Fractional NFTs Boost Accessibility and Liquidity of Crypto Assets

It didn't take long for non-fungible tokens (NFTs) to become one of the most popular types of crypto assets. The first NFT was created in 2014 to establish provenance for a piece of digital artwork, Quantum. Developers soon found ways to use NFTs for gaming and other purposes, and interest reached an all-time high in January 2022. Although the NFT bull market of 2021 has faded, they're still a mainstream conversation topic.

According to CryptoSlam, popular NFTs from series like CryptoPunks and Bored Ape Yacht Club still regularly sell for $100,000 or more. The average investor can't afford these expensive NFTs. However, fractionalization can remove the cost barriers that limit demand for certain tokens.

In this article, we'll look at fractionalized NFTs, their benefits and challenges, and their future.

A closer look at fractional NFTs

A fractionalized NFT (F-NFT) is an NFT divided into multiple pieces, allowing for fractional ownership of the original token. This process lowers the barrier of entry, as the NFT fractions cost less than the full token.

The original NFT gets locked in a smart contract, which creates a predetermined number of fungible tokens, each representing a piece of the NFT. An NFT owner can fractionalize a token even if they aren't the token's creator. Many fractionalization platforms reward the NFT's owner with "curator fees," representing a percentage of the fractions' trading value.

The curator can make all fractions available for purchase or keep some for themselves. In this way, fractionalized NFTs more closely resemble a cryptocurrency than an NFT. In fact, on the Ethereum blockchain, fractionalized NFTs are created using the ERC-20 fungible token standard.

The benefits of fractional NFTs

Fractionalization can drastically increase an NFT's value because the pieces can be bought and sold more easily than the underlying NFT. In this section, we'll dive into the specifics of how NFT fractionalization benefits the NFT ecosystem.

• Increased accessibility and affordability for investors. Most people can't afford a $100,000 NFT. However, if that token were split into 1,000 pieces, with each one valued at roughly $100, it would be a feasible purchase for a much wider pool of investors. This concept makes it easier for the average person to invest in valuable NFTs.

• Higher liquidity for NFT owners. Market liquidity refers to how easily an asset can be bought or sold on the secondary market. NFT market liquidity can drop significantly as an NFT's price increases, because fewer investors can afford it. When an expensive NFT is divided into smaller pieces, it becomes easier to buy and sell, leading to more liquidity. Fractionalization makes it easier for NFT owners to sell, which makes the NFT market as a whole more liquid.

• Greater exposure for NFT creators. Enhanced exposure is one of the lesser-appreciated benefits of fractionalization. It leads to more NFT holders. These holders can post about their purchase on social media or tell friends about their asset ownership. If their friends or social media followers want to own the same NFT, they can buy a fraction on the secondary market. This can create a snowball effect, with each new holder bringing more attention to the fractionalized asset. This is good for the NFT itself, but it also benefits the NFT's creator by bringing more awareness to them and their collection.

• Potential for the increased value of NFTs. Enhanced liquidity, accessibility, and exposure can increase the value of an NFT. Fractionalization also enhances price discovery, meaning the market can more efficiently determine an NFT's value. Often, fractionalization smart contracts include a buyback auction feature. This feature lets any entity purchase all NFT fractions to gain ownership of the original NFT. Assuming the value of the fractions increased, the NFT's value will be higher than it was before being fractionalized.

Challenges and limitations of fractional NFTs

Many of the challenges involved in traditional NFTs and digital assets are present in the fractional NFT ecosystem. Security is prominent among them. Malicious entities sometimes trick investors into thinking they are buying partial ownership of a popular NFT. For instance, scammers can easily create fungible tokens with names that imply they're related to a particular NFT. Those with a limited understanding of fractional NFTs could be tricked into buying the tokens.

Fractional NFTs also represent a collective investment, which means they could be perceived as unregistered securities. SEC Commissioner Hester Peirce, an avid supporter of digital assets, has noted numerous times that fractionalizing NFTs can turn them into securities.

NFT fractionalization also reduces decision-making power for the asset's original owner. If the owner wishes to sell the original NFT, they'd have to initiate a buyback auction, in which case, they could lose the original NFT if they're outbid.

The future of fractional NFTs

Fractional NFTs present an interesting opportunity for NFT owners and creators. The concept can create more demand for tokens that have become stagnant and may increase exposure for artists, musicians, and other NFT creators. Fractionalization is especially helpful during bear markets since investors take on less risk when buying these assets. However, regulatory concerns could halt the adoption of fractionalized NFTs, as they may be unregistered securities.

Fractional NFTs can also represent partial ownership of a physical asset, such as a diamond, a painting, or a house. This creates new ways to sell valuable physical assets. It also has the same benefits and challenges as a traditional F-NFT.

The Hedera Token Service makes it easy for creators to generate fungible and non-fungible tokens. Fees are low and adhere to a strict schedule, which can be found on the Hedera website. All Hedera NFTs are mapped to ERC-721 standards, meaning they're interoperable with EVM-compatible networks. The Hedera Token Service allows for the creation of NFTs that can be fractionalized, traditional NFTs, and traditional fungible tokens.

Hedera also has a growing selection of NFT wallets and tools. For example, mintbar.xyz lets you easily create an NFT collection on the public Hedera network. There are numerous NFT marketplaces on the Hedera network, such as Zuse, HashGuild, and HashAxis. Additionally, the HBAR Foundation gives grants to developers building NFT tools for the Hedera ecosystem.

• "Fractional NFTs: The Future of Accessible and Liquid Crypto Assets"

• "Breaking Down Fractional NFTs: Benefits, Challenges, and Opportunities"

• "Fractionalizing NFTs: How it Increases Accessibility and Enhances Value in the NFT Market"