NFT Fractionalization: What It Is & Best Platforms [2023]
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NFT Financialization
Being non-fungible is one of the aspects that made NFTs so successful. However, it is a key reason they have such low liquidity. NFT fractionalization refers to making non-fungible tokens more fungible. In this article, you will learn what NFT financialization is, how it works, and its benefits and risks.
What Are Fractional NFTs?
A fractional NFT is simply a singular NFT that has been divided into fractions, enabling shared ownership. This way, more than one person can own one NFT, each claiming a fraction of it. While fractionalization of NFTs is a relatively new market, this practice has been done for a long time in the traditional art market.
How Does NFT Fractionalization Work?
NFT fractionalization starts with the original NFT being locked up in a vault. Then, smart contracts can divide the original non-fungible token into small fungible tokens. Each token will represent a fraction of the ownership of the indivisible original NFT.
Once the fungible parts of the NFT are created, they can be commercialized to interested investors on specialized platforms or secondary markets.
To illustrate, let’s look at how NFT fractionalization works on Ethereum, where the largest share of the NFT market is. This process happens by deploying a smart contract to generate multiple ERC-20 tokens linked to an indivisible ERC-721 NFT. That is because the ERC-20 token standard is more commonly used for fungible tokens. Then, the ERC-721 standard token is used to create non-fungible tokens – NFTs.
What Links NFT Fractionalization and Valuation
As explained, NFT fractionalization enables an illiquid market to become more liquid, benefiting all parts involved. For example, NFT holders can sell a portion of their NFTs for crypto while still managing to own part of their assets. On the other side, investors have access to often costly investments without spending the price of the whole asset. But it is essential to know that this dynamic of NFT fractionalization can affect the value of a given NFT to go up or down.
In the traditional financial market, stocks of a company being traded at a higher or lower price due to simple speculation can increase or decrease the evaluation of that given company. This fluctuation can happen regardless of whether that valuation reflects the reality of the company or not.
Something similar can happen in NFT fractionalization. NFT valuations can change depending on whether the fungible tokens representing the ownership of a given NFT are traded at y high or low value. This can affect the valuation of the NFT as a whole.
To illustrate this, let’s look at a well-known example: the doge meme NFT.
In June 2021, PleasrDAO acquired the doge NFT for 1,696 ether, which was around $4 million. Then, in September 2021, the organization fractionalized the NFT into $DOG tokens and auctioned 20% of them. The immense demand for these fractions raised the valuation of the original NFT to $225 million. This astounding discrepancy in valuation was possible because there is no mechanism to stop a fractional NFT from deviating from the underlying asset’s price. Thus, investors should always be careful and do their due diligence when trading this asset.
Fractional NFT Platforms
There are a number of platforms that allow users to trade fractional NFTs, approaching the market in different ways. Thus, below are some of the main fractional NFT platforms available:
This popular NFT fractionalization platform allows users to create, trade, exchange, and bid on NFT fractions. To do it, you will only need to link your wallet and generate a uToken, which is an ERC-20 token that represents ownership in a single NFT or a collection of NFTs. In addition, the platform provides guaranteed liquidity through liquidity pools, in which investors may supply liquidity as well as stake tokens to earn yields.
Fractional.art enables NFT holders to fractionalize their assets and redeem ETH in return. A great aspect of Fractional.art is that it has a simple and permissionless protocol architecture, which provides additional freedom for developers to build on its protocol.
NFTX offers a significantly different approach to NFT fractionalization. The platform allows polling NFTs of equivalent value (eg. similar rarity in the floor price) into index funds. Whenever NFT holders add or buy a share of the index, they receive ERC-20 tokens. They are also given a vToken, which represents a 1:1 claim on an NFT in the index they are engaging with.
Thus, if the user wishes to reclaim an NFT, they won’t necessarily receive the one they deposited. Instead, since all NFTs in the index are considered equal, they might receive another one. However, NFTX does offer the option of paying a 5% premium on the token price to be able to choose the NFT they wish to claim from the index.
This decentralized exchange platform for NFTs allows owners of rare and collectible NFTs to fractionalize their assets and trade these parts. On NIFTEX, this process of fractionalization is called “sharding,” and the fractions are “shards.” Sharding can be done with one single or a collection of multiple NFTs. Regardless, fractions will be represented by ERC20 tokens. NIFTEX protocol does allow buyout auctions.
The NFTfy platform approaches NFT fractionalization by allowing NFTs to be shared among multiple owners. They accomplish this through a provable and reversible fractionalization process. When an NFT holder fractionalizes their asset, they receive ERC-20 tokens in exchange. Then, other interest users can make private offerings or IDOs for the fractions.
This Solana-based and community-led NFT marketplace offers a space to trade and, of course, fractionalize NFTs. Whenever NFT holders utilize NFT fractionalization on LIQNFT, their non-fungible token is placed in a vault, and the fractional tokens are minted. Then they can be traded based on the demands of the original owner. Owners of the fractions as well as the original, then become a small community around the NFT, with governance tools to define pricing and strategies.
LIQNFT also allows users to serialize their NFTs. This interesting tool creates a limited number of serialized tokens (ST) that can be commercialized. An ST represents full ownership of a unique limited edition print of an original NFT, similar to a numbered print copy of an original piece of art.
The Bottom Line
NFT fractionalization is a powerful tool to create liquidity in the NFT market. On top of that, it also democratizes the NFT industry, allowing more investors to have access to these assets. The evolution of NFT fractional ownership can also assist in catapulting NFTs and Web 3 to the mainstream by enabling more individuals to engage with these tokens.
However, fractional NFTs still face challenges, such as regulations. But this should improve once fractional NFTs can receive classifications similar to stocks in the future. Regardless, fractional NFTs are a great step towards a more dynamic, inclusive, and liquid NFT market.
Fortunately, fractional NFTs are just another vertical of many that can be used to access liquidity in the NFT ecosystem. nftperp, for instance, allows users to trade and place bets on blue chip NFTs with up to 5x leverage. Check the nftperp discord and learn about other NFT-related types of investment to take advantage of the best the NFT industry has to offer.
