Many issues are plaguing the NFT ecosystem that prevents it from gaining mainstream adoption. This includes problems with copyright and environmental sustainability, insufficient safety measures, lax rules on market speculation, and inefficient storage methods.
But recently, a new sort of tool has emerged that may help NFTs address these challenges. Fractionalized NFTs, or FNFTs, are used to represent this solution.
Crypto investors now have the opportunity to hold a small portion of a large pie with little to no risk of being taken advantage of thanks to fractionalisation. Equivalent to the idea of stock ownership in a corporation. This allows average investors, as opposed to only the ultra-wealthy “whales”, to acquire NFTs.
What are fractional non-financial assets (NFAs)? How do they function? And why are they attractive to investors? Find out by reading on.
What Is a Fractional NFT?
According to Grapherex, fractional NFTs are just complete NFTs that have been cut into tiny pieces so that multiple users can lay claim to ownership of the same NFT. To make the NFT divisible, a smart contract creates a certain number of tokens that can be exchanged for the original. These fractional tokens can be sold or swapped on secondary markets; they represent a fractional share in an NFT and offer their holders certain rights to the 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 tracing since they are indivisible and impossible to duplicate.
In 2021, the value of NFT assets skyrocketed as a result of a series of record-breaking auctions of NFT projects. Digital works of art, in-game resources, virtual real estate, and numerous other forms of media are all examples of virtual assets.
How Fractionalised NFTs Work
In the world of digital assets, NFT fractionalisation is a relatively recent technology. There has historically been a strict restriction on NFTs allowing for only a single owner at any given time.
Due to this, FNFTs were developed to enable NFT holders to issue tokenized fractional NFTs and distribute ownership of the asset. It will be impossible for everyone to possess a high-value asset like a Cryptopunk, but NFT fractionalisation can enable individuals to invest a little amount of capital to achieve partial ownership of a high-priced asset.
The Fractionalisation Process
In theory, anyone can buy a fractional interest in a high-value asset using FNFTs. Thereby, this instrument can usher in a brand-new economic paradigm predicated on the division of valuable assets among multiple owners.
The process of fractionalisation of an NFT begins with the underlying asset being secured in a smart contract. Afterward, the fungible ERC20 tokens are created by the smart contract as fractions of the original indivisible ERC721 NFT. For the ERC721 NFT, each decimal point stands for a proportionate share of ownership.
Shareholders can now hold a fraction of the NFT represented by an ERC20 token, which is equivalent to holding a piece of the original ERC721 asset.
What Makes Fractional NFTs Important?
It’s important to have F-NFTs for three main reasons:
Because of their high costs, many retail investors can’t afford to buy NFTs. An expensive NFT can be made available to more investors by fractionalizing the ownership into smaller pieces. It’s also worth noting that the value of each fraction of an NFT rises in direct proportion to the rise in its price. In the event of an unexpected price drop, as is often the case in the cryptocurrency market, the value of all associated fractions will also fall.
To help identify the value of a fractionalized NFT, price discovery procedures can be implemented. As per Grapherex, The fractionalized ERC-20 tokens’ market prices can be used as a proxy for the value of the underlying tokenized asset.
NFTs are distinguishable from other token types primarily by their uniqueness; they cannot be duplicated or split. Since no two NFTs are alike, only the most well-off investors can afford to buy the rarest and most valuable ones. F-NFTs solve this problem because their ERC-20 tokens can be exchanged freely on fractionalised NFT marketplaces. Instead of waiting for a single NFT to sell, which could take weeks or months, multiple investors may be ready to purchase up portions of an NFT instantly, at a discounted price, thus increasing their incentives and resolving market liquidity difficulties.
As blockchain technology progresses, we should expect to see more exciting innovations and applications in the NFT business, which is now seeing meteoric growth.
Although fractional NFTs are still in their infancy, they seem poised to become the next big thing in the rapidly expanding cryptocurrency market.