (MATIC), and Cardano (ADA) support smart contracts and can create and transfer NFTs. These blockchain networks have faster transaction speeds and low gas fees.
Benefits of fractional NFTs
Democratization
Most popular NFTs are unaffordable for many investors, preventing many collectors from participating in the NFT space. Fractional NFTs can make an expensive NFT accessible to more investors or collectors.
Greater liquidity
With rising popularity, NFT collections tend to increase dramatically in price. This property makes NFTs accessible to a few wealthy collectors. Users can divide ownership of ERC-721 tokens into multiple ERC-20 crypto tokens by fractionalizing an NFT, making it more affordable for many users.
Price Discovery
It can be hard to determine the right price for an expensive NFT with a limited transaction history. More people can trade an NFT by fractionalizing it, making it easier for investors to determine the actual value of an NFT.
More visibility for creators
Digital creators can get greater exposure because they will be able to reach a wider audience with fractionalization.
Risks of Fractional NFTs
Fraud or misrepresentation
An NFT creator is vital for determining its value, but there are many cases of fake NFT projects that associate themselves with the name or style of popular NFT collections. This issue will be made worse by fractional NFTs, where a different creator can fractionalize an NFT and sell it. A similar piece of digital art can be fractionalized while claiming to be the original.
The Uncertain Legality and Regulations Around Fractional NFTs
Uncertain legal rules and regulations surround the entire crypto space in many countries. Some countries do not have any crypto laws, while others have vague laws and guidelines to adhere to. No clear regulations surround fractionalized NFTs, which can be challenging for many crypto users.
Conclusion
The most significant advantage of fractional NFTs is that more investors or collectors can own a percentage of a more expensive, whole NFT. Depending on the blockchain platform where the fractional NFT was bought, the holder may have some governance rights on the platform. Fractionalization is helping with liquidity for NFTs while increasing participation in the NFT space. Fractional NFTs can expand the NFT market by bringing more democratization, liquidity, and price discovery. But they face the same issues that NFTs do, such as intellectual property rights, contracts, and publicity rights.
Fractional NFTs can play a vital role in the future of digital asset ownership. However, significant risks and challenges must be addressed for its wider adoption.
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Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Each investor must do his/her own research or seek independent advice if necessary before initiating any transactions in crypto products and NFTs. The views, thoughts, and opinions expressed in the article belong solely to the author, and not to ZebPay or the author’s employer or other groups or individuals. ZebPay shall not be held liable for any acts or omissions, or losses incurred by the investors. ZebPay has not received any compensation in cash or kind for the above article and the article is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.
