NFTs, or Non-Fungible Tokens, have proved to be a sensational innovation in the Crypto market for a considerable time. The fascinating concept hit its peak in the year 2021 with some astonishing numbers to its name. The positive aspect of the story was the emergence of fractional NFTs, which needed just a little bit of tinkering work in the primitive structure of the usual NFT concepts.
For the unknown, NFTs are crypto assets that possess uniqueness and rarity. Like traditional tokens, a subdivision isn’t possible. The non-fungibility factor defines NFTs. The outstanding growth of NFTs in various fields increased the demand. It increased the cost of NFTs to an extent. Hence, only a few average buyers could afford such a huge amount of money for NFTs despite a deep interest in them.
Besides, the general thought process for an average buyer is to invest in small pieces of a remunerative product. For a significant part of the last few years, the question “can I invest in a small portion of an NFT” has made the rounds. Despite the answer being “Yes,” few are aware of the concept involved. This blog envelops a complete discussion on Fractional NFT and how it could help participate a lot more people in the NFT world.
What are Fractional NFTs?
Fractional NFTs (F-NFTs) are small fragments broken from a whole NFT to interest many more buyers into a piece of artistry. Each of these fragments has an ownership claiming facility, thus inviting more owners into the world of NFTs. Buyers no longer have to worry about affordability and can concentrate on owning a part of their favorite NFTs at reduced prices.
Doge NFT is a perfect example that might help you understand better about fractional NFTs. The popular Doge NFT sold for a whopping price of $4 million in June 2021. PleasrDAO bought the Doge NFT and fractionalized it into 17 billion pieces, allowing more traders to invest in the token for lower than $1.
Various artworks which are relatively high-priced have resulted in owners fractionalizing them, and the broken pieces facilitate individual trading. The original NFT gets stored in a vault while new fractional NFT owners receive a limited supply of fungible tokens representing the fractions. The process follows similarities to the share market, where companies buy a certain number of shares from the owner.
Before entering the process of fractionalization, it’s essential to know the popular fractional NFT Marketplaces in the market.
Popular Fractional NFT Marketplaces
An NFT usually gets created, minted, traded, bought, or sold on NFT marketplaces. However, only a few of the platform offers fractionalization for NFTs. The expensive NFT owners access the platform to lock up their original asset in a vault and fractionalize it into fungible tokens with the ERC-20 token standard for small-scale buyers. Here are some of the popular NFT Marketplaces with fractionalization options available.
The fractionalization concept has ensured that the weightage is equally distributed while investing in an expensive NFT among the buyers. Moving on, there are several areas where fractional NFT serves.
Use cases of Fractional NFT
Fractional NFTs have taken a huge stride in several sectors and announced their arrival with a bang. Right from NFT gaming to metaverse, fractionalized NFTs have made their presence felt already in the latest developments. Here’s an overview of some of the use cases of fractional NFTs.
Fractional NFTs in artwork
Honestly, NFTs managed to uplift the life of artists who had seen a drastic downfall despite their impeccable creativity. The expensive artworks minted as NFTs did not find many buyers; however, with fractional NFTs entering the fray, life has become easier for artists. A lot more investors are ready to break the bank for the different fragments of art with the introduction of fractionalized NFTs.
Fractional NFTs in gaming
The gaming industry has evolved rapidly, and its addictive nature is still prominent among users. In fact, NFT-based gaming platforms like Axie Infinity proved to be another revolutionary addition to the sector. P2E (Play to Earn) games that allow buying, selling, or trading NFTs have included fractional NFT options for more users to engage in their platform.
Fractional NFTs in Metaverse
Probably, one of the most amazing developments in the last few years has been Metaverse. Platforms like Decentraland, Sandbox have shown the pathway for investing in Metaverse and earning revenue by trading NFTs. Buying virtual land in Metaverse is no longer a tedious process, with fractional NFTs coming to the fore. Investors can come together collectively and buy virtual land, which could be a profitable earning model.
Fractional NFTs in Music
NFTs in Music has enabled a different source of revenue for Musicians. A piece of music can now release in the virtual world directly before the real world. The immense developments visible here through NFTs is now possible with fractional NFTs as well. Thus, the most expensive music works which weren’t under the range of average buyers are being bought at ease. Also, the Royalty feature is another way to generate revenue for Musicians and grab more audience. Through fractionalized NFTs, Musicians are now looking to ensure royalties from a music album directly go to the fans who invest in the album.
