Talk of fractional nonfungible tokens (F-NFTs) is rife in the IT community. They are the most recent advancement in the NFT market, and they have the potential to completely alter the architecture of NFTs while also providing investors with new opportunities.
Anyone who has been keeping up with NFT developments is aware that NFTs frequently make the news due to their absurd values. Popular NFTs can cost millions of dollars, making them unaffordable for the typical consumer. The development of F-NFTs was prompted by the requirement to address this issue.
From a financial standpoint, owning a tiny portion of a well-known but costly NFT is far more advantageous than buying outright multiple unimportant ones for the same price.
The concept of F-NFTs is quickly gaining traction. Their launch is viewed as a revolutionary step that will push the limits of what is practical in the ownership of digital assets.
A Fractional NFT is What Exactly?
An NFT that has been divided into fractions and sold separately is known as an F-NFT, sometimes known as a fractionalized NFT.
A practical illustration of NFT fractionalization is the Doge NFT sale. The Doge meme, an NFT, was sold for a staggering $4 million in June 2021. After purchasing the NFT, PleasrDAO later made fractional ownerships of the NFT available to supporters for as little as $1 in $DOG tokens.
Art is the source of inspiration for F-NFTs, however this is not the sole use for F-NFTs.
Use Cases of Fractional NFTs
F-NFTs and gaming
You may purchase, trade, and possess numerous in-game products, some of which are NFTs, in the majority of play-to-earn cryptocurrency games. F-NFTs may be used in these multiplayer games to let players to pool their resources and trade pricey in-game items by investing in their fractionalized shares. By offering fractionalized ownerships of ultra-rare Axies, one of its most well-liked in-game NFT assets, Axie Infinity, an NFT-based online video game, is already exploring the viability of F-NFT trade.
F-NFTs and the metaverse
We may anticipate a significant increase in funding for metaverse-related initiatives as the concept becomes more widely accepted. Businesses like Sandbox and Decentraland have already entered this market.
F-NFTs may be utilized to enable corporations, individual investors, and even small organizations to gather together and purchase virtual land and other comparable digital assets within the virtual world.
F-NFTs and real estate
By substituting middlemen with smart contracts to facilitate a quick and secure transfer of ownership, NFTs can substantially speed up the process of purchasing real estate. Other significant advantages of converting a real estate asset into an NFT include immediate ownership settlement and a streamlined transaction process. Additionally, because the ownership and rights history may be directly recorded on a blockchain, it is often quick and simple to verify transaction information.
In that they permit the acquisition and sale of properties without the need of a middleman, F-NFTs are comparable to NFTs. The sole distinction is that F-NFTs let numerous people, as opposed to just one, to share ownership of the property. Although F-NFTs have not yet become a mainstay of the real estate sector, it is clear that their use will eventually make real estate investment simpler and more accessible.
How do Fractional NFTs Function?
We will attempt to explore fractionalization using an ERC-721 NFT as an example as the majority of NFTs adhere to the Ethereum ERC-721 standard.
This NFT has to be locked in a smart contract that will divide the ERC-721 token into a number of ERC-20 tokens in accordance with the instructions provided by the NFT owner before it may be divided into fractions. Everything is specified by the owner, including the quantity of ERC-20 tokens to be produced, their pricing, the metadata to be utilized, and any other features they think significant. Each produced fraction or ERC-20 token represents a portion of the NFT. The fractions can then be offered for sale for a set period of time or until they are all gone for a set price.
To further understand how F-NFTs function, let’s look at an example. We are all aware that one of the most well-known pieces of art ever made is Edvard Munch’s The Scream from Norway. In reality, New York investor Leon Black purchased it for about $120 million in 2011 when it was placed up for auction by Sotheby’s. Imagine this piece of art as an NFT. It is simple to assume that its price will be in the millions and that only a small number of affluent investors would be able to afford it. But if this astronomically expensive NFT could be fractionalized into, say, 10,000 ERC-20 tokens, one might invest in the piece for as little as $12,000 a fraction.
Therefore, fractionalization makes pricey and uncommon NFTs more accessible and appealing to even small- and mid-sized investors.
It’s crucial to keep in mind that fractionalized NFTs aren’t exclusive to the Ethereum network. Any blockchain network that accepts smart contracts and NFTs is capable of fractionalization. F-NFT ownership transfers can be facilitated via networks like Polygon, Solana, and Cardano.
Is Fractionalization Required for NFTs?
The price of owning an NFT is rising significantly as they become more and more popular. Only through fractionalization will pricey NFTs be made accessible with democratized ownership. Fractionalization produces intriguing outcomes. It first guarantees affordability. Second, the value of the fractions that other stakeholders hold would not be impacted if one of the fractional owners decided to sell their portion at a lower price. Third, purchasers who are ready to pay less for fractionalized ownerships will still be drawn to NFTs even if their bidding prices rise during an auction.
The Advantages of Fractional NFTs
Cost-effective pricing discovery
For NFTs, F-NFTs provide effective price discovery. The method by which a market chooses the appropriate price for an object is known as price discovery.
Pricing newly formed NFTs and NFTs with little to no transaction history is typically challenging. By enabling the division of an NFT into several sections, which may subsequently be made available to the market for bidding, fractionalization facilitates the price of NFTs. This aids in determining an NFT’s pricing depending on market demand.
F-NFTs are a rapid method for determining the market value of uncommon and special NFTs. Additionally, the value of an NFT’s fractions grows as its price does. However, as is frequently the case with cryptocurrencies, an NFT might also rapidly lose value, in which case the prices of the fractions will also decrease simultaneously.
High liquidity
NFTs have value since they are uncommon. They are still less liquid as a result than many other trading digital assets. Due to its ability to allow smaller investors to hold assets collectively, F-NFTs increase liquidity in the NFT market. The quickest and most efficient way to sell pricey NFTs is through fractionalization. Therefore, you may fractionalize an expensive NFT into as many parts as necessary to achieve the right degree of affordability if you possess one and are having trouble selling it. NFTs are now more enticing to investors thanks to fractionalization, which has also successfully addressed the liquidity issue this asset class was having.
Curator incentives
The NFT marketplace of the NFT owner’s choice will pay them a curator fee if they divide their asset into fractions. Although the owner is free to decide and alter this fee’s amount, there is a cap on it to prevent overcharging.
