Fractional NFTs (F-NFTs): What Are They and How Do They Work?

    Tanya Sharma
    Tanya Sharma
    Published on January 4, 2023 10:04 AM

    Updated on January 16, 2023 8:14 AM

    Fractional NFTs, like standard NFTs, can be bought and sold on the open market. However, because they are less expensive, the pool of possible consumers is much wider.
    Fractional NFTs (F-NFTs): What Are They and How Do They Work?
    Source: Unsplash

    NFTs have grown in popularity in recent years. They have quickly evolved from a novelty in the arts and collectables market to a thriving digital asset class with several applications.

    Several new types of NFTs have also emerged in the previous year and a half, each with its own set of USPs and use cases. The fractional NFT is one of the most recent variants of the NFT asset class.

    This sort of NFT provides a new perspective on digital asset ownership and has the potential to attract thousands of first-time investors.

    You can't buy a bored ape with a McDonald's salary. You cannot, similarly, own the Mona Lisa. However, you can own a portion of a Bored Ape.

    NFTs that are fractional. Don't pretend you've never heard of them. No? Nothing? This article will teach you all you need to know about fractional NFTs and how they work.

    Related: Defining NFT moments of 2022

    What Exactly Is a Fractional NFT?

    Fractional NFTs (F-NFTs) are, as you might expect, shares of a single NFT.

    You divide the initial non-fungible token (which implies it is not equal to any other token) into many fungible tokens (ERC-20 tokens) that reflect a claim on the original NFT. It's essentially the digital equivalent of obtaining an IOU saying "you own X% of this Bored Ape/Crypto Punk."

    The fractionalization process of NFTs is facilitated by smart contracts. On a marketplace, you can later swap the fractional tokens (the digital IOUs) for cash.

    Also Read: NFT Use Cases Beyond Digital Artworks

    How do fractional NFTs function?

    To build and administer fractional NFTs, smart contracts are employed. A smart contract is a self-executing contract in which the conditions of the buyer-seller agreement are directly encoded into lines of code.

    The contract is transparent, traceable, and irrevocable because the code and agreed-upon terms are stored on the blockchain. The following steps are commonly included in the process of developing and managing fractional NFTs:

    The creator of the asset (such as an artist) determines the terms of ownership for the asset, such as the total number of fractions and the price of each fraction.

    The inventor generates and maintains a smart contract on the blockchain outlining these ownership terms. The author then mints the NFTs, which entails issuing a new token on the blockchain for each fraction of the asset.

    The NFTs are available for purchase through an online marketplace or exchange platform. When an individual acquires a fractional NFT, the smart contract instantly registers the transaction on the blockchain and transfers ownership of the fraction to the buyer.

    Is it possible to divide an NFT?

    No, it does not. Yes, indeed. It's difficult.

    Because an NFT is non-fungible, it is technically non-divisible. A Bored Ape NFT cannot be divided into two, just as the Mona Lisa cannot be divided into two (technically...). Only that, but that is where fractionalized NFTs come into play.

    In essence, the non-fungible token cannot be divided into smaller pieces, however, fractionalized NFTs provide a workaround in which the fungible token is obtained as a claim on a portion of the original NFT.

    There was also a proposal for an ERC-864 token standard for the Ethereum network, which would have allowed for divisible non-fungible tokens. However, it appears that it never took off. As of now, fractionalized NFTs are the only option to divide NFT assets.

    F-NFTs vs. Traditional NFTs?

    The distinction between F-NFTs and how NFTs work should be as apparent as day now. But let me say it again for those in the back.

    F-NFTs represent a percentage ownership (a fraction) of a whole NFT. An NFT is a unified whole that cannot be split. An F-NFT is a subset of the entire.

    Fractionalization can also be reversed. The smart contract includes a buyout option, which allows the investor to exchange his fractions of the original NFT whenever they want. When an F-NFT holder transfers their stake back to the smart contract, it starts a buyback auction that lasts for a set amount of time.

    During that time, the other holders can make a choice, and if the buyout is successful, the fractions are automatically returned to the smart contract, and the buyer obtains full ownership of the NFT.

    There are two regularly used F-NFT examples:

    1. In July 2021, the singer Grimes auctioned her piece Newborn 1 & 3 on Otis, a fractional NFT marketplace, with a reserve price of $10 per share.

    2. In June 2021, the NFT of the Doge meme sold for $4 million. PleasrDAO, which purchased the Doge NFT and fractionalized it into 17 billion pieces, allowing everyone to own a piece of the original Doge meme in true Dogecoin spirit.

    How Can I Purchase a Fractional NFT?

    So, as a mere pleb looking to acquire some digital art, where can you jump on the fractionalization bandwagon? Aside from OpenSea, there are a few other options:

    Unicly is a protocol that allows you to mix, trade, and fractionalize NFTs. Any ERC-compliant Ethereum NFT can be fractionalized there.

    You can also buy, sell, mint, and fractionalize your non-fungible tokens on Fractional. art. Also compatible with ERC-standard Ethereum NFTs.

    The good old centralized exchange KuCoin often sells fractionalized NFTs from renowned collections such as Mutant Apes.

