Non-fungible tokens, or NFTs, have been the focus of countless media articles in recent years and are no longer a new phrase. It represents ownership of a unique item, such as digital artwork, collectibles, or a domain name. An NFT is a one-of-a-kind token that cannot be duplicated or fabricated, so it is incredibly expensive. Popular NFTs can sell for millions of dollars, making them prohibitively pricey for the typical buyer. Take a look at the average pricing per single token on popular NFT marketplaces: $938.99 on OpenSea, $7,940 on SuperRare, and $123,690 on CryptoPunks. In that situation, Fractional NFT (F-NFT) has developed as a solution, providing better liquidity and lower entry barriers to a wide range of investors. You can now split NFTs and purchase and possess portions of the coveted tokens. Let's continue reading to learn more about fractional NFT ownership!
1. What Are Fractional NFTs? How Do They Work?
A fractionalized NFT, also known as an F-NFT, is a token that has been divided into fractions and sold separately. When you purchase an F-NFT, you are purchasing a little fraction of the NFT's value. For example, a high-value asset like real estate or a luxury yacht will be impossible for everyone to own. However, with fractional NFTs, it can be easier to gain fractional ownership of a high-priced asset just with a small budget.
If you are wondering “How do Fractional NFTs work?” or “How to create a Fractional NFT?”, the process is as below:
- An NFT is locked in a smart contract.
- The NFT issuer determines how many parts the NFT will be divided into, as well as its price and metadata. The NFT can be divided into as many parts as the owner desires, be it 10, 1000, or even a billion.
- The ERC-721 token is divided into a preset number of interchangeable ERC-20 tokens by the smart contract.
- ERC-20 tokens now represent fractions of the original NFT and can be sold at a fixed price.
- Buyers purchase F-NFTs, which they can then sell on secondary marketplaces without influencing the original token's value.
Although ERC-721 and ERC-20 are token standards created by Ethereum, NFT fractionalization is not limited to this blockchain but to any platform, such as Solana, Polygon, and Cardano that supports NFT minting and works with smart contracts.
2. Key Benefits Of Fractional NFTs
Let’s check out some benefits of F-NFTs:
- High Liquidity: NFT fractionalization solves the liquidity problems that NFTs have. When selling a high-priced NFT, you'll have to wait a while because only a few investors can afford it. F-NFTs, on the other hand, allow you to split the ERC-721 token into numerous ERC-20 tokens and sell each one separately. The price of F-NFTs is cheaper, hence easy to exchange and create liquidity.
- Price Discover: Pricing newly formed NFTs and NFTs with little or no transaction history is typically problematic. Fractionalization facilitates NFT pricing by dividing one NFT into numerous portions that can subsequently be released into the market for bidding. This helps in estimating an NFT's pricing depending on market demand.
- Democratizing Investment: Previously, small and medium investors are hard to participate in the NFT market due to the high price of NFT assets. However, the introduction of fractionalized NFTs has increased the number of chances available to them.
3. Top 04 Fractional NFTs Use Cases
a. Real Estate
By replacing intermediaries with smart contracts to facilitate a straightforward and secure transfer of ownership, NFTs can significantly speed up the property buying process. Even small and medium investors on a tight budget can engage in fractional NFT real estate. Instead of pouring a huge amount of money into owning a land, investors now can share the ownership of one property. This helps to boost the liquidity in the market, which is difficult to achieve when trading a highly valuable asset.
Although F-NFTs have yet to become widely used in this industry, this may soon change. To begin with, its implementation will lower the entry hurdle for small and medium-sized investors. Second, there's the much-discussed metaverse, where you may purchase digital properties. F-NFTs will become more popular in real estate as a result of these two applications.
We can expect a large wave of funding for metaverse-related projects as the concept of the metaverse becomes more prominent. F-NFTs can be used to bring together a group of investors, corporations, or even individuals to buy virtual land and other digital assets in the virtual world.
c. Play-to-earn Game
Participants in most play-to-earn games can buy and trade in-game items including rare cards, skins, money, swords, and avatars. F-NFTs can be used in such games to allow players to trade pricey in-game assets for fractionalized shares. For example, Axie Infinity, an online video game based on NFTs, is already experimenting with the F-NFT trade by selling fractionalized ownerships of ultra-rare Axies, one of the game's most popular NFT assets.
Digital artworks by famous artists are usually expensive, and not all people can afford them. Therefore, fractional NFTs can be a potential solution, allowing people to get collective ownership of iconic digital artworks. It avoids expensive and risky investments, and they’ll see that fractional tokens do not require a large outlay.
4. Final Thoughts
To summarize, fractional NFT has already piqued the interest of a wide range of investors because it made traditionally pricey tokens considerably more affordable. Furthermore, as NFT's popularity and demand expand, we may anticipate seeing many more exciting advances in this field.
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