Fractional NFTs are wholes divided into smaller parts. They help increase participation and inclusion of investors in the NFT space by making NFTs more accessible. Additionally, they are more affordable, enhance market liquidity, and provide democratization.
For example, if you wanted to invest in a particular NFT but found it too expensive, fractional NFTs provide you with a more affordable alternative. When an NFT collection becomes more popular, its floor price rises.
This is great for collectors, artists, and investors who all get to make profits, but new investors trying to join the market will have a more challenging time making investments as the NFTs exceed their budgets.
With the help of Fractional NFTs, such investors can better explore the market. Fractionalization of NFTs shares the same concept as share ownership in a company.
As described above, fractional NFTs are whole NFTs divided into smaller parts. This means that multiple investors can buy the same NFT and claim partial ownership of the whole. A simple way to visualize this is to consider the NFT as a whole cake and a Fractional NFT as a slice of the cake.
Most people seeking to begin investing in NFTs have doubts about the authenticity of Fractional NFTs. However, understanding how the fractionalization of NFTs works can provide suitable answers to your questions.
NFTs are created using ERC-721 and ERC-1155 tokens on the Ethereum Blockchain. These two standards create unique NFTs that can not be duplicated. However, the ERC-20 tokens can be used to create fungible tokens and altcoins.
Fungible tokens are not unique and are therefore interchangeable. To fractionalize an NFT, you deploy a smart contract that generates multiple ERC-20 tokens and links them to an ERC-721 NFT. This allows you to gain partial ownership of the NFT. Take an NFT masterclass today to learn more about the fractionalization of NFTs.
You can reverse the fractionalization process described above to turn your Fractional NFTs back into whole NFTs. This is possible because the smart contracts used to fractionalize NFTs have buyout options that let an investor holding Fractional NFTs purchase all the parts to claim ownership of the whole NFT.
Fractional NFTs have many benefits. These include:
Democratization – As NFT collections increase in popularity, NFTs become more expensive and unaffordable to investors and collectors. To prevent shutting out such small investors or collectors from the NFT space, Fractional NFTs lower the cost, making the NFT more accessible.
Increasing liquidity – Expensive NFT collections are only accessible to wealthy investors. Fractional NFTs increase liquidity in the NFT space by dividing expensive NFTs into more affordable fractions.
Price discovery – Determining the accurate price of expensive NFTs that have limited transaction histories can be difficult. When such expensive NFTs are fractionalized, more people trade in the assets. This allows investors to determine the actual worth of the NFT accurately.
Increased exposure for the creator – Fractionalized NFTs can reach a bigger market than whole NFTs.
One of the most significant benefits of being a Fractional NFT holder is that you claim ownership of a fraction of expensive NFTs. This can often give you benefits like voting rights and exclusive access to NFT spaces.
A Fractional NFT is only as secure as the smart contract it is built on. If the smart contract has an invalid code, then the Fractional NFT is not secure.
Sometimes, Fractional NFT holders and potential buyers trigger buyout auctions by attempting to purchase the whole NFT. To retain ownership of your Fractional NFT, you must outbid the buyer. This means you will have to pay more to keep control of your Fractional NFT.
If the buyer outbids you, payment is distributed based on your percentage ownership. However, this means you can be forced to sell your Fractional NFT even when you do not want to.
Fractional NFTs might be the next big thing, as their numerous advantages, such as liquefaction and democratization of the NFT space, continue to make them more popular.
If you are an investor looking to join the NFT space but on a tight budget, you should consider exploring the more affordable options made available by Fractional NFTs. However, ensure to seek advice from an experienced professional before investing.