Fractionalization: How to trade NFTs you can’t afford
If you have been following the NFT market, you are either in regret that you “missed the bus” of blue-chip NFTs or are keeping an eye out for an NFT that you think will catapult into a blue-chip.
It goes without saying that NFTs which make the news constitute the portion of the NFT market that is largely illiquid. Thanks to the hype around NFTs, their price often makes it impossible for most investors to even consider purchasing a stable NFT. It is however undeniable that these NFTs have their utility, and a lot of web3 users want to own as many popular NFTs as possible.
Fractional NFTs might just be the solution we need.
What are fractional NFTs?
Fractional NFTs, as their name suggests, are NFTs which are ‘fractioned’ into sub NFTs that can be sold individually to allow multiple users to hold partial ownership over the original NFT.
For example, PleasrDAO bought DOGE NFT worth $4 million and fractioned it into 17 billion sub NFTs, allowing people to obtain partial ownership over DOGE for as low as $1.
How are NFTs fractioned?
We know, they are supposed to be non-fungible. They still are.
Most NFTs in the market today are represented with the ERC-721 token standard (some use ERC1155). These are non fungible token standards. ERC-20 is a standard for fungible tokens. Blue chip NFT holders create multiple ERC20 tokes linked to the original ERC721, and people buying them become partial owners of the original NFT.
This happens in 3 steps:
- The initial owner chooses one or more NFTs to fractionalize
- A “vault”, essentially a smart contract, is created
- The owner enters the desired quantity and price of ERC20 tokens
Once created, these tokens can be bought and sold in secondary markets and DEXs.
The Buyout Process
The fractionalization of an NFT can be reversed by a buyout process, wherein an interested investor can bid for a price higher than the reserve price of the NFT. The reserve price is the minimum price the NFT can be bought back for, and is initially set by the original holder. Eventually, it is determined using the weighted average of the reserve prices decided upon by the voting fractional owners.
A fractional owner can start the bidding by returning some fractional NFTs to the smart contract. This starts the auction, which might last up to 8 days (varies according to the platform). Fractional owners must bid higher if they want to keep their NFTs.
Advantages of fractionalization
Given that the NFT fractions are substantially less expensive than whole NFTs, the market lowers the entry barrier for investors and individuals, enabling wider accessibility and a democratization of the ecosystem.
There are a number of reasons why NFT holders would want to fractionalize their NFTs:
- Price discovery: Each ERC20 token is assigned a set value. This allows the original holder to estimate the actual market value of their NFT.
- Curator fee: The original NFT holder receives an annual curator fee which is set by the owner, but is also usually capped by platforms.
- Liquidity: Owners have much better liquidity after fractionalization. Decentralized exchanges like Uniswap allow the owners to create liquidity pools.
Why should anyone buy fractionalized NFTs?
- Fractional ownership: Apart from social benefits, partial ownership often allows access to token gated communities of these prestigious NFTs.
- Flexibility: Fractional owners get to vote on reserve prices. They can also sell their share of the NFT on secondary markets and profit out of the same.
- ETH on buyout: If a buyout takes place, the fractional holders receive a percentage of the ETH equivalent to the fraction of NFT shares they held.
F-NFT marketplaces
On F-NFT marketplaces, buying and selling fractional NFTs is rather straightforward.
It involves navigating to the platform, choosing the NFT you want to buy fractions of, connecting the wallet, and paying equivalent ether to finally own the fractions. Here are some platforms that allow you to do this:
Unic.ly
Unicly has its own uTokens that are created upon fractionalization. The platform allows:
- NFT holders to create fractions
- Investors to buy stake in multiple NFTs
- Farming of NFTs through staking and contributing to liquidity pools
Fractional.art
Fractional runs on a permissionless protocol, offering flexibility to developers to build over itself. It allows users to buy , sell and mint fractions of NFTs.
NFTX
This is another popular platform that allows users to buy, sell, stake and swap like-NFTs.
Otis, DAOfi, and NFTfy are some other popular platforms. A fraction’s price is initially determined by its initial owner, but over time, it depends on the liquidity pools to which it belongs.
Are F-NFTs safe to buy?
The US Securities and Exchange Commission (SEC) has brought up a few concerns and wants to investigate into F-NFTs in more detail. The committee deems it important for them to be registered as securities if they are to be used accordingly.
Any asset becomes a security if it involves a direct distribution of revenue and an expectation of appreciation in value arising from third party efforts. F-NFTs have largely been invested in for future profits. However, classifying them as securities would involve registering tokens and trading on centralized licensed platforms. This essentially takes away anonymity and decentralization-something the web3 community will definitely not agree to.
Additionally, it’s crucial to remember that NFTs’ IP rights and custody solutions are static rights that are hardcoded into smart contracts and are not governed by security laws. Therefore, despite the current surge in demand for F-NFTs, it is always wise to consider market risks and address any outstanding legal issues before making a purchase.
That said, with their approach, fractional NFTs are making the world of NFTs more accessible to everyone. It’s now possible for more people to own metaverse real estates or dNFTs for real world real estate.
They might usher in a new legal system that allows NFT markets to stay regulated. NFTs are unable to be widely used due to market regulation as it stands, a lack of security measures, and market speculation. F-NFTs may just be what NFTs need to create a fully functional digital asset ecosystem.
Check out the RoverX blog for NFT project analyses, NFT news, and the latest alpha.
Join us on Twitter and Discord to be a part of the RoverX community and BUIDL roverx.io with us!
Article originally published at RoverX Blog
