What are Fractional NFTs?
A deep dive on what fractional NFTs are, what are their benefits and their risks.
As the NFT market keeps growing, so are the innovations connected to it. One of the latest use cases introduced into the NFT niche is the fractional ownership of NFTs, a new frontier that adds to the fun and ease of use of most popular NFTs.
Most of the NFT collections of high rarity, like the Cryptopunks, are expensive to get hold of. Blue-chip collections like this one were once acquired at a discounted price by early adopters. Fractional NFTs (also known as F-NFTs) represent a way for new entrants into this space to own a piece of these expensive NFTs creating a smaller microeconomy of fractionalized digital assets.
What is the Fractionalization of NFTs?
The concept of fractional ownership has been around for decades, applicable to almost any asset as a form of investment strategy. Fractional ownership implies that the cost of a specific asset is divided in many fractions, that are shared among different individuals — also known as shareholders.
This same concept has been recently adopted into the NFT space. Fractional NFTs are whole expensive NFTs divided into smaller fractions, giving the ability to those interested in owning parts of the asset to claim ownership of a piece of the same NFT. Instead of a whale owning entirely an NFT, fractionalization makes it possible for more investors to own a particular NFT at a lower price. With fractionalization, expensive NFTs like the Cool Cats, Doodles, or Bored Ape Yacht Club (BAYC) can be owned in parts.
Fractionalization of NFTs is possible with the aid of a smart contract. This is done by issuing a number of — fractional — tokens linked to the whole original parent NFT. Each individual owning one of these fractional tokens owns in turn a portion of the NFT, that can be traded or exchanged on secondary marketplaces.
One of the most well-known examples of fractional NFT is the “Doge” meme NFT, which sold for nearly $4 million in June 2021. PleasrDAO bought the meme and then fractionalized it into 17 billion shares. This allowed, for a few dollars, to own a piece of this asset, that reached a valuation of several hundred million dollars.
What Are The Perks Of Fractional NFTs?
Greater efficiency and higher Liquidity
NFTs value comes from their rarity, making them illiquid compared to other tradable digital assets. Fractionalizing NFTs into smaller divisions allow a greater number of investors to acquire assets collectively. This, in turn, makes NFT more tradable and easier to sell off quickly on marketplaces, due to the high liquidity. In other words, if you have a highly-priced NFT collection without a buyer, you may consider fractionalizing it into many parts to achieve a desired level of affordability. Not only has fractionalization made NFTs more attractive to investors, but it has also effectively resolved the liquidity issue.
Owing to the high cost of these popular NFTs, it is obvious that not everyone will be able to acquire these entirely. This keeps smaller investors and retail collectors away from entering more actively into the NFT market. Fractionalizing expensive digital assets balance the price impact, allowing the ownership of NFTs to be affordable and democratic.
Fractional NFT platforms
There is a set of interesting platforms allowing the creation and purchase of fractionalized NFTs. This list includes:
- Otis: Otis is a platform for investing in fractional NFT collectibles and art. Aside from this, Otis enables users’ real-time trading and allows a seamless acquisition of fractional NFTs.
- Unicly: Unicly is the go-to platform for investors who want to turn their NFT collection into a tradable asset with instant guaranteed liquidity. It also provides a medium for NFT tokenisation with bidding and staking features.
- Fractional.art: On the fractional.art platform, Investors can buy, sell, and mint fractions of NFTs. It is similar to the Unicly platform, except that it does not provide bidding and a staking option.
Are Fractional NFTs Risk-Free?
Fractional NFTs are undoubtedly an applaudable way of investing in valuable rare NFTs. They are helping to transform the NFTs space into a more liquid market, making it easier for more individuals to join the investment opportunities that comes with it.
Nevertheless, fractionalized NFTs aren’t risk-free. Like the traditional NFTs, they also face some limitations, such as publicity rights, contracts, and intellectual property rights. As regulation is gradually coming on board, F-NFTs are more likely to be strictly monitored as their creation (division into fractional tradable tokens) could be opined as issuing Illegal Initial Coin offerings (ICOs). Thus, collectors or traders should keep up with emerging decisions on NFTs regulations.
Hester Peirce, the SEC commissioner, once expressed a concern during the Security Token Summit in 2021 that the agency may see fractional NFTs as securities in the future. However, no official legal or regulatory standards on NFTs have been released nor published by the SEC (US Securities and Exchange Commission) or any regulatory body.
We will undoubtedly witness more intriguing use cases as NFTs continues to soar in growth, popularity and demand. Although fractional NFTs are still an emerging concept, there is a solid chance for these to become the next big thing in the ever-expanding NFT market. Greater liquidity is achieved by NFT fractionalization, opening up an infinite number of investing strategy options. By allowing access to a much larger pool of potential investors, F-NFTs could drive the upcoming wave of monetization of digital assets.
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