Fractional NFTs: Can You Own Half an NFT?

NFTs are part of the revolutionary technology that changed how we deal with owning digital or physical assets. Their non-fungible trait has made them a one-of-a-kind token that ensures exclusive ownership. However, this exclusiveness has put a strain on the community since popular NFTs are famous for being overly priced for the average investor. The need for inclusivity in the NFT scene has led to these non-fungible tokens being broken apart into smaller fractional NFTs. 

Ever wanted to get your hands on the super expensive and well-known NFT collection CryptoPunks, but simply didn’t have the money to own one? Well, you can own a small part of a CryptoPunk NFT without the need to sell your kidney. The emergence of fractional NFTs can open up many opportunities for small investors to own a fraction of a super-expensive NFT as part of a microeconomy. Fractional NFTs are growing fast and catching mainstream attention for being a transformative move in the digital asset ownership sphere. 

So what exactly are fractional NFTs? Read along for extensive details on fractional NFTs’ functionality, benefits, potential problems, and legal risks. 

What is a Fractional NFT?

Simply, if you divide a whole NFT into smaller fractions, you will end up having several fractional NFTs, also referred to as F-NFTs. Think of it as a cake. The whole cake is the original intact NFT. You can choose to cut down the cake and sell the individual pieces to others. Each piece of the cake signifies a piece of the original NFT, in this case, a fraction of the NFT. That means several individuals own a part of the whole cake. Thus, several owners can own a fraction of the whole NFT. 

Therefore, each fraction of the NFT represents a percentage of the NFT ownership. An NFT could be fractionalized endlessly. Meaning, that an NFT could be broken up into 2 fractional NFTs or 20 billion fractional NFTs. There is no limit to the number of NFT holders when it comes to fractional NFTs. 

Fractional Assets

Although the idea of an NFT having several owners is a bit odd, fractional ownership is not a new concept. In fact, fractional ownership is used in many industries today and makes up one of the most popular types of investment. It is when several parties hold a certain percentage of the ownership of an asset. Fractional ownership can be used for shareholders in an asset to receive a return on their investments, in this case, stocks are one popular example of fractional ownership. On the other hand, fractional ownership could be implemented on the shared use of an asset for recreational purposes, such as real estate or luxury properties. 

Therefore, shareholders of a specific asset can make use of this fractional share based on the percentage of ownership they hold. That means if the asset grows in value over time, so will the percentages of shareholders. In contrast, when the value of an asset drops, shareholders will suffer losses proportional to their percentage. 

It is important to point out that in case an asset is fractionalized, no one of the shareholders gets complete control over the asset. 

How do F-NFTs Work?

Going back to fractional NFTs, you must be wondering, regular assets are easily divided since they are not written on the immutable blockchain, then how on earth do NFTs with smart contracts get divided into fractional pieces?

Let’s get semi-technical here. NFTs that are on the Ethereum blockchain are simply ERC-271 tokens. ERC-271 tokens are non-fungible tokens. The process of breaking up an NFT into fractions is simply breaking these non-fungible ERC-271 tokens into multiple fungible ERC-20 tokens. This could be done by writing the instructions of these divisions into the smart contract of the original NFTs. Therefore, when someone owns a fraction of an NFT, he simply owns an ERC-20 token of that NFT. 

How to Fractionalize an NFT

There’s a platform dedicated to fractionalizing your NFTs for you. Fractional.art is a fractional marketplace that does the heavy lifting for you while you only set a few parameters. Here’s the process of how to fractionalize your NFT using Fractional.art’s platform: 

• Smart Contract: In order to fractionalize your NFT, you should make sure that the NFT is secured in a smart contract that can break ERC-271 tokens to smaller ERC-20 tokens.
• Create a Vault: There, NFTs that are to be fractionalized are placed in something called a Vault which locks the NFTs until further action is taken. Navigate to fractional.art’s website and press on the “Fractionalize” button. Then you’d be given an interface that lets you create a vault. 
• Set Parameters: Set the parameters of the fractionalization of your token. Parameters include the vault’s name, symbol, token, NFT ID, initial NFT price, and the number of fractional shares to be issued. 
• Finalize the Process: Press “Continue” to approve the transfer of NFTs. Lastly, press “Fractionalize” to complete the final mint which will give you 100% fractional shares of the NFT. 

Benefits of Fractional NFTs

There are many benefits to fractionalizing an NFT and sharing ownership of digital assets. Although the major selling point of these non-fungible tokens is their uniqueness, sharing their ownership might open the NFT space to a wider market, thus, elevating the market’s revenue. Let’s discuss some of the benefits of F-NFTs. 

High Liquidity 

As mentioned before, the high prices and exclusivity of some NFTs make it less hard for small investors to be a part of the emerging market, therefore, making it less liquid. Fractional NFTs facilitate the fast selling of expensive and rare NFTs. This way, the market won’t be filled with overpriced NFTs waiting for a high-profile buyer to be taken off the shelves. Fractionalizing popular NFTs will most certainly fix the problem of liquidity in the NFT market. 

Wider Market Audience

You can view fractional NFTs as a democratic approach in the NFT space. The NFT market has lost tons of potential buyers for its exclusive overpriced non-fungible tokens. With fractional NFTs, interested individuals who can’t afford to invest in high-profile NFTs can join the community by owning a small percentage. People who are also scared of investing in the newfound NFT space can see fractional NFTs as an opportunity to tiptoe into the market, without the risks of major NFT investments. 

Price Discovery 

Fractional NFTs can help discover the NFT’s overall price. Since fractional pieces of NFTs are sold as individual ERC-20 tokens, the price at which these tokens are sold can amount to the total value of the whole NFT. It’s important to note that when the whole NFT increase in value, so does the fractional percentages. 

