How Does a Fractional NFT Work?

Here’s an overview of what a fractional NFT is and the benefits they provide to investors but before diving deeper into that, let’s have a brief explanation of what NFTs are.

Non-fungible tokens (NFTs) are one-of-a-kind blockchain-based digital assets. Because of the unique nature of NFTs, demand for them is extremely high, resulting in increased prices for NFTs, making them only available to high-net-worth investors.

This is where fractional NFTs (F-NFTs) enter the picture. Fractional NFTs are a great way to invest in NFTs because they allow small and mid-tier investors to own a piece of an NFT. It is analogous to owning stock in a company.

What Exactly Is a Fractional NFT?

A fractional NFT is an entire NFT that has been broken down into smaller fragments, allowing multiple people to claim ownership of the same NFT. A smart contract programmed to generate a predefined number of tokens linked to the original indivisible NFT is used to fractionalize NFTs.

For each NFT holder, these fractional tokens represent a percentage of ownership. On NFT-supported exchanges, the tokens can be exchanged or traded.

What Is the Process of NFT Fractionalization?

The majority of NFTs are currently based on the Ethereum blockchain and adhere to the ERC-721 standard. The first step in fractionalizing an NFT is to place it in a smart contract, which is a blockchain script that is programmed to produce a specific result when certain conditions are met.

Based on predefined conditions, the smart contract divides the ERC-721 NFT token into multiple fragments in the form of ERC-20 tokens. The smart contract specifies the total number of ERC-20 tokens to be produced, as well as their base price, attributes, metadata, and other distinguishing characteristics. Each ERC-20 token represents a portion of the total NFT ownership. Fractions are typically sold at a fixed price for a set period of time or are sold out immediately after they are created.

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Consider an iconic painting that has been turned into an NFT with a price tag of $100 million. Only a small number of investors could afford it. The same NFT can be fractionalized into 20,000 ERC-20 tokens using a smart contract. This will allow investors to own a portion of the iconic painting for as little as $5,000 per piece, making it much more affordable and appealing to a larger pool of investors.

The use of fractionalized NFTs is not limited to the Ethereum blockchain. Any blockchain that supports NFTs and smart contracts can be used for fractionalization. Blockchains such as Solana (SOL), Polygon (MATIC), and Cardano (ADA), for example, all support the creation of NFTs. These networks also have lower gas fees and faster transaction speeds.

What Is the Distinction Between Fractional and Traditional NFTs?

Investors can own a fraction of a whole NFT through fractionalized NFTs. The distinction between a fractionalized NFT and a whole NFT is obvious—a whole NFT is a whole piece, whereas fractionalized NFTs are fractions of a whole NFT.

It is important to note that the process of fractionalization can be reversed, and a fractional NFT can be converted back into a whole NFT. In most cases, a buyout option is included in the smart contract that fractionalizes an NFT. This allows the original NFT owner or a fractionalized NFT investor to purchase all of the fractions and reclaim the original NFT.

A buyback auction is used for buyouts. Transferring a specific number of ERC-20 tokens of a fractionalized NFT to the smart contract can initiate this auction. This buyback auction will last for a set period of time, giving other fractionalized NFT holders time to make a decision. To keep their fractions, F-NFT holders will have to outbid the potential buyer. If the buyout is successful, all fractions are automatically returned to the smart contract, and the buyer obtains complete ownership of the NFT.

How Can I Get a Fractional NFT?

With the growing acceptance of F-NFTs, there has been an increase in the number of dedicated platforms where investors can buy and create fractionalized NFTS.

Individual investors can purchase fractional ownership in NFTs and other digital assets through Otis. Investors can use the platform to buy fractional NFTs, manage their portfolios, and trade their assets in real-time.

Unicly combines NFTs and decentralized finance (DeFi) to provide investors with a one-stop shop for creating, fractionalizing, and trading NFTs. Unicly claims to provide guaranteed liquidity for assets on its platform, as well as the ability to invest in multiple NFTs. The platform is also backward compatible with various NFT standards. By providing liquidity and staking their NFTs, investors can earn UNIC, the platform’s native token.

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Investors can buy, sell, and mint fractions of NFTs using fractional. It provides fractional ownership in some of the most popular NFTs. Fractional actively promotes NFT utility and community building around popular NFT collections.

The Advantages of Fractional NFTs
One of the most advantageous aspects of F-NFTs is that they allow investors to own a portion of a larger and more expensive NFT. F-NFTs are a useful investment option, and holders may gain governance rights on the NFT platform in some cases. It also allows for quicker inclusion and active participation in the thriving NFT industry.

Other advantages include:

Making NFTs More Accessible: The exorbitant prices of some NFTs prevent the majority of investors from purchasing them. Fractionalization reduces ownership costs and makes NFTs more accessible to a broader range of investors. Furthermore, investors can benefit from an NFT’s price increases because this automatically reflects on all of its fractions proportionally.
Price Discovery: Price discovery is the process by which the market determines the best price for an asset. New NFTs are typically difficult to price because they have little transaction history. Pricing becomes easier with fractionalization because multiple fractions can be put into the market for active bidding. This facilitates the quick establishment of prices based on market demand.
Increased Liquidity: The most distinguishing feature of NFTs is their uniqueness. This distinguishing feature influences access to NFTs, particularly valuable ones. F-NFTs address the NFT liquidity issue with ERC-20 tokens that are easily traded on secondary markets. Rather than waiting weeks or months to sell a whole NFT, investors can buy several fractions of it right away and trade them.

The Use of Fractional NFTs Levels the NFT Playing Field

Because they are simple to understand, inexpensive, and exist on major blockchains, fractional non-fungible tokens (NFTs) are an excellent way to get started with NFTs. You can buy as little as one-tenth of an NFT to diversify your portfolio and capitalize on the space’s potential upside.

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