    Otis is another platform in the NFT investing ecosystem that allows you to fractionalize NFTs., a bitcoin investing platform, has purchased it.

    What are the benefits of using fractional NFTs?

    Several advantages of fractional NFTs over typical ownership structures include:

    Greater accessibility: Fractional NFTs enable consumers to own a portion of something that would otherwise be too expensive or out of their price range to purchase in its full. This is especially useful for people who want to acquire unusual or valuable things but don't have the financial capacity to do so.

    Increased liquidity: Like standard NFTs, fractional NFTs can be bought and sold on the open market. However, because they are less expensive, the pool of possible consumers is much wider. This is especially important for those who plan to sell their ownership stake in an asset in the future. A fractional NFT will almost certainly have more investors than a standard NFT. This larger audience base ensures that digital creators have more visibility.

    The following are some potential drawbacks of fractional NFTs:

    Complexity: Because fractional NFTs entail ownership of a portion of an asset rather than the full asset, they might be more difficult to understand and administer than standard NFTs.

    Liquidity: Selling fractional NFTs may be more challenging due to fewer purchasers interested in obtaining a partial ownership stake in an asset. This can result in decreased liquidity and potentially lower resale value.

    Value fluctuation: As more investors acquire and sell NFT fractions, the price valuation of the NFT may become more volatile. This can make predicting the future value of a fractional NFT challenging.

    Legal concerns: If fractional NFTs are used to represent fractional ownership in physical assets, there may be legal issues or uncertainties. This might pose dangers for both buyers and sellers.

    In Which Industries Do Fractional NFTs Fit?

    Is it possible to use all of the blockchain black magic for something other than gambling on fractions of digital JPEGs using DeFi protocols?

    In theory, there are numerous use cases:

    Fractional NFTs in Art

    Digital art is clear, and there is nothing that prevents fractionalizing a real-world art piece.

    The only question is whether such an invention would be accepted by the highly conservative market and whether it would solve more problems than it generates. In theory, all of the benefits outlined above, such as enhanced liquidity and democratization, would also apply to real-world art.

    Real Estate for Fractional NFTs

    Property transactions that can be solved with fractionalization are a more practical use case. There's a case to be made that investors may desire to buy or sell only a portion of a larger piece of real estate for liquidity or other reasons. 

    Furthermore, the real estate market is fairly illiquid and paper-heavy – and hence more accessible to innovation that boosts liquidity. Fractionalization via tokens could be a solution.

    In the Metaverse, there are fractional NFTs.  If you believe digital land is garbage, no amount of fractionalization will persuade you otherwise.

    However, if you believe it is the next great thing — and many do — fractionalization may add fuel to the speculation fire that will be chunks of digital real estate.

    Fractional NFTs in Gaming

    Crypto games are still attempting to develop a viable pricing mechanism for their NFTs and in-game tokens. But, given the amount of money pouring into the sector and the level of interest from participants, they will triumph sooner or later. Owning a tiny piece of an ultra-rare monster may then appear to be a far smarter investment than it is now.

    Are Fractional NFTs a Good Investment?

    There are numerous reasons to believe in partial ownership if you believe in NFTs. If you believe that owning an NFT is a fad and a bubble, a fraction of an NFT will not change your mind.

    The bottom line is that tokenization and NFTs are not going away. The next liquidity surge will most likely not drive the same assets that did so previously. However, the underlying technology, ERC-721 tokens, will continue to be a part of whatever is trendy in the next bull run. So, invest at your own risk in those digital assets, but keep them in mind for when the next major NFT speculative frenzy arrives.

    Final Line

    Overall, fractional NFTs have a wide range of possible applications and can be utilized to expand accessibility, diversify investment portfolios, and foster a sense of community ownership. Individuals should, however, carefully evaluate the potential downsides and restrictions of fractional NFT ownership before making a purchase.

    Fractional NFTs FAQs

    How do fractional NFTs function?

    Users can divide an NFT into various fractions with fractional NFTs, lowering the barrier to entry for investing in real-world assets.

    Is it possible to profit from fractionalized NFTs? 

    They can begin by fractionalizing their NFT and first selling small fractions. The NFT owner will know the overall price of their entire token once customers begin acquiring them or providing their own prices.

    How are 10,000 NFTs produced?

    To build 10,000 NFTs, you'll need 10 layers, each with four variations. Of course, manually combining 10,000 photos will be quite difficult. As a result, NFT-Generator will be required. The rarity % of each variation is indicated by the number in the top right corner of the variation.

    Can you make a fortune with NFTs?

    You can earn from NFTs by purchasing them and selling them at a profit. In less than 6 months, Pablo Rodriguez-Fraile, a Miami-based art collector, flipped a Beeple digital art piece about 1,000 times its initial price.

    Can you make a fortune with NFTs?

    You can earn from NFTs by purchasing them and selling them at a profit. In less than 6 months, Pablo Rodriguez-Fraile, a Miami-based art collector, flipped a Beeple digital art piece about 1,000 times its initial price.

    What are the advantages of using a fractionalized fungible token?

    Surprisingly, the advantages of fractional NFTs not only decrease access barriers to NFTs but also boost liquidity in the NFT market.