Here’s How Fractional NFTs are Changing the NFT Space

Dr Vin Menon
4 min readFeb 16, 2023

Introduction

NFTs, or non-fungible tokens, have become a hot topic in the cryptocurrency world as they allow for the easy tokenization of various assets. However, these tokens often face a liquidity problem due to their rarity and uniqueness, which often leads to high prices that make them unaffordable to many people.

Even if someone is able to purchase an NFT, there is no guarantee that they will be able to sell it for a higher price in the future. As a result, it is challenging for people to acquire NFTs, and some may even consider giving up on buying a rare collectible.

Fortunately, advances in blockchain technology may provide a solution to the liquidity issue by allowing NFTs to be divided into smaller fractions and sold separately. This could potentially improve their liquidity and make them more accessible to a wider audience.

Fractional NFTs

Fractional non-fungible tokens (NFTs) are whole NFTs that have been divided into smaller pieces, allowing multiple buyers to have partial ownership of the NFT at a lower price.

NFTs are typically created using the ERC-721 or ERC-1155 token standards on the Ethereum blockchain, which generate unique, non-fungible tokens. However, the ERC-20 standard, which is used to create interchangeable, fungible tokens, can also be used to create fractional NFTs.

This is done by using a smart contract to generate ERC-20 tokens that are linked to an indivisible ERC-721 NFT. The smart contract should also have a buyout option that allows a fractional NFT holder to purchase all the fractions and unlock the actual NFT as a whole through a buyback auction triggered by transferring a certain number of fractionated ERC-20 tokens back into the contract. If the other fractional NFT owners choose to sell their shares during the set window of time, the buyer who initiated the buyout will gain full ownership of the NFT.

Can Fractional NFTs be Reversed?

Yes, it is possible to reverse the fractionalization process and turn a fractional NFT back into a whole NFT. This is typically done through a smart contract that has a buyout option, which allows a fractional NFT holder to purchase all the fractions and unlock the original NFT.

The buyout option can be initiated by transferring a specific number of corresponding ERC-20 tokens back to the smart contract, which will start a buyback auction for a set period of time. If the other fractional NFT holders choose to sell their shares during this time, the buyer who initiated the buyout will gain full ownership of the NFT.

Benefits of Fractional NFTs

Fractional non-fungible tokens (NFTs) offer several advantages in the cryptocurrency market. One benefit is the democratization of NFTs, which makes them more accessible and affordable to a wider range of investors.

Previously, NFTs were often too expensive for smaller investors or newcomers to the market, but by dividing them into smaller fractions, the cost is reduced, and more people are able to participate. This can also improve liquidity for NFTs as a larger pool of investors is able to buy and sell them.

In addition, fractional NFTs can facilitate better price evaluation of expensive NFTs that have limited transaction history. As these fractions are traded more frequently, it becomes easier for buyers to determine the actual value of the original NFT.

Another benefit of fractional NFTs is that they allow buyers to access the wider NFT community and potentially earn exclusive benefits such as staking rights, governance, voting rights, and rewards. This can be especially appealing to those who are interested in participating in the governance of NFT projects.

Fractional NFTs can also be beneficial for creators of NFTs as they provide increased visibility and the opportunity to reach a broader audience. Additionally, fractional NFTs are easily integrated with decentralized finance (DeFi) applications because they are ERC-20 tokens that can be traded on decentralized exchanges and used in functions such as staking and yield farming.

Overall, fractional NFTs provide a range of benefits that can enhance the NFT market and make it better accessible to a wider range of participants.

Disadvantages of Fractional NFTs

Fractional non-fungible tokens (NFTs) may have some drawbacks to consider. One potential issue is the volatility of the cryptocurrency market, which can cause the price of fractional NFTs to fluctuate and potentially result in losses.

In addition, the security of fractional NFTs is dependent on the quality of the smart contracts used to create them, so any glitches in the contracts could be a cause for concern.

Despite these potential drawbacks, investing in fractional NFTs is generally considered to be less risky than buying whole NFTs, and they offer more accessibility and profitability for both experienced NFT investors and newcomers.

Conclusion

In conclusion, fractional NFTs offer several benefits in the cryptocurrency market, including making NFTs more accessible and affordable to a wider range of investors, improving liquidity, facilitating better price evaluation, allowing buyers to access the wider NFT community, providing creators with increased visibility, and being easily integrated with decentralized finance (DeFi) applications.

In addition, depending on the specific NFT and the platform where the fractional NFT was purchased, the holder may have access to the NFT community and other benefits, such as voting rights. Some fractionalized NFT projects also support staking, which allows holders to lock up their fractional NFT on a platform or protocol in exchange for staking rewards and other benefits.

However, there are also potential drawbacks to consider, such as the volatility of the cryptocurrency market and the security of fractional NFTs being dependent on the quality of the smart contracts used to create them.

Overall, it is important to do research and carefully consider the risks and potential returns before investing in fractional NFTs or any other asset.

Interested in the world of crypto and blockchain? Head over to my blog for more informative posts!

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Dr Vin Menon

A blockchain enthusiast and entrepreneur’s musings on the next big revolution since the Internet.