Get Started with Fractional NFTs – Risks, Examples, and More

Calibraint

Author

August 28, 2024

Last updated: August 29, 2024

NFTs have taken the digital world by storm, giving artists, musicians, and creators a new way to monetize their work. Developing an NFT is pretty easy, but let’s be real—buying an NFT can be expensive and it’s not something everyone can afford. You have the NFT renting option, but some people would actually want to own it. 

That’s where fractional NFTs come in. They allow you to own a piece of an NFT without breaking the bank, kind of like buying a slice of pizza instead of the whole pie. If you’re curious about what fractional NFTs are, how they work, and why they might just be the next big thing, you’ve come to the right place. 

What Are Fractional NFTs?

So, you’re probably familiar with NFTs—those one-of-a-kind digital assets that live on the blockchain, representing ownership of a unique item like digital art, music, or even virtual real estate. If you still need more clarity refer to our blog on NFT usecases. Okay, but what happens when an NFT is worth more than your entire car? Enter fractional NFTs.

Fractional NFTs are exactly what they sound like: NFTs that have been divided into smaller fractions, allow multiple people to own a piece of the same asset. Imagine you’re eyeing that super exclusive digital artwork by a famous artist, but it’s priced at $1 million. With fractional NFTs, you and others can pool resources and each own a fraction of that artwork, just like owning shares in a company.

Fractionalizing an NFT makes it more accessible to a broader audience. You don’t need to be a crypto whale (a person with a large amount of cryptocurrency) to get in on the action. Instead, you can own a piece of the digital pie and even potentially profit if the value of that NFT goes up.

How Do Fractional NFTs Work?

Now that you’ve got the basic idea, let’s break down how fractional NFTs actually work.

The Fractionalization Process

Fractionalizing an NFT involves dividing a single NFT into smaller parts, each represented by its own token. This process is done through smart contracts on the blockchain. Here’s how it typically works:

1. NFT Owner Decides to Fractionalize: The original owner of an NFT decides to split it into multiple parts. 
2. Smart Contract Creation: A smart contract is created to divide the NFT into a specific number of fractions. Each fraction is represented by its own unique token, sometimes called fractional tokens or F-NFTs. 
3. Selling the Fractions: These fractional tokens are then put up for sale. Buyers can purchase these fractions, gaining partial ownership of the NFT. 
4. Owning a Fraction: As a fractional owner, you hold a token that represents your share in the NFT. You can sell your fraction, hold onto it, or potentially benefit if the NFT’s value increases.

The Role of Smart Contracts

Smart contracts are crucial in the world of fractional NFTs. They’re self-executing contracts with the terms of the agreement directly written into code. In the case of fractional NFTs, the smart contract manages everything from dividing the NFT to handling transactions between buyers and sellers. It’s like having a super-efficient middleman who never takes a day off.

Governance and Voting

Here’s a cool feature: some fractional NFTs come with governance rights. This means that as a fractional owner, you might have a say in certain decisions regarding the NFT. For example, if the original owner decides to sell the entire NFT, fractional owners could potentially vote on whether or not to sell. It’s like having a say in a homeowner’s association—only with digital assets.

Why Fractional NFTs Are a Game-Changer

So, why should you care about fractional NFTs? Well, there are several reasons why they’re making waves in the digital world.

Accessibility

The most obvious benefit is accessibility. By fractionalizing an NFT, high-value assets become affordable to everyday investors. You no longer need a hefty crypto wallet to own a piece of digital art, music, or virtual real estate. It’s democratizing the space, allowing more people to participate in the NFT marketplace.

Liquidity

Liquidity is another big plus. Traditional NFTs can be hard to sell because they require finding a buyer willing to pay the full price. With fractional NFTs, there’s a larger pool of potential buyers for smaller, more affordable fractions. This means it’s easier to buy and sell fractional NFTs, making the market more fluid and dynamic.

Diversification

Fractional NFTs also allow you to diversify your portfolio. Instead of putting all your money into one expensive NFT, you can spread it across multiple fractional NFTs. It’s like investing in a variety of stocks instead of betting everything on one company. This diversification can help reduce risk and increase the potential for returns. 

Potential Risks of Fractional NFTs

Of course, like anything in the crypto world, fractional NFTs come with their own set of risks.

Market Volatility

The value of NFTs can be highly volatile, and fractional NFTs are no exception. The price of your fractional token can fluctuate dramatically based on the market demand for the underlying NFT. If the value of the NFT drops, so does the value of your fraction.

Lack of Control

As a fractional owner, you have limited control over the NFT. While some fractional NFTs offer governance rights, these are typically limited. The original owner or the majority of fractional owners may still have the final say in major decisions, like selling the entire NFT.

Legal and Regulatory Uncertainty

The world of NFTs is still relatively new, and the legal landscape is far from settled. There’s an ongoing debate about whether fractional NFTs could be considered securities, which would bring them under the purview of regulatory bodies like the SEC. This could lead to increased regulation and potential legal challenges down the road.

Real-World Examples of Fractional NFTs

Fractional NFTs are more than just a buzzword—they’re being used in some really cool ways across different industries.

Digital Art

One of the most common applications of fractional NFTs is in the world of digital art. For example, Beeple’s famous NFT, “Everydays: The First 5000 Days,” could theoretically be fractionalized, allowing thousands of people to own a piece of this historic digital artwork.

Virtual Real Estate

In the world of virtual real estate, platforms like Decentraland allow users to buy, sell, and develop land in a digital environment. Some of these plots are worth a lot of money, but with fractional NFTs, groups of investors can pool their resources to own a piece of this virtual land.

Collectibles

Fractional NFTs are also being used for collectibles like trading cards and rare in-game items. For instance, a rare CryptoPunk could be fractionalized, allowing multiple collectors to own a piece of this digital collectible without needing to shell out millions of dollars.

How to Get Started with Fractional NFTs

Ready to dive into the world of fractional NFTs? Here’s how you can get started.

Choose a Platform

First, you’ll need to find a platform that supports fractional NFTs. Some popular options include:

1. Fractional.art: A platform specifically designed for creating and trading fractional NFTs.
2. Unic.ly: Another platform that allows users to fractionalize and trade NFTs.
3. DAOfi: Focused on fractionalizing NFTs and creating liquidity pools for trading.

Buy Fractional NFTs

Once you’ve chosen a platform, you can browse the available fractional NFTs and make a purchase. You’ll need a cryptocurrency wallet and some ETH to get started. After buying, you’ll receive a token representing your fraction of the NFT.

Participate in Governance

If your fractional NFT includes governance rights, you can participate in voting on decisions related to the NFT. This might include whether to sell the NFT or make other changes that affect its value.

In a nutshell 

Fractional NFTs are still in their early days, but they’re already making a big impact. As more people become aware of the benefits—like accessibility, liquidity, and diversification—we can expect to see even more innovation in this space. From art and music to virtual real estate and beyond, fractional NFTs are opening up new possibilities for ownership in the digital age amongst the multiple revenue streams. 

Happy collecting, and remember—always do your own research before diving into any investment, whether it’s a whole NFT or just a fraction!

Calibraint

Author

August 28, 2024

Last updated: August 29, 2024