What are Fractional NFTs (F-NFTs) - Complete Guide for beginners

Fractional NFTs are divided into pieces of wholesome NFTs that could be owned by various stakeholders. For example, if you want to buy a portion of a big land and the land costs around $500K but the owner wants to sell the land whole, What would you do?

As you don't have that much money, you will ask your friends and family members to buy a piece of the land while summing up the total value or if the owner finds some more customers who want to purchase a portion of it, they will acquire the piece along with you and you don't have to worry about paying the whole value. That's exactly how a Fractional NFT works.

By purchasing a portion of an expensive NFT, you can still sell it to other buyers in profit when the NFT's value raises.

In this article, we will learn about Fractional NFTs , how they work and many aspects of it.

Exploring the Unique Attributes of Fractional NFTs Compared to Traditional NFTs

When we delve into the world of Non-Fungible Tokens (NFTs), it becomes evident that Fractional NFTs (F-NFTs) have distinct characteristics that set them apart from their traditional counterparts.

In the traditional NFT space, a single buyer or a collective representing a group of NFT collectors typically assumes ownership. 

F-NFTs take a different approach by enabling joint ownership among multiple investors. This collective ownership structure adds a new dimension to the NFT market, fostering inclusivity and expanding opportunities for regular consumers to participate.

The Fractionalization of NFTs has significantly removed the barriers around it, allowing a larger audience to engage in the NFT market. This advancement has opened doors not only for regular customers but also for enthusiasts in various other investment sectors such as real estate and fine art. 

Hence we can conclude that fractionalization has emerged as a viable investment strategy in these domains, adding to the growing trend within the metaverse.

How Fraction NFTs Works

F-NFTs represent shares of a single NFT, meaning that the original non-fungible token is divided into several fungible tokens known as ERC-20 tokens. Each of these tokens represents a specific portion or claim on the original NFT.

• To put it into perspective, think of acquiring an IOU that stipulates your ownership percentage of a valuable asset like a Bored Ape or a Crypto Punk. 

• The fractionalization process relies on smart contracts, which facilitate the division of the NFT into fractional tokens or digital IOUs. 

• As a result, these digital IOUs can be further converted into currency within the marketplace, offering liquidity and flexibility to F-NFT holders.

By fractionalizing NFTs, individuals who may not have had the means to acquire a complete NFT can now gain exposure to valuable assets through partial ownership.

It's worth noting that the popularity of NFTs has continued to grow, with the global NFT market reaching a whopping $2.5 billion in Q1 of 2021 alone. 

Additionally, the rising popularity of NFTs has made them highly sought after, with some of the most popular collections selling for millions of dollars. 

For instance, Beeple's "Everydays: The First 5000 Days" NFT sold for a whopping $69 million at a Christie's auction, breaking the previous record for a digital artwork sale.

Fractional NFTs have an Enormous amount of benefits 

What Sectors Do Fractional NFTs Fit Into?

Fractional NFTs in Art:

• Fractionalization can extend beyond digital art to real-world art pieces, providing increased liquidity and democratization to the conservative art market.

• Benefits like fractional ownership, lower entry costs, and wider accessibility can be applied to real-world art assets as well.

Fractional NFTs in Real Estate:

• Fractionalization can revolutionize property transactions, allowing investors to purchase or sell a fraction of a real estate asset for liquidity or other reasons.

• The real estate market, traditionally illiquid and paperwork-intensive, could benefit from increased liquidity through tokenized fractionalization.

Fractional NFTs in the Metaverse:

• rtyuFor those sceptical of digital land, fractionalization may further fuel the speculation surrounding digital real estate, catering to those who believe it is the next big thing.

• Fractional NFTs in the metaverse can provide opportunities for investors to own fractions of valuable digital properties and participate in the growing virtual economy.

Fractional NFTs in Gaming:

• Crypto games are actively exploring pricing mechanisms for NFTs and in-game tokens, aiming to find a balance between value and gameplay.

• As the sector continues to attract investments and player interest, fractional ownership of ultra-rare in-game assets can become an attractive investment option.

Popular F-NFT Marketplaces

The NFT fractionalization market is growing rapidly. In Q2 2021, the market for fractionalized NFTs was worth $40 million, and by Q4 2021, it had increased to over $500 million. 

This growth has attracted major players in the crypto industry, including Coinbase, which recently acquired the fractional NFT platform, BoringDAO.

