The fractionation of NFTs is an innovative way to invest through the benefits offered by the blockchain. This method allows you to buy a part of an NFT for a lower price and participate in the ownership of such an object, whether digital or natural, which facilitates access to the investment market for those who do not have the resources to buy a complete NFT.
This guide explains what fractional NFTs (F-NFTs) are, how they work, and what their benefits and applications are. If you are interested in investing in NFTs or just want to learn more about this revolutionary method, keep reading and join us on this tour of the world of non-fungible tokens.
A fractional NFT is a non-fungible token divided into smaller parts that represent ownership of a portion of an asset. That is, it is the process by which an entire NFT is divided into several parts so that more people get ownership of that asset instead of just one person.
Think of a regular NFT as a whole pizza, while each piece or slice of pizza is like an F-NFT. These non-fungible tokens can be bought and sold individually, allowing investors to own a percentage ownership of an asset that might otherwise be too expensive to acquire in complete. In this way, the fractionation of NFTs allows for democratizing access to support and increasing participation in the digital asset market.
Greater access to NFTs
One of the most beneficial aspects of splitting NFTs is that it offers investors the opportunity to own a piece of a more expensive NFT. The prices of some NFTs, in many cases outrageous, exclude the majority of people who cannot afford to buy them. But the collective ownership represented by the fractionalized NFT allows greater accessibility to a large number of investors, thus lowering the barrier to acquiring this type of asset.
Fractionalized NFTs are more accessible to sell and buy than traditional non-fungible tokens. In the case of a full NFT, the buying and selling process is more problematic, especially in the case of those that are priced too high for the general public. On the contrary, the more affordable price of F-NFTs allows them to be bought and sold in a similar way to how cryptocurrencies are traded in secondary markets.
Pricing (Price Discovery) is the process of establishing the correct price of an asset, whether actual or digital. It is usually challenging to determine the price of a new NFT because they have a minimal transaction history. But splitting non-fungible tokens makes the pricing process more straightforward by listing a percentage of the total NFT for sale, determining the price the market is willing to pay, and thereby pinpointing the total cost of the entire NFT.
Let's say you're trying to estimate the price buyers are willing to pay for your NFT. One way to determine this is to split the NFT, put a part up for sale (for example, 5 or 10%) and, once sold, you can calculate the total value of the non-fungible token.
Fractional NFT and Gaming
Most crypto games allow you to acquire, buy, and sell in-game items, many of which are NFTs. Such games may use F-NFTs to enable players to collectively purchase and sell expensive assets. In this way, developers can reward more players, and it will be easier for them to acquire a piece of a valuable NFT.
Fractional NFT and Metaverse
The metaverse is a virtual space that goes hand in hand with NFTs; in fact, popular metaverse platforms like The Sandbox and Decentraland are already benefiting from the implementation of non-fungible tokens. The Sandbox platform, for example, sells virtual land or parcels as NFTs, but land located in vital areas can be costly and not affordable for small users. F-NFTs can be used to allow groups of investors and even individuals to come together and purchase virtual parcels or other similar digital assets within the virtual world.
Fractional NFT and Real Estate
NFTs can significantly speed up the real estate buying process by replacing intermediaries with smart contracts that allow for a simple and secure transfer of ownership, as well as eliminating the worry of fees and commissions from all these intermediaries. The implementation of fractionalized NFT in the real estate market has the same advantages, but this case also allows several people to share ownership of the real estate asset instead of just one.
This is similar to the process by which Xperiend allows access to real estate projects to a large number of users who would not otherwise be able to access the real estate investment market. Through the digitization and tokenization of properties, Xperiend divides the ownership of a property into multiple social participants that can benefit from the profitability of these properties.
Regular Vs. Fractional NFTs
Fractional NFTs allow you to own a small portion of NFTs. Here the main difference is the ownership criteria. In the case of regular or traditional NFTs, you can only purchase NFTs in their entirety. Also, there will only be one owner for an NFT. By contrast, fractional NFTs allow multiple properties for a single NFT.
What if you want to revert the F-NFTs back to the full NFT? Don't worry, it's possible. The NFT owner can choose the buyout option to convert their F-NFTs into the whole original NFT. The purchase process is carried out through a repurchase auction. Here, fractional NFT owners have a limited time to decide and sell their ERC-20 tokens.
Incentives for splitting NFTs
Among the many benefits that come with splitting up NFTs, there are several reasons why an NFT owner may want to split up their asset. In fact, splitting an NFT has three main advantages, which are the following:
liquidity of assets
To do this, the value of an NFT is generally established using three different metrics: past sales, auction, and fractionation.
The past sales mechanism uses historical data to generate an estimate of the NFT price, and is often used on the open market, where there are many other similar and interchangeable products for sale. Applying this method to estimate the price of NFTs is not necessarily the most efficient, since, most of the time, there is literally not enough historical data on the asset to make a reasonable valuation.
The auction mechanism reveals people's willingness to pay for a specific NFT good, and is used to get a rough estimate of the price. The auction mechanism takes the value of the bidder who is willing to pay the highest price for the good, and this is often a great judging process, as well as a great way to arrive at an estimate of the value of NFTs, since collectors have their own different valuations.
As mentioned above, the fractionation mechanism involves taking an NFT, enclosing it in a smart contract that then splits it into multiple fractions of fungible ERC-20 tokens, making these tokens openly tradable on the market. This process produces an estimate of the price of each ERC-20 token, allowing for a global assessment of the underlying NFT ERC-721 itself.
More liquidity of assets
NFTs are intrinsically distinguished by possessing unique and singular characteristics. Its non-fungibility and scarcity have always been its main objective, as well as its most important selling point. However, one of the most pressing problems when it comes to NFTs and their exchange is the generally illiquid market that encompasses them. In fact, illiquidity in this sector continues to be a point of concern among NFT artists, creators and investors, as it is clear that the NFT market is limiting access to its supply of rare and more valuable NFTs.
In fact, with some NFTs selling for millions of dollars, it's no surprise that only a few investors around the world can afford to bid on them and grab some of the highest quality NFTs out there.
This naturally leads to illiquidity of the assets as only a handful of investors are willing to buy these NFTs. However, NFT splitting was created and designed to address and resolve the lack of liquidity that exists in the secondary markets.
When an NFT is split, the ERC-20 tokens representing each NFT slice could be traded on decentralized and centralized exchanges, thereby increasing the liquidity of the NFT's own assets.
Most of the time, the prices of the NFT markets prevent small investors and collectors from participating in NFT auctions, leaving only a few investors able to buy the most expensive NFT pieces. Splitting an expensive, high-end NFT into multiple fractions lowers the barrier to entry and costs of ownership, essentially allowing more investors exposure to the mainstream NFT market.
Overall, by design, fractionalized NFTs can essentially boost the liquidity of the NFT market by breaking up the NFT's base asset into multiple natively liquid components, and can also open up more investment opportunities for smaller collectors, democratizing access to the previously exclusive environment of NFTs.