Fractional Nfts and how they work
Fractional NFTs can be bought and sold on the open market just like traditional NFTs. But since they come with smaller price tags, the pool of potential buyers is much larger.
NFTs have increased in popularity in recent years. They have quickly transformed from a fad in the art and collectibles industry to a burgeoning digital asset class with many uses. Over the past year and a half, several different types of NFTs have also emerged, each with their own set of USPs and use cases. One of the latest renditions of the NFT asset class is the fractional NFT. This type of NFT gives a new impression of ownership of digital assets and can attract thousands of first-time investors.
But what are fractional NFTs and how do they work? Join us to find out.
What are Fractional NFTs?
Buying an NFT may be out of reach for many investors, especially with the prices that these digital assets command today. Fractional NFTs offer a review of this problem. They allow investors to buy a fraction of the total NFT. By doing so, the investor can access the asset and any return without coughing up a small fortune to buy the entire NFT.
For example, an artist can create a limited edition piece of art worth thousands of dollars. If the NFT is divided into 1,000 fractions, a person can buy 50 fractions, which represents five percent ownership of the NFT. This is much cheaper than buying the entire NFT. And just like regular NFTs, the ownership of each fraction is recorded on the blockchain, enabling a transparent and verifiable record of ownership.
How do fractional NFTs work?
Smart contracts are used to create and manage fractional NFTs. A smart contract is a self-executing contract with the terms of the agreement between buyer and seller written directly into lines of code. The code and the agreed terms are stored on the blockchain, which makes the contract transparent, traceable and irreversible. The process of creating and managing fractional NFTs typically involves the following steps:
The creator of the asset (such as an artist) defines the terms of ownership for the asset, including the total number of fractions into which the asset will be divided and the price of each fraction.
The creator creates a smart contract on the blockchain that outlines these terms of ownership and stores it on the blockchain.
The creator then creates the NFTs, which involves creating a unique token on the blockchain for each fraction of the asset.
The NFTs are made available for purchase via an online marketplace or exchange platform. When a person buys a fraction of the NFT, the smart contract automatically records the transaction on the blockchain and transfers ownership of the fraction to the buyer.
Key differences between fractionalized NFTs and traditional NFTs
Ownership structure: Traditional NFTs are owned by a single individual, while fractionalized NFTs are owned by multiple individuals, each of whom owns a fraction of the NFT.
Reasonable price: Traditional NFTs can be more expensive as they represent ownership of the entire asset. Fractionalized NFTs can be less expensive, as the cost of ownership is shared between multiple individuals.
Potential for financial gains: Both traditional and fractionalized NFTs can increase over time, providing the potential for financial gain for owners. However, the value of a fractional NFT may be more volatile as it is divided into smaller units and may be more subject to market fluctuations.
What are the benefits of Fractional NFTs?
Fractional NFTs offer several advantages over traditional ownership models, including:
Greater availability
Fractional NFTs allow individuals to own a portion of something that may be too expensive or otherwise out of reach for them to purchase in full. This can be particularly beneficial to individuals who are interested in owning unique or valuable assets but may not have the financial resources to do so.
Increased liquidity
Fractional NFTs can be bought and sold on the open market just like traditional NFTs. But since they come with smaller price tags, the pool of potential buyers is much larger. This can be particularly useful for individuals who may wish to sell their stake in an asset at a later date.
Added exposure for creators
A fractional NFT is guaranteed to have more investors than a traditional NFT. This wider audience base ensures that digital creators enjoy increased visibility.
Some potential disadvantages of fractional NFTs are:
Complexity
Fractional NFTs can be more complex to understand and manage than traditional NFTs, as they involve ownership of part of an asset rather than the entire asset.
Liquidity
It may be more difficult to sell fractional shares of NFTs as there may be fewer buyers interested in purchasing a partial stake in an asset. This can lead to lower liquidity and potentially lower resale value.
Value fluctuation
With more investors buying and selling the fractions of an NFT, the price assessment can be subject to greater levels of volatility. This can make it difficult to predict the future value of a fractional NFT.
Legal problems
There may be legal issues or uncertainties associated with fractional NFTs, particularly if they are used to represent fractional ownership in physical assets. This can create risks for buyers and sellers.
To conclude
Overall, fractional NFTs offer a number of potential use cases and can be used in a variety of contexts to increase accessibility, diversify investment portfolios and create a sense of community ownership. However, it is important for individuals to carefully consider the potential disadvantages and limitations of shared NFT ownership before making a purchase.
