NFT Blog In Nigeria

How Can You Share An NFT? Fractional NFTs Explained

One may think it is ridiculous to ask this question “how can you share an NFT”, knowing fully that NFTs stand for non-fungible tokens which means that NFTs are not interchangeable or transferable unlike fungible crypto assets like bitcoin, no two people can own one NFT. 

But is this ideal? Is there a way to share(funge) NFTs?

Yes, though, NFTs are said to be unique, non-transferable or interchangeable, indirectly NFTs can be shared among people through the process of fractionalizing NFTs.

An NFT can be split into millions of fungible tokens by locking them in the vaults of decentralized platforms. 

Fractionalization of assets(breaking down the value of assets into smaller fractions of the same asset) has been a common practice in the traditional finance system where fractions of a high-value asset like hotels, aircraft, and estates are owned together by some investors instead of one.

This practice of fractionalizing an asset also fractionalizes the risk and costs involved in that asset. 

This is the same scenario of NFTs fractionalization. Just like these expensive tangible assets mentioned earlier, some NFTs known as Blue Chips such as Bored Ape Yacht Club, CryptoPunks and Moonbirds are worth millions of dollars. The cost of these NFTs makes them less attractive for some investors who may be able to afford them, however, fractionalization of these NFTs has reduced the cost of entry for these investors, as well as the risks involved.

NFTs were born on the Ethereum blockchain and as such fractionalization of NFTs(creating more new fungible tokens from non-fungible tokens) means ERC-20 tokens are pegged to underlying NFTs (ERC-721 tokens).

This article has been written to explain how this fractionalization of NFTs became feasible.

What Is A Fractional  NFT?

NFTs themselves are unique and non-interchangeable units of data recorded on a digital ledger known as the blockchain. An example is the Ethereum blockchain which serves as a public ledger that allows for verification of the authenticity of the NFTs. But what about fractional NFT?

A fractional NFT is an NFT divided into multiple smaller pieces to increase participation and inclusion in the NFT project. This allows many people to have ownership of the same NFT, reducing the cost of buying It and the risk involved in owning and keeping the NFT.

Fractional NFTs have changed the narrative that NFTs cannot be divided or shared among individuals.

When an NFT is fractionalized, the original is locked in a vault and a supply of fungible tokens that represent the ownership of that original NFT is issued. The fungible tokens can be purchased in fractional NFTs platforms like the NFTX and traded in a secondary market like Uniswap.

How Does Fractional NFT Work?

NFTs are mostly created on the ERC-721 token standard used for creating NFTs on the Ethereum blockchain(along with the ERC-1155). Even though these two standards can generate unique NFTs, the ERC-20 standard is used to create altcoins and other fungible tokens which are interchangeable, meaning that each unit has the same intrinsic value and gives the same satisfaction.

As such, one can deploy a smart contract to generate multiple ERC-20 tokens linked to an indivisible ERC-721 NFT. This way, anyone who holds any of the ERC-20 tokens generated can own a percentage of the linked NFT.

Can Fractional NFTs Be Reversed?

One may ask if it’s possible to reverse a fractional NFT to an original NFT after it has been fractionalized.  Yes, It’s possible to reverse the fractionalization process of an NFT and turn a fractional NFT back into a whole NFT. 

This happens when a fractional NFT holder buys back all the fractions of the NFT.

How does this happen?

Generally, a fractional NFT holder can purchase back all the fractions of the NFTs to unlock the original. There’s a buyout option in the smart contract that fractionalizes an NFT which allows for this transaction. A fractional NFT holder can initiate the buyout option by transferring a specific number of the corresponding ERC-20 tokens back to the smart contract. But this doesn’t unlock the original immediately, rather, a buyback auction will commence within a fixed timeframe. The fractional NFT holders will decide if they will sell or not, but if the buyout is successful, the fractions return to the smart contract and the buyer has full possession of the NFT.

Benefits Of Fractional NFTs

Considering how fractional NFTs enable investors who are always priced out of the market to lay hands on some proportion of NFTs with little risks and low costs,    there is no doubt that fractional NFTs may just have some more interesting benefits such as;

1. Greater Liquidity:

The price of NFT keeps increasing in direct proportion to their popularity. This has presented NFTs to be a luxurious asset that only the rich can afford. However, fractional NFTs have made it possible to divide ownership of ERC-721 or ERC-1155 tokens into multiple ERC-20 tokens, which makes them more affordable.

2. Price Discovery:

Setting the right price for a very expensive NFT with no or little transaction history is a difficult thing.

When NFT is fractionalized, it allows more people to trade the asset, makes it more affordable and the actual price value is easily determined.

3. Democratization: 

Popular NFTs are expensive, they are not just expensive, the prices are increasing over time, making NFTs unattractive for smaller investors and collectors.

Fractionalizing a very expensive NFT lowers cost and makes it cheaper and easily accessible to more people.

4. Increased Visibility For Creators: 

Fractionalization can help digital creators gain more exposure online since there is more inclusion of people in the fractional NFT projects who can reach a wider audience in a more liquid market. 

Conclusion 

As days go by, fractional NFTs seem to be more appealing than the NFT itself as it makes the NFT world more accessible and less expensive.

Investors who are passionate about NFTs but lack the financial power to buy any can take advantage of the fractional NFT of the collection of their choice. Fractional NFTs are worth exploring but as you do so, don’t forget to fo your research before investing in any digital asset.