Fractional NFTs and what they mean for real-world asset investing

While non-fungible tokens (NFTs) are currently suffering in the bowels of a bear market, some are using this time to build and develop new concepts with the technology.

One such new concept is fractional NFTs – an iteration of NFTs that allow multiple investors to own a portion of a single token.

These NFTs differ from regular NFTs in that they use smart contracts to fractionalize the token into a number of parts predetermined by the owner or issuing organization, who then sets the minimum price.

When applied to real-world assets, these NFTs provide an interesting use case for investors who plan to own valuable real-world commodities.

Fractional NFTs spread the cost of asset ownership over a wide range of users, enabling a group of investors to own a portion of a larger asset.

David Shin, head of global group at the Klaytn Foundation – a metaverse-focused blockchain – told Cointelegraph that they “enable more people to reap the benefits of assets while reducing the amount of upfront capital required per user, creating more inclusion for users who want otherwise has been priced out.”

Tokenized ownership is not a new concept. Before the use of NFTs, tokenization was a way for users to fractionalize real-world assets. However, fractional NFTs provide a new way for investors to share costs and transfer ownership of specific assets.

More accessible assets

Availability is one of the biggest benefits of NFT fractionalization as it is less expensive for investors, thus lowering the barrier to entry to owning certain assets.

The collective ownership that comes with fractional NFTs allows a group of investors to own assets with traditionally high entry barriers. For example, owning real estate or artwork requires investors to meet certain requirements, whether it’s a certain level of net worth or certain legal requirements.

Recent: Gym owners aim to bring NFT memberships to health clubs

By using fractional NFTs, these obstacles can potentially be circumvented by the average person. Alexei Kulevets, co-founder and CEO of Walken – a blockchain game to make money – told Cointelegraph:

“Whether you’re a builder, a collector, or a consumer, with fractional NFTs, you can co-own any fragment of an artwork or NFT project you’re working on. Or it could be something else entirely, where the ownership is confirmed by an NFT (eg real estate). Think of it as an exchange-traded fund, only without intermediaries and management fees. I think it’s a beautiful concept, fully worthy of being called the new era of the Internet. The era of creating and owning. “

Joel Dietz, CEO of MetaMetaverse – a metaverse creation platform – echoed the sentiment, telling Cointelegraph: “It makes it easier and, more importantly, accessible. Asset fractionation is not new, but it entered the NFT space not too long ago – one aspect is to make expensive tokens more accessible to different investors with different appetites – it makes it easier to set the price of NFTs and even unlocks opportunities for monetization via DeFi platforms.”

This accessibility could also bring additional investors into the blockchain space, Asif Kamal, founder of Web3 art investment platform Artfi, told Cointelegraph.

“Fractional ownership is the way forward to massively increase the size of the market and help adoption and accessibility for a much wider audience to invest in the asset class easier and in a much simpler way,” he said.

What are the use cases?

Real estate is a popular use for fractional NFTs, and the underlying blockchain technology adds an extra layer of transparency. For example, users can view past buyers and investment activity via the blockchain explorer.

Dietz said: “The common issue that everyone is very concerned about right now regarding Fractional NFTs is the potential for a person to transfer ownership of property (an IRL asset) – store the information on the blockchain and it transfers seamlessly and immutably.”

“By owning a fraction of an NFT that represents a real asset, investors can cash out their crypto holdings without leaving the decentralized financial ecosystem entirely. Now the hype is focused on real estate, but these high-involvement fractionalized commodities could be very interesting in the form of watches, paintings, boats, planes and more,” he continued.

Play-to-earn play is another use case for fractional NFTs, enabling multiple players to collectively purchase expensive in-game assets. In-game NFTs can become very expensive due to demand, and allowing players to share the cost can make it easier for them to use the same assets. For example, the P2E NFT game Axie Infinity is currently testing the idea of ​​fractional NFTs by selling fractions of the rarest Axie NFTs.

Barriers to adoption

While fractional NFTs can make it easier for people to invest in certain assets, market conditions can potentially disrupt their use.

Dietz said, “Given the market right now, though, we’re either going to see more creators and marketplaces using these fractional NFTs and gain popularity through these media, but if things don’t change, I doubt that fractional NFTs is going to develop much further, for now anyway. Who knows what the market will look like in the next three months, let alone three years?”

Regulators and legislators can also slow adoption. Since fractional NFTs allow people to own a fraction of an asset, they may be classified as stocks by the United States Securities and Exchange Commission (SEC).

Yaroslav Shakula, CEO of YARD Hub – a Web3 venture studio – told Cointelegraph: “As an idea, fractional NFTs sound promising, but on a practical level it involves certain difficulties, with regulation being the most important. Fractional NFTs are comparable to shares as they also confirm ownership of a share of an asset (NFT, in this case).”

Shakula also says current legislation is unclear about the legal status of fractional NFTs used to own a share of physical assets. “In many cases, this type of NFT ownership is not clearly outlined in the legislation, and projects and users have a hard time figuring out how the SEC or other authorities will handle this ownership. So for now shared ownership is only valid in certain territories where the relevant legislation is in place.”

Shin similarly stated, “The success of fractional NFTs in allowing investors to reap benefits from fair values ​​also depends on whether regulations work together. For example, dissonance will arise if fractional NFTs and traditional deeds pose competing legal claims to assets in the real world.”

Due to the uncertainty surrounding the taxation and legal status behind fractional NFTs, temporary ownership may be a safer bet in the short term.

Recent: Could Bitcoin Have Launched in the 1990s – Or Was It Waiting for Satoshi?

Shakula expanded on this, saying, “At the present time, a much more viable and feasible approach is to transfer timeshare/temporary ownership through NFTs. Examples of use cases are the rights to rent a car or stay in a hotel. This way, the NFT avoids owners to decide who pays taxes or who handles damage costs. But until these issues are resolved, fractional NFTs look better on paper rather than having common use cases.”

Regulatory concerns aside, some believe that fractional NFTs represent the values ​​of a decentralized internet. Kulevets sees fractional NFTs as a catalyst for Web3 adoption, saying:

“If you look closely, fractional NFTs represent the very essence of the Web3 concept. We call Web3 the next era of the Internet for a reason: decentralization, security, ownership and creation without intermediaries are among its fundamentals. Anyone who shares the vision , the skills and competence can co-create and co-own the new reality and be part of many projects.”