As the space of NFT technology is rapidly changing, one of the most promising advancements is NFT fractionalization. FearlessToken.com regular columnist Jason takes the plunge into the mechanics, benefits, and risks of this growing trend. FearlessToken.com dives deep into digital creativity. It follows NFT royalty wars, showcases bold generative art, unpacks PFP project trends, takes you inside the latest metaverse maneuvers, and brings you market intel with no strings attached. To the intrepid creators and innovators who will build the next creative ecosystem.
What is NFT Fractionalization?
NFT fractionalization is the process of splitting an NFT into multiple, fungible tokens. These smaller tokens take a portion of the original NFT’s value. This arrangement allows dozens of individuals or institutions to own part of it. Rather, this process takes one unique, indivisible asset and divvies it up into many identical, tradable units. It’s analogous to taking one original, priceless painting and divvying it up into shares that people can own, buy and sell.
The process of fractionalizing an NFT consists of dividing up that NFT into multiple fungible tokens, usually ERC-20 tokens. For instance, a single NFT could be fractionalized into 100 parts, issuing 100 additional tokens that each signify owning 1% of the NFT. First, we ring-fence the original NFT, meaning we securely lock it in a vault or smart contract. Next, we mint the fractional tokens to correspond to that ownership.
These fractions can then be freely purchased and traded on different online exchanges, like Fractional.art or Unicly. Each one of those shares corresponds to a percentage of ownership in that original NFT. This creates wide-ranging new opportunities for investment, trading, and community building around these valuable digital assets.
Why Fractionalize NFTs?
NFT fractionalization has a few major benefits, especially when it comes to accessibility and liquidity. Dividing high-value NFTs up into smaller, inexpensive pieces makes it more accessible to a wider audience. This democratizes the process and opens up the opportunity to engage a broader audience. This democratization of ownership is one of the key forces propelling the trend.
Increased Accessibility and Diversification
Fractionalization allows many more people to own a portion of a high-value NFT. With this innovation, these kinds of assets are now available to the general public. That’s because investors no longer have to invest a huge amount of money in order to purchase an NFT outright. They’re now able to buy smaller fractions that better match their budget. It further democratizes the investment opportunities, especially for those who have been priced out of the NFT market in the past.
Enhanced Liquidity and Community Creation
Some NFTs are divisible, meaning investors can purchase and sell smaller, tradable fractions of an NFT. This method increases market liquidity and facilitates quicker transactions. This new liquidity measures conveniences for NFT owners that help them easily realize value from their NFTs. Fractionalization builds new shared communities focused on high-value NFTs. This creates an opportunity for different owners to work together and plan how best to invest in the asset as a whole.
Where Can You Fractionalize NFTs?
The race to democratize NFT ownership has begun, with several platforms taking the lead in fractionalizing NFTs. Once NFTs are fractionalized, blockchains like Ethereum allow for their very secure trade on open markets, such as those built on the platforms above.
- Otis: This platform allows users to buy and sell fractions of NFTs. For example, Grimes' artwork "Newborn 1 & 3" was auctioned on Otis in July 2021.
- Fractional.art: This platform enables users to fractionalize NFTs, including popular collections like "Bored Ape" and "Jordan."
- Tessera: Tessera facilitates the fractionalization of NFTs, allowing users to buy and sell fractions of digital art pieces.
- PleasrDAO: This decentralized autonomous organization (DAO) fractionalized the Doge meme NFT into 17 billion pieces, allowing anyone to own a piece of the original artwork.
- RealT.co: While primarily focused on real-world assets, RealT.co is experimenting with fractional ownership of real estate, though currently only available to accredited investors in the United States.
How to Get Started with Fractional NFTs
If you're interested in getting involved with fractional NFTs, here's a step-by-step guide to help you get started:
- Study the basics: Begin by learning about fractional NFTs, their importance in the digital asset space, and how they work. Resources like articles and guides can provide a foundational understanding.
- Choose a platform: Select a platform that allows you to buy and sell fractional NFTs. Some popular options include OpenSea, Unicly, Fractional.art, and Otis.
- Understand the process: Familiarize yourself with the process of fractionalizing an NFT. This typically involves creating an ERC-20 smart contract with additional functionalities to split the NFT into smaller fractions and sell them to investors.
That said, just like any investment, fractional NFTs have inherent risks that you should be aware of. Smart contract failures, security vulnerabilities, and hacking attacks are just a few that come to mind. As with any investment, make sure you do your own research and are aware of the risks associated with investing in fractional NFTs.
What are the Risks?
Though fractionalization creates some remarkable opportunities, it’s very important to understand the risks and dangers that may exist. As with any new tech, fractional NFTs have downsides that must be addressed.
Security and Smart Contract Risks
Bugs in the underlying code and security flaws can make fractional NFTs vulnerable to hacking attacks. Exploits and failures in smart contract infrastructure could put their security at risk. Smart contracts used in fractional NFTs can present points of failure or vulnerability. Failure to address these concerns can lead to catastrophic monetary damages. Security risks with fractional NFTs are obvious. They remain vulnerable to hacking and theft due to the complicated technology that underpins them.
Regulation and Market Volatility
The regulatory environment around NFTs and fractional NFTs is still developing, and any change in regulations could pose a risk to the market. The value of NFTs and their fractions can be extremely volatile, and investors should not invest more than they can afford to lose.
Despite these risks, the potential benefits of NFT fractionalization are huge. Fractional NFTs are poised to change the way we own digital assets. They’re going to do it by increasing accessibility, improving liquidity and stimulating civic participation. As the market matures further, providing better and deeper information will become crucial along with making value-based decisions.
