Fractional NFT (F-NFT) Explained: How Do They Work

At a time when NFTs are in high demand, newcomers need opportunities to explore and benefit from the NFT technology too. Helping such novice investors, F-NFT is a smart solution.

Furthermore, low-budget investors that can not afford high-value NFTs to add to their collection can also benefit once they buy fractional NFTs.

These NFTs, similar to normal NFTs, introduce various opportunities for investors. They work in a way that’s analogous to stock ownership. As a result, NFT whales have access to NFTs, and so do regular people through fractional ownership.

In this detailed guide, we will dive deeper into Fractional NFTs, how they function, how they became popular, and the many advantages and risks involved in fractionalized NFTs ownership.

What is a Fractional NFTs (F-NFTs)? A Brief Overview:

When NFT owners divide one of their NFTs into smaller pieces, it creates a fractional NFT. You can divide your NFT into any number of parts, but the minimum is two.

When an NFT divides, the price of the fractional portions is redistributed, lowering the cost of smaller NFTs.

In this process, ERC-721 tokens back parent NFTs, while ERC-20 smart contract backs a fractional NFT. With the help of this process, fractionalized NFTs ownership becomes possible for both smart money investors and low-budget investors.

NFT fractionalization always results in a lower price per fractional share of NFT. However, because more collectors want to buy a piece of the NFT, the fractionalized NFT in total may rise. This phenomenon mostly happens with popular NFTs.

For example, before fractionalization, the Feisty Doge NFT was $35,000 in June 2024. However, following the release of its fractional NFT, the NFT’s overall value reached a new high of $80 million.

How Fractional NFT Works

Most NFTs are based on the Ethereum blockchain and adhere to the ERC-721 standard. Hence, the first step in fractionalizing an NFT is to place it in a smart contract. This smart contract is a blockchain script programmed to deliver a specific result after meeting certain criteria.

Based on predefined criteria, the smart contract divides the ERC-721 NFT token into many fragments in ERC-20 tokens. After that, the smart contract specifies the total quantity of ERC-20 tokens to be issued and their base price, attributes, metadata, and other distinguishing characteristics. Each ERC-20 token represents a portion of the total NFT ownership. Fractions are often offered at a preset price for a set length or sold out shortly after they are formed.

For example, if we consider a renowned painting turned into an NFT with a price tag of $100 million. Only a small number of investors could afford it. The same NFT can be fractionalized using a smart contract into 20,000 ERC-20 tokens. This will allow investors to purchase a portion of the legendary painting for as little as $5,000 per piece, making it far more accessible and appealing to a larger pool of investors.

Another noteworthy factor is that fractionalized NFTs are not confined to the Ethereum blockchain. Instead, any blockchain that supports NFTs and smart contracts can be used for fractionalization. Blockchains like Solana (SOL), Polygon (MATIC), and Cardano (ADA), for example, all permit the production of NFTs. These networks also provide reduced gas expenses and better transaction speeds.

What is the Difference Between Fractional NFTs and Traditional NFTs?

Considering the difference between fractional NFTs and traditional NFTs, F-NFTs allow investors to own a small piece of a larger NFT through a fractionalized NFT. Having said that, it’s easy to see that there’s a big difference between a whole NFT and its fractionalized counterpart, as the former is just a part of the latter.

However, what’s interesting about fractional NFT is that we can turn them back into a whole NFT. The smart contract that helps fractionalize an NFT often includes a buyback provision. This allows the original NFT owner or an NFT investor in popular NFT collections to buy back all the fractions and recover the original NFT. In this scenario, once the value of the whole NFT surges after its conversion into fractions, this recreation of a whole NFT with all the fractions can bring great profit returns for the sole owner of the NFT.

What Brought Fractional NFTs In Light?

The ERC-721 standard on the Ethereum blockchain is used for Non-Fungible Tokens. Every NFT has unchangeable and unique smart contracts. Moreover, the fact that NFTs can’t be split up is a good sign for finding people’s intellectual property.

Due to this reason, the value of non-fungible assets grew like a rocket in 2024, and many million-dollar NFTs saw extensive market demand.

