What is a fractional NFT?
What makes NFTs so unique is that they only have a single owner at a time, guaranteeing exclusive ownership. As NFTs grow in popularity, and some collections increase in value, the price of owning a single NFT has become quite expensive. Also, since they’re one-of-a-kind tokens and can’t be replicated, buying them off of secondary markets can be difficult due to lack of liquidity. Innovators in the space are pushing the boundaries of what’s possible for NFTs, including opportunities for fractional ownership.
A fractional NFT is one NFT that has been divided into smaller fractions. This allows ownership of a piece of the same NFT to be claimed by a number of different people. Anyone can own a high-value asset at a low cost. It’s similar to owning shares of a company by opening up NFT ownership to smaller investors to affordably invest. Fractional ownership has created more accessibility and allowed a lot more people to invest in NFTs bringing more liquidity to the market while increasing inclusion and participation in the NFT space.
Also, as the price of the NFT rises, the value of its fractions increases proportionally. Market activity around the NFT also remains relatively high as more people can participate at lower prices. Even if one of the owners decides to sell, their move won’t affect the overall value held by other stakeholders.
The NFT is fractionalized using a smart contract that generates a set number of tokens and these are linked to the indivisible original. Simply, it takes a whole NFT and creates a set number of shares that are sold at a fixed price. On Ethereum, the ERC-721 token (NFT) is divided into multiple ERC-20 tokens by the smart contract, and each ERC-20 token becomes a fractional NFT of the asset, based on the instructions provided by the NFT owner. The owner determines the number of ERC-20 tokens that will be created, their price, and other properties. These fractional tokens give each holder partial ownership of an NFT and can be traded or exchanged on secondary markets without affecting the value of the original NFT.
An example of this is the “Doge” meme NFT which was sold for $4 million to PleasrDAO, who fractionalized the NFT 17 billion times, to allow anyone to own a piece of it for just pennies.
It’s also important to note that the fractionalization process can be reversed, and the fractionalized NFTs can be transformed back into a whole NFT. There’s typically a buyout option in the smart contract that allows a fractional NFT investor to purchase all of the fractions and unlock the original NFT.
Overall, fractional NFTs open up a lot of new opportunities for investors and play a massive role in allowing people with smaller sums of money to gain fractional ownership over high-priced assets.