Fractional NFTs Might Democratize Digital Investing
2021 has arguably been the year of non-fungible tokens (NFTs). With over USD 10bn in sales, the largely crypto art-driven NFT market could overtake the traditional arts & antique markets in sales by as early as this year.
One of the latest innovations in the NFT market is so-called “fractional NFTs,” which aim to provide fractional ownership of individual NFTs to allow more than one owner of a tokenized asset.
Read on to learn more about fractional NFTs and their use cases.
What are fractional NFTs?
Fractional NFTs (F-NFTs) are cryptographic tokens that represent fractional ownership in a non-fungible token.
In other words, F-NFTs allow investors to hold a share in an expensive tokenized item as opposed to being the sole owner. You can think of it as akin to shares in a company, except your share is in an NFT.
A theoretical example of a fractional NFT would be owning a percentage of Beeple’s “Everydays: The First 5,000 Days” artwork that sold at Christie’s for USD 69m.
NFTs can be split up?
NFTs can be divided into smaller units, through a process known as fractionalization. You can already find F-NFTs on platforms such as Fractional, Nftfy.
The fractionalization process entails taking an NFT (ERC-721 token), locking it up into a smart contract that divides the token into many fractions of fungible ERC-20 tokens, and then making these tokens (F-NFTs) available to the market.
By doing this, the cost that would have gone into paying USD 500,000 for a single NFT, can be divided by 100 potential owners, each paying USD 5,000.
Fractional NFTs introduce more liquidity into the NFT market. They also democratize access to high-value NFTs by moving the opportunity of ownership from individuals and organizations who can afford them to anyone who would like to invest in the NFT space.
A real-world example of NFT fractionalization is the sale of the Doge NFT. The Doge meme, which is the official face of Dogecoin (DOGE), was sold for USD 4m in June 2021. In August 2021, PleasrDAO, the owner of the NFT offered fractionalized ownership in the form of $DOG tokens, which could be bought by the fans of the meme for as little as USD 1. This instance shows the potential of F-NFTs in the art space.
But, art is just one sector that can benefit from F-NFTs.
Fractional NFTs use cases
Fractional NFTs have been inspired by the sale of artwork in the form of NFTs. However, the application of the technology can have other use cases.
F-NFTs and gaming
Play-to-earn crypto games involve earning, buying, selling, and trading of in-game items, most of which are NFTs. With the introduction of F-NFTs however, multiplayer games such as Star Atlas and Axie Infinity could utilize the technology to provide players with the ability to band together to purchase more expensive items such as spaceships and planets in Star Atlas.
In fact, Axie Infinity is already testing this through the sale of ultra-rare Axies, which are the game’s NFT assets. Here, community members have fractionalized the Axies and sold them via Niftex, a fractionalization platform.
F-NFTs and the metaverse
The metaverse is a concept that is growing by the day. With companies such as Decentraland, Sandbox, and Facebook building in the growing virtual universe, there is bound to be a lot of investment from the “physical world.”
F-NFTs could potentially allow people, groups of people, investors, and even conglomerates to band together to buy virtual land and other assets in the virtual world.
F-NFTs and real estate
It is not only owners of land in the metaverse that can benefit from F-NFTs. In the real world, F-NFTs could be used to power fractional ownership of real estate property.
But will regulators play ball?
With new developments, come challenges, especially in emerging technology sectors such as crypto and tokenization.
In the case of F-NFTs, there is already some pushback by regulators that claim that F-NFTs have similarities with securities, and might be treated as such in the future. While regulations aren’t always net-negative, overregulation could halt the development of this new technology that could help to democratize investing in tokenized assets.
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