Where Can I Buy a Fractional NFT? Here goes the list pick any and you are good to go.

Overall, with the increasing demand for fractionalized NFTs, we can expect to see more marketplaces and platforms emerging in the future, providing even more opportunities for collectors and investors to own a share of their favourite NFTs.

Risks and Security Concerns with Fractionalized NFTs

Fractionalized NFTs are only as secure as the smart contracts they rely on, emphasizing the importance of robust code and thorough audits.

The buyout auction mechanism can pose risks, where a potential buyer triggers an auction by sending the total amount of all fractionalized parts to the smart contract.

Buyout auctions can lead to unexpected outcomes, where other fraction holders must outbid the buyer or risk selling their fraction at a higher price.

Regulatory Considerations:

• NFTs could be classified as securities, subject to regulations set by entities like the SEC. This classification is based on factors such as investment of money, common enterprise, expectation of profit, and reliance on the efforts of others.

• The evolving nature of the NFT market and the potential for increased scrutiny from regulatory bodies necessitate cautious engagement.

Market Risks:

• The NFT market is still relatively unregulated and open to various participants, including influencers seeking to monetize their creations through fractionalization.

• The ease of fractionalizing NFTs can lead to lower barriers for investing in potentially risky or low-value assets, making thorough due diligence essential.

Reconstitution Challenges:

• Reconstitution refers to the process of regaining full ownership of a fractionally owned NFT. However, it can become complicated if some fraction holders refuse to sell their portions, hindering the reacquisition of the entire asset.

• Unlike traditional companies, where fractional ownership is common, NFTs inherently rely on complete ownership for optimal value and utility. Fractionalization may decrease an NFT's liquidity and complicate future transactions.

Examples of Fractional NFTs

Grimes' Newborn 1 & 3:

• Musician Grimes auctioned her artwork, Newborn 1 & 3, as a fractional NFT on the Otis marketplace in July 2021.

• The auction started with a reserve price of $10 per share, allowing individuals to own a fraction of the artwork.

Fractionalized Doge Meme NFT:

• The iconic Doge meme NFT was sold for $4 million in June 2021.

• PleasrDAO, the buyer of the Doge NFT, further fractionalized it into 17 billion pieces, enabling widespread ownership of the original Doge meme.

Access to Expensive NFTs:

• Fractional NFTs provide an alternative for individuals who wish to invest in high-value NFTs without having to spend large amounts of cryptocurrency.

• By purchasing a fraction of an expensive NFT, collectors can gain exposure to renowned digital artworks and cultural icons.

Increased Accessibility:

• Fractionalization democratizes the ownership of valuable NFTs, allowing a broader audience to participate in the market.

• Individuals can own a piece of coveted artwork or memes, fostering inclusivity and reducing the entry barriers associated with high-priced NFTs.

Fractional NFTs offer a flexible and affordable way for individuals to engage with the NFT market, enabling fractional ownership of renowned digital assets and empowering collectors with diverse investment opportunities.

FAQs on Fractional NFTs

What is a fractional NFT?

A fractional NFT refers to the division of a non-fungible token (NFT) into smaller fractions, allowing multiple individuals to own a portion of the original NFT. Each fraction represents a share or claim on the underlying asset.

How does fractionalization work for NFTs?

Fractionalization involves converting a single NFT into multiple fungible tokens, typically ERC-20 tokens, where each token represents a fractional ownership stake in the original NFT. Smart contracts facilitate the creation, management, and trading of these fractional tokens.

What are the advantages of fractional NFTs?

Fractional NFTs allow more people to participate in the ownership of high-value NFTs that they may not be able to afford otherwise. They also increase the liquidity of NFTs, making it easier to buy and sell fractions of an NFT.

What are the risks of fractional NFTs?

The risks of fractional NFTs include the possibility of smart contract errors, potential price manipulation by large fraction holders, and the potential for legal issues if fractional NFTs are deemed to be securities by regulators.

How can I invest in fractional NFTs?

Investors can buy fractions of NFTs on NFT marketplaces that offer fractionalization services. Some popular marketplaces for fractional NFTs include Fractional.art, Niftex, and Fractionalize. It's important to do your research and understand the risks before investing in fractional NFTs.

Also Read:

• How to Create an NFT?
• What is NFT Staking?
• Buy & Sell NFTs
• Marketplaces for NFT
• Fungible vs Non-Fungible Tokens