Also Read: Best Way to find Upcoming NFT Projects

With this growing demand, we can now find non-fungible tokens in virtual real estate, in-game collectibles, writer’s NFTs, digital art, and even the metaverse. But the prices of NFTs have increased so much that most people can’t afford them.

As a solution, the idea of fractional NFTs came about to solve this problem. In addition to making the market easier to get into, fractional NFTs make the market more flexible. These tokens make a lot of other cheap tokens that can be bought on the market and used to buy shares of well-known NFTs.

4 Risks Involved In Fractional Ownership:

When an NFT is available in fractional value, modest NFT collectors can easily invest through secondary marketplaces. However, before investing in such pooled crypto assets, keep the following risks in mind when seeking fractional ownership:

1. A Lack of Regulation:

There are no specific rules, policies, or regulations governing fractional NFT platforms and marketplaces. In most DAOs, a community governs the platform’s actions. It’s no secret that only the wealthiest individuals have a say in such communities. As a result, if these large investors make poor selections, your investment may suffer.

2. Ownership Documentation:

You must do two types of digital paperwork when seeking fractional ownership: copyright infringement and proof of ownership. Before investing, ensure that the seller owns the NFT and the artwork it represents through proper procedures.

Otherwise, the NFT project developer or brand with intellectual property rights (IPR) may sue the seller. Such behaviors can lower the value of your NFT fraction holdings. Furthermore, you must check the seller’s genuine NFT ownership using reputable platforms such as Ethplorer, Etherscan, Etherchain, etc.

3. Smart Contract Security:

In the NFT metaverse, hacking attacks against smart contracts are possible. Furthermore, the seller or entity that fractionalizes certain NFTs may make errors in smart contract management. As a result, before putting your money at risk, educate yourself on blockchain smart contracts.

4. Market with a High Volatility:

The sentiment of investors and collectors is the foundation of the fractional NFT market. Because the regular NFT market is highly volatile, the values of fractionalized NFTs are equally variable.

Furthermore, when the Ethereum blockchain transitions to a proof-of-stake (PoS) consensus system, some elements of the existing NFT fragment marketplaces may change dramatically.

Benefits of Fractional NFTs Ownership:

One of the main attractions of F-NFTs is that they allow investors to own a piece of a more expensive NFT. As a bonus, holders of F-NFTs may be eligible for governance roles within the NFT ecosystem. The burgeoning NFT business is another area that benefits from this accelerated integration.

Some added benefits you can access when you buy fractional NFTs include the following:

• Increased Liquidity:

The biggest distinguishing attribute of NFTs is their uniqueness. This distinguishing feature influences access to NFTs, particularly valuable ones. F-NFTs address the NFT liquidity issue using ERC-20 tokens easily exchanged on secondary marketplaces. So rather than waiting weeks or months to sell an entire NFT, investors can immediately buy multiple fractions of it and trade their NFT ownership.

• Price Determination:

Price discovery is the process through which the market discovers the best price for an object. New NFTs are typically difficult to price because they have minimal transaction history. Fractionalization makes pricing easier since various fractions can be put into the market for active bidding. This facilitates the swift establishment of prices depending on market demand.

Making NFTs More Available: Most investors cannot afford some NFTs due to their constantly surging pricing. Fractionalization reduces ownership expenses and makes NFTs more accessible to various investors. Furthermore, investors can benefit from an NFT’s price increases because this automatically reflects on all of its fractions proportionally.

Can You Sell Fractional NFTs? (How to Sell F-NFTs)

Finally, F-NFT owners can list an NFT at any time on several NFT marketplaces. Some might get verified by the platform, and others will not, depending on if they are real.

You can also vote to determine if NFT fraction holders should put up the digital collectible for auction and at what price. The votes allow users to suggest a listing price, and it uses a weighted average to come up with the right price.

If someone buys the NFT, everyone who has a fraction of it will earn the profit. You can also set a 5% curator fee inserts inflation by the number of years when you create the listing.

Final Verdict:

Does F-NFT sound like a smart investment option for you on a lower budget? Then it’s time you benefit from this trending asset investment option.

With a reliable and easy-to-use fractional NFT marketplace like Ommniverse, you can pick good NFTs with high return potential in the crypto sphere and make that long-awaited bet on a valuable NFT fraction! Happy Investing.

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