Nerd For Tech
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Nerd For Tech

Exploring the concept of fractionalized NFT in web3

As the popularity of some NFT collections increases, so do their floor prices. This is good news for collectors, investors, and artists who got into the space early in the market. But what about those who are willing to enter the market? While most people can’t afford the more expensive NFTs they need, they might be able to explore fractionalized NFTs.

NFT fractionalization is the next chapter in this rapidly growing crypto, blockchain and decentralization sector. NFT fractionalization means that ownership of an NFT is divided into smaller fractions. This allows multiple people to have a single NFT. To explain more, an NFT is not a cryptocurrency and cannot be exchanged for other assets. Fractional NFTs, however, allow you to split ownership of the NFT. For example, it is impossible to exchange the Mona Lisa’s original painting for another painting. However, it is possible to split the painting into smaller pieces. Similarly, with fractionalize NFT, several people can own a piece of the same rare item. Smart contracts enable Fractionalized NFTs.

How do fractionalized NFTs work?

To illustrate fractionalized NFTs, we will be using token development standards of ERC20 and ERC721. ERC721 tokens serve as the standard for creating non-fungible tokens using the Ethereum blockchain, whereas the ERC20 standard is used for creating fungible tokens. A fungible token can represent fungible items like gold, money and any other commodity. On the other hand, a non-fungible token can be used to signify any rare item, such as a collectible game card.

A fungible token is flexible, and you can exchange it for another of the same kind without any loss. So, we can deploy a smart contract for generating ERC20 tokens linked to an ERC721 NFT, which is indivisible by default. This way, anyone who holds any ERC20 token can get a share of rare and valuable NFT. This is how fractional ownership can be achieved for an NFT. The smart contract can also secure data distinguishing fractional NFTs from other NFTs. This idea is also applicable to any blockchain network that supports smart contracts. This way, the NFT is locked in the smart contract, and multiple fungible tokens represent its ownership. The smart contract governs the supply of these tokens.

Can fractionalized NFTs be reversed?

We can reverse fractionalized NFT to make a complete NFT. During the fractionalization of NFTs, we get a buyout option in smart contracts associated with it. This buyout option enables fractional NFT holders to purchase all fractions necessary to unlock the original NFT. Once the fractional NFT holder transfers several ERC20 tokens into the smart contract, it initiates the buyout. This will initiate a buyback auction that will last for a set time. If the buyout succeeds, it will automatically return fractions to the smart contract, and the buyer takes full ownership of NFT.

Benefits of fractionalized NFTs in web3 development

Democratization

It is unaffordable for smaller investors and collectors to participate in the NFT market due to the increasingly high prices of some of the most popular NFTs. The cost of the expensive NFT gets reduced through fractionalization, and it becomes more accessible for anyone.

Greater liquidity

The rising popularity of NFTs makes popular collections more expensive. However, the costly NFTs are only accessible to wealthy investors. With fractional NFTs, you can divide your ERC721 tokens or ERC1155 tokens into multiple ERC20 tokens making them more affordable.

Price discovery

It is difficult to determine the current price for a higher-end NFT with limited transaction history. Fractionalized NFT makes it cheaper and more accessible for traders, making it easier for buyers to determine the NFT’s true value.

More visibility for creators

Digital creators have greater visibility online due to fractionalization and can reach a larger audience in a more liquid market.

Where to buy a fractional NFT?

Many platforms allow users to create and buy fractionalized NFTs.

  • Otis is an NFT investment platform that allows users to invest in NFT art and collectibles, manage their portfolios, and trade via the Otis app. The platform allows investors to acquire fractional shares in crypto assets.
  • Unicly — It is for investors who want to turn their NFT collections into tradable assets that guarantee liquidity. The platform allows investors to tokenize NFTs and to create tradable collections that can be traded of any size.
  • Fractional.art — This platform allows investors to buy, sell, and mint fractions of NFTs. Also, NFT holders can use the platform to create fractionalized NFT collections or to create NFT fractions.

Is fractional NFT a good investment?

Fractional NFTs can be a great investment. They help increase liquidity and inclusion in the booming NFT marketplace. They increase the NFT market’s potential by providing liquidity, price discovery and democratization. However, fractionalized NFTs come with their risks. They are generally subject to the same problems as NFTs, such as contracts, publicity, and intellectual property rights. While the sale or purchase of entire NFTs as digital collectibles may not pose a problem with securities laws, fractionalized NFTs could raise red flags with regulators because financial regulators could view them as unauthorized ICOs (initial coin offerings).

As the market for NFTs and fractionalized NFTs continues to grow, legal rules around the assets will also evolve. For now, investors and owners in NFT-related ventures need to be aware of potential legal issues.

Bottom line

As the NFT marketplace grows in popularity and demand, we will see many more interesting developments and use cases as blockchain technology evolves. Although fractional NFTs are still in their infancy, it seems like they will be the next big trend within the growing crypto industry. NFT fractionalization allows for greater liquidity and therefore opens up endless investment options. This opens the market to a wider range of investors and ensures that fractionalized NFTs will power the next wave in digital asset monetization.

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LeewayHertz

LeewayHertz

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Fullstack software and web3 development company building custom software solutions, dApps, metaverse platforms, etc. https://www.leewayhertz.com