Non-fungible tokens abbreviated as NFTs, open a new age of decentralized asset ownership. They are characterized by exceptional transparency, decentralization, and uniqueness. NFTs’ popularity grows by the day – more and more celebrities launch their own NFT projects and collections, naturally attracting broader populations. Traditional NFTs cannot be replicated or forged. Although it makes them so pricey and profitable, it is also why the NFTs holder’s possibilities are limited. This limitation has resulted in the occurrence of new types of NFTs – fractional NFT or F-NFT and dynamic NFTs. In this article, we will focus on the question, “what are fractional NFTs?”
The shortest explanation of what are fractional NFTs is that they are shares or fractions of a traditional NFT that had been divided. But this explanation naturally raises more questions. Thus, here we are going to explain how this division happens, how fractional NFTs work, and what their benefits are.
What are Fractional NFTs?
The increased popularity of traditional NFTs makes the prices soar to millions of dollars. There are even collections of the priciest NFTs, such as Bored Ape Yacht Club. Although such prices may excite artists and encourage them to create their own NFTs, they also push away a large number of individuals from the market. The majority of people are simply unable to spend thousands of dollars just to enter the NFT market. This is why NFT fractionalization was introduced.
So, what are fractional NFTs? They are pieces or fractions of an original NFT. These fractions of NFTs, or non-fungible tokens, are fungible tokens. The process of dividing an NFT into smaller pieces is called fractionalization.
How fractionalization is made, you may wonder – like almost anything in Web3 – through smart contracts. A smart contract establishes the conditions, i.e., the number of fractions and their interconnection with the original NFT. Each buyer of an F-NFT basically becomes an owner of a percentage of the original NFT. These percentages of ownership or fractions then can be traded on exchanges or marketplaces.
Thus, fractional NFTs allow collective ownership over one non-fungible token, NFT. Each buyer owns a percentage of the NFT based on the number of “shares” he purchased.
Now that we have explained what fractional NFTs are, let’s see in more detail how fractionalization needed for their making works.
How Do Fractional NFTs Work?
NFTs are tokens that implement a particular standard. For example, Ethereum’s ERC-721 and BNB Chain’s BEP-721. These standards are employed for the regulation of NFTs on different networks. To initiate the fractionalization of an NFT, first, it must be locked in a smart contract. Smart contracts are Web3 programs that execute transactions or operations automatically when the set conditions are met.
The NFT locked in a smart contract is split into the set number of fungible pieces predetermined by the contract when the established conditions are met. The metadata of the NFTs, the number of fractions, and other NFT properties are specified by the original NFT owner.
The fractions then represent shares of ownership over the parts of an original NFT then can be put up for sale.
There is no limited amount of fractions for one NFT. It is the owner of the original NFT who decides the number of fractions it will be divided into. It can be 10, 100, or even several million. All of these pieces can then be sold by their owners on the secondary markets without affecting the value of the original NFT.
Such practice can be used for the pricey works of art. For example, Vincent van Gogh’s “Sunflowers” painting, valued at around $40 million, can be tokenized and then fractionalized to thousands or even millions of fungible tokens. As a result, virtually anyone could buy a piece of this artwork in the form of F-NFT.
NFTs vs. F-NFTs
If you read till this paragraph, most likely, you can already answer the question, “what are fractional NFTs?.” As the next topic, let’s compare NFTs and F-NFTs. You already know that NFT is an original non-fungible token while F-NFTs are fractions of an original token. The main difference, logically, is the percentage of the original NFT each of these types represents. And of course, they are very closely interconnected because F-NFT, basically, is a part of the original NFT that occurred as a result of its splitting or fractionalization.
Fractionalization is not irreversible. It is possible to buy out the sold fractions of an original NFT to become a sole proprietor of the token. It is made again through the smart contract that has the build-in buyout option. It allows to buy back all of the NFT parts and restore the ownership of the whole original token.
The process of buying back the fractions of an NFT is started when an owner of a certain specific amount of fractions transfers them to a smart contract, and this triggers the buyout process. In this case, F-NFT owners would be provided with a decision to sell their shares. If the buyout occurs, all of the fractions are autonomously transferred to the smart contract, and the buyer who initiated the buyout gains ownership of the complete NFT.
It’s clear that the occurrence of NFTs fractionalizing will shortly result in the occurrence of much more interesting and beneficial ways to use it besides already existing numerous uses of traditional NFTs.
Benefits of F-NFT
In this section of our guide, we will review in detail the main benefits of F-NFT. We will cover how fractional NFTs make the NFT market more accessible to a broader audience, how they help NFT owners with the liquidity of their assets, and also how they facilitate price discovery. Let’s start with the democratization of the NFT sphere through the introduction of F-NFTs.
Democratization
We have already briefly mentioned that F-NFTs open the token market for a broader audience. We all witnessed that their prices skyrocketed due to the spiked interest in NFTs. Naturally, this hugely restricts the NFT market entering. But with fractional NFTs, when the 6 figure costs of NFTs can be split into thousands or millions, smaller investors obtain the possibility to join the NFT market. F-NFT indeed opens the market and even the whole blockchain industry for a broader population. This is what we call the democratization of the NFT market.
Liquidity improvement
High prices of NFTs not only prevent numerous potential buyers from entering the NFT market but also affect the liquidity of the market. Thus, it also affects the ability of NFT owners to sell their assets. It is natural that the most expensive tokens are harder to sell. But fractionalization solves this issue. Instead of finding a single buyer for an expensive token, the owner can fractionalize the NFT and instantly sell the shares to multiple buyers. This is how fractional NFT can help with market liquidity issues.
Price Discovery
We have already said that selling expensive NFTs is hard. Thus, their market is quite small. The small number of transactions, in its turn, makes it very difficult to establish a fair price for the tokens. Thus, by fractionalizing, the number of bids and transactions on the market increases, and it’s easier to discover the real price of NFT.
What are Fractional NFTs? – Summary
NFTs have become increasingly popular among crypto industry investors and developers. However, their high prices put certain restrictions on their use and efficiency. To solve this problem, developers have devised several solutions – dynamic and fractional NFTs. In this guide, we focused on the question “what are fractional NFTs?” and tried to outline the main aspects of this innovation.
In short, fractional NFTs are fungible shares of an original NFT that occurred as a result of the original NFT splitting through a smart contract. The process is called “fractionalization,” hence the name of the tokens. Fractionalization and F-NFTs improve NFT market accessibility, liquidity, price discovery, and in general, opens more use possibilities. F-NFTs make the market more accessible to smaller investors and, at the same time, allow owners of expensive NFTs to find buyers for their tokens easier and faster.
