What is a fractional NFT (F-NFT) and how do they work?

Non-fungible tokens (NFTs) are unique digital assets that exist on a blockchain. The unique nature of NFTs makes the demand for them extremely high, resulting in increased prices for NFTs, making them available only to high net worth investors.

This is where fractional NFTs (F-NFTs) come in. Fractional NFTs are a great way to buy into NFTs as they give small and mid-tier investors the opportunity to own a portion of an NFT. It is similar to owning shares in a company.

Here’s a look at fractional NFTs, how they work and their benefits for investors.

What is a fractional NFT?

A fractional NFT (F-NFT) is a whole NFT broken up into smaller fragments, so that several people can claim ownership of part of the same NFT. NFTs are fractionated using a smart contract programmed to generate a pre-defined number of tokens linked to the original indivisible NFT.

These fraction symbols represent a percentage of ownership for each holder of the NFT. The tokens can be exchanged or traded on NFT-backed exchanges.

How does NFT fractionalization work?

The majority of NFTs currently exist on the Ethereum blockchain, using Ethereum’s ERC-721 standard. The first step in fractionalizing an NFT is to lock it into a smart contract, a script on the blockchain that is programmed to automatically produce a specific result when predetermined conditions are met.

The smart contract splits the ERC-721 NFT token into multiple fragments in the form of ERC-20 tokens based on preset conditions. The smart contract outlines the total number of ERC-20 tokens to be produced, their base price, attributes, metadata and other unique properties. Each ERC-20 token represents a partial share in the ownership of the entire NFT. Factions are usually sold at a fixed price for a period of time or sold out immediately after they are created.

Imagine an iconic painting that has been made into an NFT with a fixed price of $100 million. Only a few investors would be able to afford it. Using a smart contract, the same NFT can be fractionalized into 20,000 ERC-20 tokens. This will make it possible to own a fraction of the iconic painting for just $5,000 apiece, which is much more affordable and will attract a larger group of investors.

Fractionalized NFTs are not limited to the Ethereum blockchain alone. Fractionalization can be done on any blockchain that supports NFTs and smart contracts. For example, blockchains such as Solana (SOL), Polygon (MATIC) and Cardano (ADA) support the creation of NFTs. These networks have the added benefit of lower gas fees and faster transaction speeds.

What is the difference between fractional NFTs and traditional NFTs?

Fractionalized NFTs give investors ownership of a fraction of an entire NFT. The difference between a fractional NFT and a whole NFT is clear – an NFT is a complete piece, while fractional NFTs are fractions of a whole NFT.

It is important to note that the fractionation process can be reversed, and a fractionated NFT can be converted back to a whole NFT. A buyout option is usually included in the smart contract that fractionalizes an NFT. This gives the original owner of the NFT or a fractional NFT investor the ability to buy all the fractions and get back the original NFT.

Buyouts take place via a buyback auction. This auction can be triggered by transferring a specific number of ERC-20 tokens of a fractional NFT to the smart contract. This buyback auction lasts for a fixed period and allows other fractional NFT holders to make a decision. F-NFT holders will have to outbid the potential buyer to hold onto their fractions. If the buyout is successful, all fractions are automatically sent back to the smart contract, and the buyer gets full custody of the NFT.

How to access a fractional NFT?

The growing acceptance of F-NFTs has seen the emergence of dedicated platforms where investors can buy and create fractional NFTS.

• Otis allows individual investors to purchase shared ownership in NFTs and other digital assets. Investors can buy shares of NFTs, manage their portfolios and trade their assets in real-time via the platform.
• Unicly combines NFTs and decentralized finance (DeFi) to provide investors with an all-in-one platform to create, fractionalize and trade NFTs. Unicly claims to offer guaranteed liquidity for assets on its platform with the ability to own part of multiple NFTs. The platform is also compatible with various NFT standards. Investors can earn UNIC, the platform’s native token, by providing liquidity and staking their NFTs.
• Fractional allows investors to buy, sell and mint fractions of NFTs. It offers shared ownership for some of the most sought-after NFTs. Fractional actively promotes community building and NFT utility around popular NFT collections.

Advantages of Fractional NFTs

One of the most beneficial aspects of F-NFT is that it offers investors the opportunity to own part of a larger and more expensive NFT. F-NFTs provide a useful investment option, and in some cases, holders can gain management rights on the NFT platform. It also allows for faster inclusion and active participation in the booming NFT industry.

Other benefits include:

• Make NFTs more accessible: The outrageous prices of some NFTs preclude most categories of investors from being able to afford them. Fractionalization lowers the cost of ownership and makes NFTs accessible to a wide range of investors. In addition, investors can benefit from price increases on an NFT, as this automatically reflects all fractions proportionally.
• Price discovery: Price discovery is how the market determines an asset’s optimal price. Typically, new NFTs are difficult to price because they have little transaction history. Fractionalization makes pricing easier, as the multiple fractions can be entered into the market for active bidding. This helps establish prices based on market demand quickly.
• Increased liquidity: The most defining characteristic of NFTs is their unique nature. This unique feature affects access to NFTs, especially precious ones. F-NFTs solve the NFT liquidity challenge through ERC-20 tokens, which can be easily traded on secondary markets. Investors can buy multiple fractions of an NFT immediately and trade them instead of waiting weeks or months to sell an entire NFT.

Fractional NFTs level the NFT playing field

Fractional non-fungible tokens (NFTs) are a great way to get started with NFTs because they are easy to understand, inexpensive, and exist on major blockchains. You can buy as little as one-tenth of an NFT, diversify your portfolio and take advantage of the potential upside in the space.