The rise of fractional NFTs: what does it mean for digital assets?

In the last couple of months, we have covered NFTs in some depth, first with an overview and dive into their technical aspects, then with a look at the trending projects and NFT marketplaces. According to the aggregate website NonFungible, despite the recent crypto drop, the trade in NFTs is still going strong.

  • While the number of sales was around 180,000 per day in July, that number has sharply increased, with 520,000-620,000 trades a day from mid-August to mid-September.
  • While these trades have gone down to around 370,000 per day over the last week, there has only been a small decline in the USD figures of daily sales (≈2.8 billion to ≈2.5 billion).

The second statistic suggests that the NFTs that are being traded are of higher value, which is great for the traders, collectors, and artists involved in NFT development, but what about those who are just trying to get into the market? Enter the world of F-NFTs, better known as fractionalized NFTs, which make purchasing digital assets on the blockchain more democratic for users; bringing greater investment and engagement to the sector.

In this blog post, we’re going to examine what fractionalized NFTs are, the benefits they bring, the most popular F-NFTs, and what developments are likely to occur in the future.

What are fractional NFTs?

Fractional NFTs are fairly self-explanatory — an NFT (most commonly ERC-721 standard), is taken and then locked into a smart contract, where it can be broken into fungible ERC-20 tokens of equal value. From there, a person is able to buy as many shares of an NFT as they like. Fractional NFTs bring a few distinct benefits, which we will now examine.

What benefits do fractional NFTs bring?

One of the biggest drawcards of an NFT is that you get to have complete ownership of a unique item. For some assets, however, this has meant that prices have skyrocketed, as we’ve seen with the examples above. Fractional NFTs aim to remedy this, as well as bring some other distinct benefits.

Democratization

As rising property prices have shut out a large section of the market, this has also occurred with some of the most sought-after NFTs. Fractionalizing an asset makes it more accessible to a broader range of participants, who can then purchase a share, whether this is for ownership purposes, or simply as an investment vehicle.

Greater liquidity

Related to the above point, having a limited number of buyers due to high prices means expensive items can be on the market for weeks before they find a potential buyer. Once an NFT is fractionalized, the more affordable pieces are able to be purchased on secondary markets by a greater number of investors, and with less risk than forking out a huge sum for an asset that may be overvalued.

Price discovery

It is difficult to accurately determine the right price for a non-fungible asset when there is a very limited or no transaction history. Through fractionalization, we have an asset whose parts are bid on by multiple investors, allowing us to get a better understanding of what the best price is for the NFT.

Better for artists

While the points above have focused on the buyer’s experience, for artists, fractionalizing NFTs can also bring rewards as they now gain greater exposure to a wider audience in a more liquid market.

Are fractional NFTs secure?

In terms of technology, fractionalized NFTs are as secure as the smart contracts they are built on. As with a normal NFT or any other token, you should find out what blockchain it is hosted on, and if possible, whether the smart contract used to transact the token has undergone a security audit. In terms of ownership, with fractionalized NFTs things are less straightforward, as we can see with the buyout option presented below.

The buyout option – a doubled-edged sword

As described in a recent Medium post by a representative of Zap Protocol, it is possible for a part-owner of an NFT to trigger an auction, by sending the equivalent sum of all parts to the smart contract. If an NFT is currently priced at $100,000, for example, the person who triggered the auction most likely believes it is worth more and wants to own the whole NFT. If the remaining fraction holders outbid the person who called the auction, you will keep control of your share, but at a higher price. If the person is successful in outbidding the fraction holders, you will lose control of your asset but get a payout relative to the size of your holding and its current worth. The result is that you technically won’t be out of pocket, but you could lose your asset to someone with deep pockets or a sizeable loan. This would not happen if you owned a whole NFT.

Top fractionalized NFT assets

Any asset can be fractionalized, so it isn’t possible to compile any kind of definitive list; rather, here is a small sample of some of the most popular F-NFTS on the market.

CryptoPunks

With some going for millions of dollars at a time, CryptoPunks are the perfect candidate for fractionalization. 50 CryptoPunks have been fractionalized into 250,000 million uPunk tokens on the Unicly NFT platform. The fractionalized shares were initially purchased at $0.05 each, and are currently trading at $0.07779 (with prices fluctuating quite rapidly).

Grimes’ NFT art

One of the first established artists to cash in on the NFT trend, Grimes was already reported to have made US$6 million on her artworks. Two recent pieces — Newborn 1 & 3 — have been fractionalized on a top NFT marketplace, Otis.

Mutant Cats

Part of a DAO, the Mutant Cats collection is a set of 9,999 algorithmically generated artworks in the style of CryptoPunks, Mutant Ape Yacht Club, and countless others. Participants can purchase either a whole NFT or fractions on the OpenSea marketplace, with each NFT granting voting rights within the ecosystem. Additionally, shares can be staked in return for $fish tokens.

Doge meme token 

Having paid US$4 million for the Doge meme NFT in June 2021, the owner has fractionalized it into almost 17 billion $DOG tokens. 20% of the total supply was sold to 1,796 buyers for almost US$45 million on the MISO marketplace, with the rest going to Uniswap and Sushiswap.

What are the top fractionalized NFT marketplaces?

As the NFT marketplace list grows longer by the day, we see spaces for everyone. While many of the big NFT marketplaces bring together assets from different sectors, there are smaller marketplaces that focus on music, memes, or the tokenization of physical objects, such as real estate. Alongside the NFT art marketplace and NFT music marketplace, there are now platforms dedicated to fractionalized NFTs.

Otis

Mentioned before as the marketplace where Grimes’s fractionalized art is being sold, Otis sells a mix of digital and physical items. If you have some nostalgia for vintage comics or Game Boy cartridges, Otis is the place to go.

Fractional.art

With a user-friendly interface, you can easily buy fractionalized tokens in some of the most expensive NFTs on the market, such as Art Blocks and Bored Ape Yacht Club. The statistic showing collectible supply gives an indication of the demand and how many shares of an NFT are yet to be bought up.

Dibbs

Dibbs brings sportscard collecting into the 21st century, with fractionalized NFTs representing players from the NBA, NFL, PGA, and more. With card rankings, you can see which players are currently trending, as well as the biggest winners and losers in terms of market cap over a set period.

NIFTEX

NIFTEX is a space where users can create, sell, and purchase fractionalized NFTs. Looking more like a traditional trading platform, you can trade F-NFT assets such as Axies or CryptoPunks on the mainnet exchange.

The future of fractional NFTs

The fractional NFT space is only just taking off. Whether you are a collector, investor, or someone that wishes to use NFTs for staking or as collateral for loans, there is something for everybody, as the worlds of non-fungible tokens and decentralized finance come together.

We have seen that fractionalized NFTs provide more opportunities to buy and connect with artists while providing liquidity to this burgeoning market. We’ve also looked at some popular F-NFTs and the marketplaces they are housed on.
If you are as inspired as we are by the string of exciting developments that have occurred this year and are thinking of developing your own NFT product, get in touch with INC4, a trusted DeFi development company. We have built over 90 projects over 7 years of operation, with a particular focus on DeFi. If you want to build the best NFT platform, give us your requirements; we are here to support with custom DeFi development.

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