Given the different use cases of fractional NFT, it’s inevitable that the concept has provided hope for investors who feared expensive NFT buying. As we move along, here’s a deeper look into how to create a fractional NFT and access.
Working process of Fractional NFT
To understand the fractionalization process, take an example of an NFT created on the Ethereum blockchain. ERC-721 and ERC-1155 are the token standards for NFTs created on Ethereum. The process of fractionalization involves breaking down an ERC-721 token into multiple ERC-20 tokens. The number of fractions required gets issued while deploying the smart contract, which has a set of protocols to execute an operation when the required conditions meet.
An NFT vault is a place where the original indivisible NFT gets stored during fractionalization once the owner creates it. Having seen the fundamental process of fractionization, here’s a step-by-step walkthrough of creating a vault.
- The first step is to connect the wallet to the NFT marketplace, where the fractionalization process is set to take place.
- The next step is to select the NFT that needs fractionalization. Once the NFT gets chosen, the entrepreneur has to provide the name of the vault, the amount of fractionalized tokens, a symbol for the fractions, a reserve price to trigger an auction, and the annual management fee
- The owner has to approve the NFT basket containing all the details from the previous section.
- Once the approval of the basket is complete, the next step is to approve the NFTs to transfer them into the basket individually.
- Finally, once the owner confirms the fractionalization, a vault gets created.
Notably, to access the vault, the NFT has to go to Settings and Actions. A dropdown box with options to add a description, update auction length, update reserve price, redeem NFTs, and add to Wallet option will be listed. Once the fractional NFTs are added to the Wallet, the owner can easily use the fractionalized NFTs on various other platforms.
Benefits of Fractional NFT
Fractional NFTs can serve a variety of purposes in terms of the NFT owner. Looking into it one by one should get you closer to why fractional NFTs can be on the bright side for the owner.
Equity in ownership
The concept of fractional NFT has brought about equity in ownership of some of the expensive NFTs. The low-scale investors can compete with high investors for their desired NFT ownership and will need not have to worry about the money factor. In a way, this increases the tally of the number of NFT owners.
Fractional NFT provides voting rights for owners while updating the reserve price in the vault details. The minimal price required to bid for triggering an auction is deemed as the reserve price. Interestingly, the price is calculated by weighing the average of all owners of the fraction who had already updated their reserve price.
Market value Assessment
The newly created NFTs have some complexities when compared to fractional NFTs. The market value and demand determination aren’t much easy for new NFTs with no transaction history. On the other hand, fractionalized NFTs enhance the discovery of market value since their division into several fragments, and owners can assess the demand easily.
One of the major problems in the NFT industry has been liquidity. Expensive NFTs hardly find buyers, and hence, there isn’t much liquidity in the platform. Alternatively, the introduction of fractional NFTs has solved the troubles with liquidity, with more investors making an entry into the platform.
Revenue is the ultimate point of any business. In this case, the NFT owner has the luxury of receiving curator incentives from the NFT Marketplace whenever the fractionalization occurs. However, the curator’s incentive has a maximum limit and NFT owner cannot set beyond that.
All these benefits underline how opting for fractionalized NFTs should be a dream come true for NFT owners. For entrepreneurs with NFT business ideas, the concept of fractional NFT has opened a different eye to them as it has increased the user count in NFT Marketplaces. No wonder, startups are craving to develop an NFT Marketplace soon in the mix.
To sum up, every advancement in business tends to face a few muddles. On the same note, fractional NFTs had the problem of reconstituting. Thanks to the buyout option, the NFT owners can buy back all the fractionalized NFTs if the maximum bid is with them during the auction to solve the problem of reconstitution. Additionally, fractional NFT owners can also hold back their assets if they manage to outbid the potential buyer’s amount.
Thus, on both ends, the fractional NFTs have managed to withstand and prove to be an excellent addition to the NFT business. Besides, fractionalized NFTs have kept the market improving for traditional NFT businesses. More investors indirectly lead to entrepreneurs keeping track of the profit-earning methods through NFT Marketplaces. Popular NFT Marketplaces are likely to add fractionalization to their arsenal in the coming years.
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