What are Fractional NFTs (F-NFTs), their meaning and how they work

NFTs, or non-fungible tokens, herald a new, transparent, decentralized era of assets. The assured exclusive ownership of NFTs is one of the most important characteristics. An NFT is essentially a unique token that cannot be copied or forged.

However, the NFT holders’ ability to use their assets is severely limited by this exclusivity. Because of this, industry innovators have pushed the boundaries of what is feasible for NFTs. This opens up opportunities for fractional ownership.

Crypto investors can own a piece of a big pie due to fractionation. There is little or no risk. The idea can be compared to having shares in a company. Small and mid-cap investors can now own NFTs instead of just whales with large bank balances.

A fraction NFT: What is it?

An NFT divided into smaller fractions is known as a fractional NFT. This arrangement makes it possible for many parties to claim ownership of different parts of the same NFT. A smart contract that creates a predetermined number of tokens linked to the indivisible original fractionalizes the NFT. These fractional shares, which can be sold or exchanged on secondary marketplaces, give each holder a portion of ownership in an NFT.

NFTs, also known as non-fungible tokens, are indivisible ERC-721 tokens produced by a smart contract on the Ethereum network. The tokens are the ideal medium for individualized intellectual property tracking as they are indivisible and impossible to duplicate.

Thanks to a series of record-breaking NFT project auctions, NFT asset values ​​soared in 2021. These virtual assets range widely and include virtual real estate, in-game objects, digital art, and many more.

Also read: What are music NFTs? How are they changing the music industry?

Access F-NFT ownership

NFTs are becoming an increasingly popular asset class. Some collections have grown to be so valuable that it has become prohibitive to purchase a single NFT. The NFT collections worth collecting can still be quite expensive, though not all have achieved the fame of Beeple’s artwork or the cartoon avatars of the Bored Ape Yacht Club. In addition, the fact that NFTs are unique tokens makes it challenging to buy them on cryptocurrency markets due to lack of liquidity.

Fractionalization is a potential solution to all these problems because of the high barriers to entry. The availability of NFT can increase for investors by dividing financial resources into smaller parts. Due to the increased market liquidity, this is beneficial for both investors and NFTs in general. Fractional NFTs are flooding the market with many affordable tokens offering a fraction of well-known NFTs.

Essentially, buyers with limited financial resources can purchase fractional NFTs for a fraction of their market value. Because of this, different investors can each acquire a part of the same asset.

Assets with fractionation

The concept of property ownership in parts is not new. The idea has been successfully applied to a wide range of physical assets, including warehouses, designer goods and luxury assets such as yachts and private jets, in industries ranging from real estate to fashion.

Also read: What is NFT Staking? Advantages and disadvantages of NFT Staking.

Fractionalisation is a popular method for groups of people to affordably buy holiday homes in the real estate sector. Owners who purchase shared ownership of property receive a deed representing their share, unlike timeshare owners who are only guaranteed a certain period of time on a property each year.

All gains and losses that come with owning property are assumed by fractional owners. Depending on how much of the asset each co-owner owns, they each receive a proportionate share of the income, rights of use and access to the shared property. The value of individual shares will increase if the holiday home’s overall value increases over a decade. Of course, this also means that if the value of the property falls, the value of the shares will do the same.

What is the process of NFT fractionalization?

An NFT is really just a token that follows the ERC-721 standard for Ethereum. NFT must first be locked into a smart contract, which is just a blockchain-based program programmed to run when certain criteria are met before it can be fractionated.

Following the NFT owner’s instructions, the smart contract splits the ERC-721 token into different fractions in the form of ERC-20 tokens. The owner specifies how many ERC-20 tokens will be produced, their price, their metadata and other properties. NFTs are represented by each fraction, or ERC-20 token, that has a portion of the ownership. The fractions are then offered for sale for a predetermined period of time or until they are all gone for a set price.

Also read: How to store NFT assets online and offline; Quick guide for beginners

The fact that NFTs and fractional NFTs are not only available on the Ethereum blockchain should not be overlooked. Any blockchain network that supports smart contracts and NFTs can implement fractionation. Alternative networks that support smart contracts that enable the generation and transfer of NFTs are Polygon (MATIC), Cardano (ADA), and Solana (SOL). Fast transaction speeds and tax-free use of gas are other advantages of these networks.

What differentiates F-NFTs from traditional NFTs?

Fractionalized NFTs, also known as F-NFTs, are fractional or percentage ownership of an entire NFT. An NFT is a whole, while F-NFTs are only fractions of the whole, therefore there is a clear distinction between the two.

It is important to note that the fractionation process can be undone, turning F-NFTs back into full NFTs. A buyout option is often included in the smart contract that fractionates an NFT, enabling an F-NFT investor to acquire all the fractions and unlock the original NFT.

By returning a predetermined amount of ERC-20 tokens from a pool to the smart contract, an F-NFT holder can initiate the buyout option. This will start a buyback auction that will last for a predetermined period of time. This gives time for the other F-NFT holders to decide. The fractions are automatically returned to the smart contract and the buyer gets full ownership of the NFT if the acquisition is successful within that time.

Why is the need for fractional NFTs?

F-NFTs are required for the following three main reasons:

Democratization: Smaller investors may not be able to participate in some NFTs due to their expensive costs. An expensive NFT can be made more affordable and accessible to a wider group of investors by fractionalizing it. It is also important to remember that when the price of an NFT rises, all fractional values ​​rise accordingly. The value of all the fractions will also decrease if their value drops sharply, which happens often in the cryptocurrency market.

Also read: Explain the NFT Whitelist. How do you join an NFT whitelist?

Price Discovery: Fractionalized NFTs can provide mechanisms to determine the price at which a specific NFT is valued. The open market is where the fractionalized ERC-20 tokens are traded, and their prices can thus help provide.

More Liquidity: One of the most distinctive features of NFTs is that they are unique tokens that cannot be duplicated or shared. Due to their rarity, few wealthy investors have access to NFTs, especially those that are valued. Due to the ease with which ERC-20 tokens can be exchanged on secondary marketplaces, F-NFTs alleviate this lack of liquidity. Many investors may be more eager to pick up fractions of an NFT right away at a lower price than they would wait weeks or months for one NFT to sell, to address the market’s liquidity difficulties.

Are they a smart investment?

Without question, fractional NFTs are a wise investment. They improve inclusion and participation in the burgeoning NFT market, while helping to free up liquidity for NFTs. They increase the NFT market’s new potential by democratizing, increasing liquidity and establishing prices.

However, fractionalized NFTs are not risk-free because they experience the same issues that affect NFTs in general, including publicity rights, contracts and intellectual property rights. F-NFTs are more likely to raise concerns with financial regulators because their creation could be considered unauthorized initial coin offerings, although the sale and acquisition of full NFTs as digital collectibles may not raise securities law (ICO) issues.

Hester Peirce, an SEC commissioner, expressed concern that the organization would see fractional NFTs as securities at the 2021 Security Token Summit. However, no official legal or regulatory standards for NFTs have yet been published by the SEC (US Securities and Exchange Commission).

The laws governing NFTs and F-NFTs will change as the market for these assets expands. Investors and business owners in NFT-related initiatives should be aware of potential legal difficulties for the time being.