What are Fractionalized NFTs

The popularity of NFTs has been on the rise for the past two years. Massive NFT collections like Bored Apes Yacht Club and Cryptopunks have continues to trade over the floor price of $100K+ even in a bear market.

Those who got in early made thousands in profits from these NFT collections, however, with such steep floor prices, it’s almost impossible for the majority of investors to afford one today.

But there is still one way for these investors to still invest in high-end NFTs like the ones mentioned above—fractionalized NFTs.

Fractionalized NFTs are quite literally fractions of an NFT that you can buy to claim partial ownership of an NFT.

In this article, we’ll take a closer look at what fractionalized NFTs are, how it works, and how to buy one.

What are Fractionalized NFTs?

Before we dive into the world of Fractionalized NFTs, let’s have a quick look at what NFTs are.

NFTs or Non-fungible tokens are a type of unique and unreplicable ERC-721 token that can be owned as digital property and the ownership can be validated using blockchain technology. Therefore the owner of such a property can prove their ownership and have the right to sell it to someone else.

However, the problem with traditional NFTs, especially blue chip NFTs, is the high entry barrier for investors. This is where Fractional NFTs come in to solve the problem.

Fractional NFTs or F-NFTs, in simple terms, are NFTs that has been divided into a number of fractions and sold in pieces using tokens. For example, if an NFT has been divided into a thousand fractions, each fraction will be worth 1/1000 of the total price. So when you buy one fraction, you’re essentially buying one piece of a large asset.

In technical terms, an NFT in the Ethereum blockchain follows the ERC-721 token standard and therefore is non-replicable. However, if you create a finite number of ERC-20 tokens and link it to the original NFT and lock it up inside a smart contract, those ERC-20 tokens essentially mirror the value of the NFT.

This works similarly to how stablecoins work. $USDT tokens are pegged 1:1 to the $USD. Now imagine you divide $1 into 100 cents, and create a stablecoin that is pegged 1:1 to 1 cent (in our case the fractions), then 100 stablecoins would equate to $1 (the whole NFT).

In the event that someone collects all the fractions, in our case all 100 of them, they can initiate a buyback function call. This will lead to the recovery of the original NFT and will burn the fractional tokens.

In some cases, buyers can stake their F-NFTs in the ecosystem and earn rewards from it. However, holders of F-NFTs won’t have access to special rewards, airdrops, or any other perks issued by the NFT creators for the original holders.

It’s not clear if the owners of the original NFT who executed the smart contract will still enjoy the perks albeit giving up a chunk of the ownership.

Depending on different platforms, certain features of F-NFTs vary, however, the core idea remains the same.

For example, Mutant Cat NFTs fractionalized their shares by creating $FISH token. If you buy $FISH tokens, you own a piece of a certain NFT. You can also stake that token to get more $FISH tokens as rewards.

The Benefits of F-NFTs

F-NFTs do offer the best of both worlds. The extremely high price of certain NFTs makes it impossible to afford one for the majority of people. While those who can afford to buy a Bored Ape or a CryptoPunk have to allocate a major chunk to a single asset.

F-NFTs solve this problem by allowing investors to diversify, and a few other ones.

Affordability

As mentioned above, F-NFTs make NFTs affordable to invest in. It’s impossible for regular investors to afford an NFT like BAYC#5199 which was sold for 425 ETH. However, if it was fractionalized into a million pieces, an average investor could have a piece at a fraction of a million dollars.

This makes NFTs a more democratized asset penetrating investors of all social classes and not just millionaires.

Diversification

Following the point of affordability, diversification is the next big benefit of F-NFTs. Even if some people can afford these high-value NFTs, a wise approach to investment is not putting all your eggs in one basket.

Diversification leads investors to find a way to keep investing in high-risk assets like NFTs with limited exposure and F-NFTs enable that.

For example, if you like a $150K cryptopunk, but don’t want to make that big a commitment in the bear market, F-NFTs can solve your problem. You can buy up 30% of the asset and still call yourself an owner.

As a result, you can take home a good chunk of money when the NFT rises in price, while in case of downfalls, you won’t have to incur too much loss. It’s a win-win situation for you.

Liquidity

The problem with Non-fungible assets whether digital or physical is binary ownership—you either own it or you don’t. NFTs suffer from the same problem because there can be only one owner.

So if one person buys an NFT, there is no way to buy/sell that NFT until that person sells it and it’s back in the market. But with an F-NFT it is always tradeable thanks to the ERC-20 tokens, anybody can have a piece of it at any time.

Price Discovery

Fractionalized NFTs will let the market decide the value of an NFT without bias or sudden context-shifting incidents.

For example, the announcement of the Otherside metaverse shot up the price of BAYC NFTs and the Ape token. Similarly, celebrity NFTs often tank because of incidents in their personal lives.

But when thousands of people trade an NFT, the chances of someone impacting the price individually decrease. The price movement becomes much more balanced or nuanced instead of depending on a single owner.

Existing Usecases of F-NFTs

So where are these F-NFTs? Who is using them?

Actually, quite a lot of people are minting F-NFTs from last year. We saw Grimes sold her art *Newborn 1 & 3 *as fractional NFTs and sold the fractions for $10 each on Otis.

The Doge NFT which was the inspiration for Dogecoin was bought by the PleasrDAO and they fractionalized it into 17 billion pieces.

The DAO bought the NFT at a valuation of $4 million. And after fractionalizing it, the individual tokens were priced at $0.019, a pretty low entry barrier for anyone.

Popular NFTs like Bored Ape and CryptoPunk have also been fractionalized several times.

The cryptopunk#8726 was fractionalized on Fractional.art and later sold profiting the investors.

The same event took place with BAYC#5264, which was sold for 169.9 ETH on Fractional as well.

Where To Buy/Sell F-NFTs?

Just like normal NFT marketplaces such as OpenSea or Magic Eden, F-NFTs have their own marketplaces. These are the 3 best marketplaces for Fractional NFTs:

Fractional.art

Fractional.art is the most popular NFT platform where you can invest in premium NFTs like BAYC and Cryptopunk. You can also mint your F-NFTs by locking up any NFT you own.

Rally

Rally is another great marketplace for fractional NFTs. It also lets you invest in other fractional collectibles like luxury watches and vintage video games that could make some nice profit.

Otis

Popular artists like Grimes have used Otis to fractionalize their NFTs. You can also trade other NFTs besides F-NFTs. Otis is a great platform for NFT portfolio management too.

Closing Thoughts

Fractionalized NFTs open up a new horizon for NFTs with new use cases and more flexibility. While there are risks to democratizing an already speculative asset, fractionalizing seems like a more natural progression.

We can safely presume a lot of NFTs in the future will be fractionalized leading to the creation of NFT index funds, staking, etc.

What do you think about F-NFTs? Let me know.