F-NFT Usage

Fractional NFTs are being used in several Web3 and real-life sectors as the blockchain space have embraced the shared ownership of non-fungible tokens. 

Metaverse

The metaverse is gaining more and more attraction as Web3 continues to develop. People are investing in virtual lands and properties in the metaverse like never before. However, as metaverse land assets become more expensive, small investors are finding it hard to join the metaverse craze. However, fractional NFTs can introduce fractional ownership similar to property loans. 

Play-to-Earn Games

Play-to-earn games are big on users selling and trading their in-game digital assets. Some games, like Axie Infinity, are deploying fractional NFTs to allow players to invest partially in in-game NFTs. For example, Axie Infinity is already trying to incorporate fractional NFTs into its system by selling fractional ownership of ultra-rare Axies. This creates democratic fairness between all players, where each one can own a percentage of a rare NFT. 

Real Estate 

Fractional NFTs have also made their way into the real world. Physical NFTs are NFTs that relate to real-world assets such as physical artwork, apparel, and real estate. For real estate, NFTs have facilitated the process of property buying and selling by implementing blockchain technology. Real estate procedures have been faster since the blockchain cuts all intermediaries and records transactions on an immutable ledger. Since fractional ownership is pretty common in the real estate sector, fractional NFTs will help multiple parties share a property through the blockchain. 

Problems Facing F-NFTs

Fractional NFTs come with several problems and inconveniences. Although they seem like the perfect solution for NFT market liquidity and democratization of the NFT space, they come with their own heavy baggage. For example, fractional NFTs are hard to put back together into the original NFT. For now, the best practice of selling and trading NFTs is to have the NFT in its entirety. However, if you fractionalize your NFT and sell its shares to several shareholders, it might be a hassle to tape the pieces back together. That of course, if you changed your mind about fractionalization. 

Buyout Auction

The only way to reconstitute your NFT is to buy back the fractions from every shareholder. Something like getting back all the ERC-20 tokens and taping them back together into ERC-271 through a smart contract. However, the respective owners are allowed to refuse to sell you back their fungible tokens. This, however, can be solved through buyout auctions. 

A buyout auction, like a regular auction, lets buyers bid an amount of currency to buy back the whole NFT.  The original NFT owner will set a reserve price for the NFT before fractionalizing it. That reserve price will act as the minimum price at the auction. 

Let’s say person A owns an original whole NFT and wants to split it into three fractions. He sets a reserve price of the NFT for 10 ETH. 

Person B and Person C both buy respective 20% shares of the NFT. While Person A has 60% of the NFT. 

Person D triggers a buyout auction for the fractionalized NFT. 

Let’s say Person B can’t afford to outbid the reserved price of 10 ETH, which means he forfeits from the auction. Person C bids 10 ETH, while Person A bids 11 ETH. However, Person D outbids them all by bidding 12 ETH for the NFT. That makes Person D the owner of the whole NFT. In this case, the NFT reconstitutes itself into the original NFT. Moreover, all proceeds from the sale go back to shareholders based on their percentage. 

Legal Risks of Fractional NFTs

Of course, they wouldn’t be NFTs if they didn’t have legal risks. NFTs have many legal concerns surrounding them, ranging from IP and copyright issues to data hosting and many other issues. However, since fractional NFTs allow holders to benefit from the value of their ownership percentage, they raise the concern of them being investment products that would classify as security. Security is an investment of money in the hopes of bringing more profit in the future. Since F-NFTs are more accessible to investors than regular NFTs, they could easily become a tool for investment. 

Securities and Exchange Commission (SEC)’s commissioner Hester Pierce has stated that “if someone wants to place numerous NFTs into one basket and sell F-NFTs or take one NFT and sell shards, then “you better be careful you’re not creating something that’s an investment product, that is a security.” In this case, fractional NFTs have to abide by SEC’s guidelines. 

Popular Fractional NFTs

Many popular NFT collections have opted to fractionalize their NFTs in the hopes of increasing sales. Some of these NFT collections are: 

CryptoPunks

Cryptopunks is one of the most popular and well-known NFT collections that currently has the highest market cap of all time. These NFTs are rare and super expensive, which made them the best collection to be fractionalized and be available to a wider audience. 50 Cryptopunk NFTs were fractionalized back in 2021 into 250,000 million ERC-20 tokens. Each fungible token was t a price of $0.05. 

Mutant Cats

Mutant Cats collection can be bought as single NFTs or fractions of single NFTs. This 9,999 cat artwork NFT collection gives holders voting rights within its ecosystem. That means you don’t have to pay for the whole NFT to get into the community. You can simply own a fraction that will allow you to vote on major community decisions. 

Doge Meme

The famous meme of the Japanese Shiba Inu dog that broke the internet was sold back in 2021 as an NFT for $ 4 million! Now, the doge meme is the face of the cryptocurrency Dogecoin and is valued at several million dollars. PleasrDAO, the initial buyer of the NFT, has fractionalized the NFT into 17 billion times, allowing basically anyone to hold a share of the doge meme NFT.  

Are Fractional NFTs the Next Thing?

Although the investment in fractional NFTs unlocks liquidity and enables democratization, it is not without risks. However, fractional ownership might be the next big thing in the development of the Web3 era as the blockchain gains more mainstream popularity. Fractional NFTs open the market to new investors and expand its ever-so-growing circle, which will ultimately lift up the already crashing NFT market. Although the F-NFT market is still in its infancy and consists of a niche space in the bigger NFT pool, they provide much more opportunities for innovation.