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Fractional NFTs: How Do They Work + Should You Buy?
Fractional NFTs, or F-NFTs for short, have come onto the scene to make expensive NFTs more affordable to many. We know by now that NFT ownership cannot be faked, forged, or copied, but it can be shared via NFT fractionalization. Bringing other people into the mix can seem risky, so how does a fractional NFT work, and are they worth it?
What is a Fractional NFT?
Fractional NFTs are exactly what they sound like and work like fractional stocks, which means an entire NFT is divided into smaller “fractions” and the fractions are owned by different owners. The NFT doesn’t belong to any one NFT owner, and ownership is shared between all those who have the NFT fractions.
How Long Has it Existed?
While fractional ownership for NFTs is only a couple years old, the concept of fractional ownership has been around for centuries and can be traced back to the Dutch East India Company, which started to sell off fractions of its shares to the public back in the very early 1600s.
Since then, fractionalization has often appeared in the stock market and now even online investment platforms such as WealthSimple offers fractional shares.
How Do Fractional NFTs Work?
Partial ownership of assets and stocks is not new, but it is in the NFT market, which makes many NFT owners apprehensive. The NFT space is in its infancy, so how are fractional tokens regulated? Fractionalized NFTs employ the help of smart contracts, which secure the transaction.
We’re going to use Ethereum’s ERC -721 and ERC-20 tokens as a benchmark. The ERC-721 token is for non-fungible tokens and the ERC-20 is for fungible ones. They are both important because the smart contract will generate and link an ERC-20 token, which is divisible, to an ERC-721, which is indivisible.
This is how the Ethereum blockchain network creates a fractional digital asset for ownership. The smart contract generates multiple ERC-20 tokens, and links them to a while ERC-721 non-fungible token that is indivisible and secures the data of the transaction. This concept can be applied to any blockchain ecosystem that employs smart contracts and wants to support fractional digital artwork.
Are Fractional NFTs a Good Investment?
How do NFT owners benefit if there are multiple investors? It is a good avenue into owning a part of very expensive digital art for smaller investors. Some blue-chip NFTs are very expensive, and we mean upwards of hundreds of thousands of dollars. Regular interested parties may not have that amount sitting around, so sharing the load with another buyer or buyers will give you access to at least a percentage of what you couldn’t afford and help with liquidity issues.
However, F-NFTs aren’t the best if you want sole control over the future and use of your digital asset. F-NFTs come with the same risk as traditional NFTs such as rug pulls, copyright issues, etc. We’ll get into it in more detail below.
Advantages
Accessible Ownership of NFT
As said, the first big advantage to owning an F-NFT is the total value is split into portions, which will create access to those with limited funds. The threshold for NFT collectibles that were potentially inaccessible due to the high cost is now within reach for many people. Fractionalized NFTs work to bring more people into the NFT space, which will increase the market value of a lot of NFTs.
You can monitor the fluctuation of NFT prices on NFT Sales, which accurately displays the value of NFT tokens and collections.
Liquidity
If you own a valuable NFT, such as the Doge NFT, it can be very hard to sell it on secondary marketplaces because of the high cost. But if you own just a fraction of the whole crypto art, you will have greater liquidity because it is much easier to sell your part. There will be more buyers willing to shell out a much lower amount than the whole to own a piece of the digital art pieces.
Affordability
Aside from the liquidity issue, the affordability of virtual assets also greatly increases. There is more liquidity and easier access due to a lower price, and then it will be easier to sell the fractionalized tokens on the secondary market.
Price Discovery
It’s also much easier to determine what a fractionalized NFT is worth by looking at the different parts. It’s simpler for potential buyers to gauge the value of the original NFT because when an individual part is listed on the market, buyers and creators can figure out the value of the whole thing. Or you can use sites like NFT Sales to value digital collectibles.
Disadvantages
Less Regulation
Fractional crypto assets are not without risks, even for the most popular NFTs, and the lack of regulation is a big aspect. The crypto market is much newer than the stock market, and until the ecosystem is fully developed, the lack of regulation is to be expected.
