Fractional NFTs Meaning

Jul 12, 2024 | Updated Jul 12, 2024

Fractional NFTs (F-NFTs) are a type of non-fungible token divided into smaller parts, so that many people can own a fraction of the same NFT.

What Are Fractional NFTs?

Fractional NFTs are created by locking a standard NFT in a smart contract and dividing it into multiple ERC-20 tokens. Each token represents partial ownership of the original NFT.

For example, if an NFT were divided into 10,000 ERC-20 tokens, each token would give its holder the right to own 0.01% of the NFT. These fraction tokens can then be traded or sold independently on different marketplaces.

Use Cases of Fractional NFTs

Art and Collectibles

F-NFTs can revolutionize the art world by making expensive artworks more affordable. For example, a high-value digital artwork can be fractionalized, allowing multiple investors to own a piece without needing a significant upfront investment. This democratizes art investment, making it accessible to smaller investors. What’s more, it also increases the market liquidity for valuable assets, as many people can pool their resources to make an investment.

Gaming

In gaming, F-NFTs enable players to collectively own valuable in-game assets. Games like Axie Infinity already have this concept, allowing players to purchase fractional shares of rare in-game items, thus enhancing player engagement and investment.

Real Estate

Fractional NFTs can benefit real estate transactions by allowing multiple investors to co-own a property. This can simplify buying and selling real estate, reduce costs, and increase market liquidity. For instance, an expensive property can be tokenized and sold in fractions, making it easier for investors to enter the real estate market.

Benefits of F-NFTs

By breaking down high-value assets into affordable fractions, F-NFTs make it easier for more investors to participate in the market. This can lead to better price discovery as more transactions occur, reflecting the asset’s true market value. Additionally, fractional ownership increases liquidity, making buying and selling portions of an NFT easier than trading the entire asset.

Challenges of F-NFTs

One of the main challenges with fractional NFTs is reconstitution. If someone wants to regain full ownership of a fractionalized NFT, they must buy back all the fractions. This can be complicated if other fraction holders are unwilling to sell. Some platforms address this issue through buyout auctions, where the NFT can be reconstituted if a buyer acquires all fractions at a predetermined price.