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Fractional NFTs Revolutionizing NFT Space

By Ruchi Sharma

Non-fungible tokens, or NFTs, are the newest big thing in the world of cryptocurrencies. A growing number of people are turning to NFTs as a tokenization solution for a wide range of assets.

Most people cannot purchase NFTs because of their inherent rarity and uniqueness, which naturally drives up their value. Furthermore, there’s no assurance that someone will be ready to purchase an NFT from you at a higher price, even if you are successful in doing so. However, the developing blockchain technology may already have an answer to the liquidity problem: it allows for the division of NFTs into smaller pieces and their independent trading.

What Are Fractional NFTs?

Fractional NFTs are fragmented non-fungible tokens. Smart contracts on the blockchain self-execute to carry out NFT fractionalization. The original NFT owner decides the number of smaller NFTs (fractions) to create each one’s price, and other pertinent information.

Similarly to conventional NFTs, investors can easily sell these fractions on NFT marketplaces. Because of their lower price compared to the original NFT, they are considerably more affordable for a larger group of investors, which increases their liquidity on the NFT market.

How is an NFT fractionalized?

The Ethereum blockchain governs the creation of NFTs and adheres to the ERC-721 token standard, although it also occasionally uses the ERC-1155 standard. These days, these two standards are solely used to create non-fungible tokens, or distinct tokens that cannot be replaced by another.

On the other hand, the ERC-20 standard creates fungible tokens. Since they are interchangeable, the value and usefulness of each unit are the same. Thus, a smart contract is utilized to create several ERC-20 tokens connected to an indivisible ERC-721 NFT, which is how an NFT is fractionalized. Currently, a portion of the NFT can be associated with any ERC-20 token owner.

It is also possible to convert fractional NFTs back into whole NFTs. How? The smart contract that fractionalizes an NFT should include a buyout option that allows a fractional NFT holder to acquire every fraction produced and unlock the entire NFT. Restoring a specific quantity of the fractioned ERC-20 tokens into the smart contract will activate the buyout option. This should start a kind of buyback auction that lasts for a predetermined amount of time. The buyer who initiates the buyout obtains complete ownership of the NFT in the event that the other fractional owners decide to sell their shares.

Use cases of Fractional NFTs

F-NFTs and gaming

In the majority of play-to-earn crypto games, you can purchase, sell, and own a variety of in-game items—some of which are NFTs. By investing in their fractionalized shares, gamers can purchase and sell pricey in-game items jointly in these online games through the use of F-NFTs.

F-NFTs and the metaverse

F-NFTs can be utilized to enable corporations, individual investors, and groups to purchase virtual land and other comparable digital assets in the virtual world.

F-NFTs and real estate

By displacing middlemen with smart contracts, NFTs can facilitate a straightforward and secure transfer of ownership, greatly expediting the purchase of real estate. Furthermore, the direct recording of ownership and rights histories on a blockchain typically enables quick and easy verification of transaction data. F-NFTs let several people, not just one, jointly own the property.

Benefits Of Fractional NFTs

Among the several advantages of fractional NFTs are:

The democratization of NFTs: 

The majority of rare items traded as NFTs are too expensive for the average person to purchase, which keeps smaller investors and novices out of the NFT market. However, fractionalizing a costly NFT reduces expenses and allows a wider range of investors to access the assets.

Improved liquidity for Non-Fungible Tokens: 

Once more, fractional NFTs have the ability to improve market liquidity for NFTs by granting smaller investors access to assets that were previously unattainable. 

Better price evaluation of an NFT: 

Determining the true worth of one of the more costly NFTs with little to no transaction history becomes challenging. However, as buyers exchange fractions of these NFTs more frequently, they will find it easier to determine the true value of the original NFT.

Access to the wider NFT community: 

More purchasers will have access to the larger NFT community once fractional NFTs are established. Buyers of fractional NFTs may be eligible for special privileges such as governance and staking rights, voting rights, and even incentives for their contributions, depending on the NFT platform from which they purchased them.

Better visibility for creators: 

In an NFT marketspace with increased liquidity, digital NFT creators may be able to reach a wider audience and have better online exposure.

Simple Integration with DeFi Programs: Fractional NFTs are easier to use in DeFi than ERC-721 tokens because they are ERC-20 tokens. Yield farming, staking operations, and decentralized cryptocurrency exchanges have the potential to utilize Fractional NFTs.

Potential drawbacks of Fractional NFTs

Fractional NFTs (FNFTs) provide intriguing opportunities, but before pursuing them, it’s important to be aware of any potential disadvantages. The following are important points to keep in mind:

Regulatory uncertainty: 

Like many other crypto assets, the fractional NFT space is essentially unregulated. This may expose investors to risks, as laws may change and legal concerns may arise. Be cautious—the laws do not protect investments in FNFT the same way they do regular financial instruments.

Intellectual property concerns: 

Make sure the seller of a FNFT has the required rights to the underlying asset by doing extensive due diligence before making an investment. Fortunately, the information in the FNFT smart contract frequently confirms ownership proof.

Smart contract vulnerabilities: 

A FNFT’s security is intricately related to the smart contract’s security. Contracts developed on unreliable blockchains are more vulnerable to hacking and exploitation. As always, thorough due diligence is essential to comprehending any potential hazards 

Market volatility: 

Fractional NFTs can be very volatile in comparison to traditional investments, just like the majority of crypto assets. Proceed with caution when dealing with this asset class, as it is intrinsically subject to price volatility. Gaining knowledge of volatility-hedging techniques, such as staking, may reduce the likelihood of suffering losses during market downturns.

The Future of Fractional NFTs

For NFT makers and owners, fractional NFTs offer an intriguing option. The idea may boost exposure for musicians, artists, and other NFT creators, as well as generate demand for tokens that have reached a standstill. Because investors assume less risk when purchasing these assets, fractionalization is particularly advantageous in bear markets. Regulators may be concerned that fractionalized NFTs are unregistered securities, which could prevent their adoption.

Additionally, fractional NFTs can signify a portion of the ownership of a tangible thing, such as a house, an artwork, or a diamond. This creates new opportunities for the sale of real, priceless goods. It shares the same advantages and difficulties as a conventional F-NFT.

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