What Are Fractional NFTs And What Benefits Do They Offer

Fractional NFTs: A Brief Overview

Non-Fungible Tokens or NFTs represent a new epoch of asset ownership that is transparent and decentralized. Some of the most prominent and unique attributes of NFTs are:

• NFTs are verifiable
• NFTs are indestructible
• NFTs are indivisible
• NFTs guarantee absolute ownership
• NFTs are essentially interoperable, i.e, they can be purchased, traded, or sold

One of the key defining properties of NFTs is the guaranteed exclusive ownership that it pre-eminently offers, making them a one-of-a-kind token. However, this exclusivity often limits what NFT holders can potentially do with their assets. This has pushed innovators in this space to push the boundaries of possibilities with NFTs, including opportunities for having fractional ownership.

As the prices of famous Non-Fungible Tokens can run into millions of dollars, it makes them prohibitively expensive for average buyers or small/mid-tier investors. The requisite to mitigate and solve this problem led to the emergence of fractional NFTs. From the perspective of gains and profitability, having a small fraction of expensive yet popular NFT is much better than gaining full ownership of various insignificant ones at seemingly the same prices. 

The idea of NFT factionalization is swiftly gaining momentum. And its inception is globally being perceived as a revolutionary move that would transcend the boundaries of what is possible within the virtual worlds of digital ownership.

What is a Fractional NFT?

A fractional NFT is basically a whole NFT that has been fractionalized or divided into smaller fractions, enabling them to be sold individually and allowing multiple people to claim ownership of the same Non-Fungible Token. The NFT is factionalized using smart contracts that produce a set number of tokens that are linked to the indivisible token. These fractional tokens provide each holder with a percentage of ownership of the NFT that can be exchanged or traded in metaverse NFT marketplaces. 

For instance, the Doge NFT sale is a real-world example of the fractionalization of NFTs. Although, the inspiration behind the creation of fractional tokens is basically artworks, however, art is not the only sector where F-NFTs have usage and implications.

What Is The Difference Between Conventional NFTs and F-NFTs?

Fractionalized NFTs, also reckoned as F-NFTs, denote fractions or percentage ownership of a complete NFT. The distinction between the two is obvious: an NFT is a whole while fractional NFTs are basically fractions of the whole.

It is pivotal to note that the fractionalization process can be reversed and F-NFTs can be transfigured back into a whole Non-Fungible Token. Smart Contracts that are used to fractionalize NFTs typically furnish a buyout option that enables any NFT investor or buyer to purchase all the fractions and unlock the original Non-Fungible Token.

An F-NFT holder can also initiate the buyout option by transferring particular numbers of ERC-20 tokens from a collection back to the smart contract. It triggers the buyback auction, which runs for a specific and fixed period of time. This ultimately gives other F-NFT holders some time to make a purchase decision. Moreover, the fractions are returned automatically to the smart contract in case the buyout goes through during that timeframe, allowing the buyer to gain full ownership of the NFT.

Benefits of Building Fractional NFTs

Fractional NFTs present numerous merits for performers, artists, investors, and gamers alike. Here are some of the most vital aspects:

• Aids in monetizing artistic works, virtual land parcels, and in-game assets more efficiently
• Increases liquidity in secondary markets for Non-Fungible Tokens by enabling several people to co-own any popular asset or artistic work
• Facilitates the democratization of investments. By fractionalizing an NFT into several fragments, the barrier to ownership and entry cost can be significantly reduced, thereby enabling more users to enter the NFT market

How Do Fractional NFTs Work?

Since most NFTs are built using Ethereum’s ERC-721 standard, we will try to explain fractionalization using an example of ERC-721 NFT.

So, in order to break this NFT into fractions, it must be first locked in a smart contract, which will then split the ERC-721 token into multiple ERC-20 tokens in accordance with the instructions given by NFT owners. They specify everything such as the number of ERC-20 tokens to be created, the metadata to be used, their prices, and other crucial properties. Each created fraction of the token represents partial ownership of the NFT. These fractionalized NFTs can then be put up for sale for a particular time at a fixed price until they get sold out.

NOTE: It is crucial to know that fractionalized NFTs don’t only work on the ETH blockchain. Token fractionalization is possible on any blockchain network that supports NFT and smart contracts development. Networks such as Cardano, Polygon, Solana, etc can all facilitate ownership transfers of F-NFTs. 

Also Read: Adapting Your Business Applications For The Metaverse

Use Cases of Fractional Non-Fungible Tokens

F-NFTs and the metaverse

With the notion of metaverse development services entering the mainstream and revolutionizing every possible industry, we are witnessing a colossal influx of investments into projects related to the metaverse. Companies such as Sandbox and Decentraland have already marked their presence and made a foray into the domain.

F-NFTs can be used to enable groups of conglomerates, investors, and even individuals to come together and purchase virtual lands or other digital assets within the metaverse.

F-NFTs and gaming

A majority of P2E games in the metaverse enable users to buy, own, and sell several in-game assets and items, some of which are NFTs. Moreover, multiplayer games can further use F-NFTs to enable players to own and trade expensive in-game assets by purchasing their factionalized shares. 

For instance, Axie Infinity, an NFT-based online video gaming platform is already testing the accessibility and feasibility of F-NFT by selling fractionalized ownerships of super-rare Axies, one of the most sought-after and popular in-game NFT assets.

F-NFTs and real estate

NFTs can prominently accelerate the process of purchasing properties by removing intermediaries with smart contracts to allow safe and simple transference of ownerships. Converting real estate into NFTs also has imperative benefits like a simplified overall transactions process and instantaneous ownership settlement. 

Closing Remarks

With the soaring popularity of Non-Fungible Tokens, the cost associated with owning one token is also considerably increasing. It is only through NFT fractionalization that expensive tokens can be made accessible, cost-effective, and easy to hold via ownership democratization. The results and implications of F-NFTs are remarkable as it offers benefits such as affordability, monetization, and increased adoption.

If you are looking for smart contract development, NFT development, NFT fractionalization, or metaverse NFT marketplace development services, get in touch with our experts. Our team will help in selecting the right blockchain network for you and deliver solutions that are custom-tailored to your business requirements.