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

Fractional NFTs

If you are online for work or personal reasons, you have probably already heard of NFTs. Non-Fungible Tokens, as they are commonly known, are all the rage in the crypto/blockchain world, and everyone wants to own one (or more). But, just like most other things these days, they are getting super expensive and fast becoming a luxury to own. 

That’s why you need to know about the F-NFTs, or Fractional NFTs. The process of dividing the ownership of a single NFT into small fractions and made available to purchase for multiple owners. This has been a revolution in the world of NFTs, and the most successful real life example of F-NFTs has been the DOGE NFT sale. This led to an NFT worth $4 million, transforming itself to a value of more than $225 million after fractionalisation, allowing it to be sold for over 11,000 ether. 

DOGE NFT

So we now know that fractional NFTs make NFTs more affordable to own, but this is not the only benefit or the reason why the F-NFTs are so popular. Let’s look at some of the other factors as to why F-NFTs are becoming super popular.

Advantages of F-NFTs

  • Easier Monetisation 

F-NFTs allow artists and creators to monetize their digital assets more easily & without losing total control of them, as they just have to sell a smaller portion of the NFT.

  • Democratised Ownership

Most popular NFTs are very expensive and almost out of reach for small or medium investors. The whales will sweep off such NFTs from the collection, and it will not be accessible to most people without fractionalisation. An expensive NFT becomes more affordable with fractionalisation, and ownership of it becomes easier for everyone in the community. Further, fractions depend on the value of the overall NFT, so they will fluctuate accordingly.

  • Price discovery

Price discovery is defined as the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers. This can depend on various tangible and intangible factors, from market structure to liquidity to information flow. When the NFTs are fractionalized, a specific % of it can be sold to gauge the market price of the tokenized asset. This process helps in determining a fair market value of the NFTs.

  • Liquidity

F-NFTs help transform the erstwhile illiquid assets into liquid assets. The headlining feature of NFTs is that they can’t be replicated as they are unique. This uniqueness limits their access and makes them scarce and valuable for their collectors, who can be a few wealthy investors. F-NFTs enable NFTs to be traded in smaller fractions and since the ERC-20 tokens can be easily traded in secondary markets, the investors/traders can sell them easily and quickly to anyone else who is willing to buy a fraction of an NFT instead of a whole NFT itself. This trade is possible because the transaction value is comparatively smaller, adding more liquidity to the whole market.

  • Curator Fees

F-NFTs are an excellent option for even the owners who mint their NFTs into F-NFTs, as they can earn an annual curator fee. The NFT owner has the freedom to set the curator fee; however, to minimise the chances of the curator gouging the other owners with high fees, a maximum amount is set and capped.

 

Now that you know what F-NFTs are and their benefits, let’s look at some real-life examples. Bitcoin News has listed 4 of the biggest examples of NFT collections broken up in F-NFTs,  which are highly successful. There are even specialised platforms like Unic.ly, DAOfi, Niftyx, and the fractional.art protocol which have emerged with F-NFTs gaining traction. Each of these protocols offers variations on creating and trading F-NFTs.

And if you are wondering, we already know the benefits of the F-NFTs, but still do not know how they work. Well, that’s the next logical step that you need to understand before jumping in to buy some F-NFTs.

How do you Fractionalize NFTs?

An NFT is a token that uses Ethereum’s ERC-721 standard. To fractionalize an NFT, it’s first locked in a smart contract, which is a program stored on the blockchain that’s coded to automatically execute when predetermined conditions are met. 

The ERC-721 token is then split up into multiple fractions in the form of ERC-20 tokens through the smart contract, as per the instructions provided by the NFT owner. Each fraction, or ERC-20 token, represents partial ownership of the entire NFT. The owner determines the number of ERC-20 tokens that will be created, their price, metadata, and other properties related to the NFT fractionation process. An open sale is conducted for the fractions at a fixed price for a set period or until they’re sold out.

So far, we know what F-NFTs are, their major benefits over normal NFTs & how they work, it’s time to dive in & look at some of the real life use cases where F-NFTs fit in better and are a more practical solution.

Art – Artists can sell multiple copies of their art by easily splitting up their NFTs into multiple F-NFTs to sell to collectors. It’s a great way for them to get started, cater to a wider audience, and make their art affordable to own for collectors.

In-game purchases – The biggest gaming studios are looking at adding NFTs as in-game purchases. Since these games have millions of players worldwide, F-NFTs perfectly suit this use case. 

Domain Names – Domain names of the Web3 industry like .crypto & .eth have really been off the charts in the last two years. Selling domain names as F-NFTs can be a huge business that most people would like to own. 

Collectibles – Collectibles are always seen as prized possessions and have a massive market. The fractional Cyberpunks collection sold like hotcakes. Average investors would never have had a chance to invest it otherwise.

Real Estate – High-priced real estate properties can be offered as F-NFTs. This way, the mortgages can be avoided, and multiple owners can collectively pay a certain amount for property ownership.

Music– The music industry has shown a real fondness for NFTs and F-NFTs. The artists can sell directly to their fans by fractionalizing their music, whether songs or albums. This will enable an even deeper artist-fan connection over music.

To conclude, F-NFTs are a great option in the fast developing & ever evolving world of NFTs where a few would not be able to control the valuable digital assets, but instead, the community at large would benefit. That’s the very ethos of the Web3 developments, where the community is shown as an integral part of every project that is currently under development. 

 

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