Yes, the contracts help prevent issues, but you can never be fully protected. There is also an issue with reconstitution. If you own the entire NFT, then you call the shots. You pick and choose when and how to sell off your piece (auction, fixed price, etc).
The problem arises when many people own a part of the same asset, you have to consider what the other person does, and when and how they sell because it could impact the price and value of your share.
There is also no central regulatory body for crypto as of now, which means your transactions are not protected outside of the blockchain.
Contract Risks
Yes, smart contracts do help with security, but as of now, they are still susceptible to hackers. However, this risk may be minimized in the future when more expertise is gained in the field and there is better security within the space.
Prone to Copyright Infringement
Intellectual property (IP) rights are still an issue for the tokens. Don’t just buy whatever the person is selling, make sure that the art piece is actually theirs, meaning they have ownership rights. If they do, it should be proven within the metadata of smart contracts.
Volatility
The volatility of NFTs and crypto applies to F-NFTs as well. Everything depends on demand, and the market, which can be too volatile for some buyers. At this point, digital assets are much more volatile than physical assets, and NFTs are exemplary of this.
Recurrently Issued Collectively Kept Shards (RICKS)
There is another problem, which is Recurrently Issued Collectively Kept Shards, or RICKS. RICKS is a solution to the reconstitution problem. The alternative to selling an NFT for a buyout price, it gives a constant percentage of the NFT, which can be sold at NFT auctions to existing RICKS holders for rewards.
Fractional vs. Traditional NFTs
Should you go for partial options or traditional NFTS? The difference is traditional ones are whole NFTs and fractionals are parts of an NFT representing the whole. Traditional whole NFTs are easy to understand. You buy, you sell, you have all the control.
As for fractionals, the transactions are a little more complex. It’s also worth it to note that NFTs that represent fractional ownership can be reconstituted into the original whole via the buyout option.
If you have the funds, we would suggest going for the whole thing, but F-NFTs are excellent if you do not have the capital for more expensive blue-chip NFTs.
Where to Buy a Fractional NFT
Like with fractional stocks, not every financial institution offers them. So, where can a buyer purchase F-NFTs? Below are the best marketplaces to purchase your first fractional NFT.
The first marketplace is Otis, which specializes in more than just digital pieces, and buyers can also find sneakers and other physical collectibles on the site. Its transactions have been secured by the Securities and Exchange Commission (SEC), which puts a lot of people at ease. The platform is easy to navigate and won’t take much time at all to learn.
Next up is Unicly, which focuses on bringing partial NFTs to more people. You can browse on the platform for potential buys or transform your own collection into tradable fractions. You can tokenize, trade, mix and farm on the platform.
The name says it all, Fractional.art is a dedicated platform that allows NFT supporters to buy, sell and mint just fractions of their favorite pieces. It greatly reduces the cost of entry for people and fractionalizes some of the most popular (and expensive) NFTs around.
Lastly, we have Partybid.app, which comes at the partial NFT with a different approach. You can pick who you purchase an NFT with. You can join an existing party or start your own, which for many buyers, it eliminates existing hesitancy and apprehension surrounding F-NFTs.
Before committing to any marketplace, make sure that you have the tools necessary to use it, such as a compatible digital wallet and the supported tokens.
FAQ
Is fractional art safe?
Yes, fractional art is safe, but like with regular NFTs, there is always a risk of hackers. The blockchain you pick should be secure, as should the smart contracts that regulate your transaction. Go with a marketplace that has a long-standing history of trusted transactions.
How does fractional art make money?
Fractional art makes money by greatly lowering the threshold to access popular and expensive NFTs. Because more people can enter the space and valuable NFTs are no longer only available for those with the capital, it can boost the value of many collections with increased demand.
Conclusion
The conception of F-NFTs will create many opportunities for the average NFT supporter. The demand for a low-cost entry was overwhelming, and fractional NFTs were created in response to that. Now, you can find dedicated marketplaces solely focused on these NFTs, and your funds will no longer dictate what you can and cannot buy.
