NFTs are making historical changes in our various sectors all at the same time. We can categorically say that it is reforming not just the crypto space but the world also. Non Fungible Tokens are quite impactful and are able to insert value into various industries.
NFTs collectively have gained massive popularity because of their unique characteristics and Ethereum backing. However, the NFT arena is still a work in progress, and it will take some measures for NFTs to gain ground in the mainstream financial world. These tokens have given a much bigger value and purpose to token holders and their creators enabling them to actualize their potential.
Although with these huge successes and impacts, these tokens also hone their limitations, especially when speaking of their lack of liquidity. Some potential limitations include; speculative Market, regulation & copyright Issues, lack of security protocols, environmental sustainability, storage.
A solution to the liquidity problem brings us to NFT Fractionalisation. NFT Fractionalisation is certainly the new norm. It is a trend that is gaining traction and may transform the emerging industry.
More on Fractionalised NFTs
NFT fractionalisation represents a new concept in the digital asset space and, because of its innovative proposition, it is most likely set to revolutionise the underlying architecture of non-fungible tokens as well as potentially open up new horizons in the world of investing.
When an NFT undergoes its fractionalisation process, it is first locked in a smart contract. The smart contract then splits the ERC-721 NFT into multiple fractions in the form of ERC-20 tokens, with each fraction representing partial ownership of the NFT.
Shareholders will possess a fraction of the NFT, essentially a percentage of the original ERC-721 asset, equal to the value of their ERC-20 tokens divided by the total number of ERC-20s minted when the NFT was initially locked in the smart contract. Fractions are typically put up for sale at a fixed price for a specific period of time, or until they sell out completely. With fractionalized NFTs however, several people can own a piece of the same rare item. Here is how it works.
How Do Fractionalized NFTs Work?
Fractionalized NFTs are forging the next chapter of this fast-growing sector in crypto, blockchains, and decentralization. NFT fractionalization is simply the act of dividing the ownership of an NFT into smaller fractions. This makes it possible for several people to own a single NFT.
Fractional NFTs also bring about a great deal of liquidity to the NFT marketplace. While NFTs are hot right now, their non-fungibility will ultimately lead to a lack of liquidity on most of the NFT marketplaces popping up right now. With fractional NFTs, liquidity can be sustained whereby smaller investors can participate as opposed to only having the participation of a few deep-pocketed collectors. The fungible tokens created by the smart contract to represent ownership in the NFT can be traded on other secondary platforms to further add liquidity.
Key Benefits of NFT Fractionalization
Fractional ownership has created a revolution, opened up new horizons in the NFT sector, and allowed more people to invest in NFTs. Several benefits of NFT fractionalization includes:
- Price Discovery: One of the most significant advantages of F-NFTs is that they can help you assess the market value of the NFT quickly. Say if you have digital artwork and need to understand the market value. All you need to do is fractionalize the NFT and sell 10–20% on the market.
- Enhanced Liquidity: NFT fractionalization solves the liquidity issues that come with NFTs. When you are selling a high-priced NFT, you need to wait for some time as only a few investors can afford to buy a high-value asset. But with F-NFTs, you can segregate the ERC-721 token into multiple ERC-20 tokens and sell each token individually. Hence, one can generate a lot of interest for the asset and address the liquidity issue to a large extent.
- Democratizing Investment: The NFT market has largely deterred small and medium investors from participating in NFT auctions. Since NFT assets are mainly high-priced and high-valued items, only a few investors can afford to buy those assets. The emergence of fractionalized NFTs has opened up more opportunities for small and medium investors in the NFT market, which were previously exclusive to a small set of people.
- Curator Fees: The original NFT owner who divides the NFT into fractionalized NFTs stands to receive a curator fee annually. While the curator fee can be set and updated by the NFT owner, the cost is capped at a maximum price set by the governance to prevent high fees.
- Easy Monetization: Artists and NFT owners can easily monetize their assets through fractionalized NFTs.
Future of Fractionalized NFTs
While many exchanges offer liquidity to ERC-20 and ERC-721 tokens, a new exchange needs to be developed for F-NFTs to validate the NFTs that need to be fractionalized. A new exchange created specifically for F-NFTs could help in asset authentication, smart contract fractionalization, and listing on the exchange.
F-NFTs have emerged because NFTs were selling for vast sums of money, which reduced the market to only a small group of investors.
Hence, the fractionalized NFTs were created to offer more liquidity and allow smaller investors to buy fractional NFTs of high-valued assets. But still, there is a lot of debate going on about the future of NFT.
SEC Commissioner Hester Pierce has recently stated that issuing fractional NFTs will be considered investment contracts under the securities law. The so-called “Crypto Mom” Pierce further noted that the Howey test to authenticate digital assets as securities may not hold good for real-world assets. Hence, there is still a long way to go for the F-NFT market, but the future looks promising given its vast real-world applications.
Bringing in Liquidity to NFT Market with Fractional NFTs
Algorand supports the creation of fractional NFTs and is the only decentralized network that is mathematically proven to be forkless.
The blockchain project founded by MIT Professor Silvio Micali is ideal for NFT issuers who want valuable, tokenized assets to reach a wider audience. Now, you can buy fractions of NFTs representing valuable objects. This ensures more diversification for investors and more convenience for NFT creators.
Developers can tokenize digital and physical goods through Algorand Standard Assets (ASA) functionality, which allows for the creation of digital assets in Algorand’s Layer-1 blockchain – a high-performing network that is rapid, secure, and forkless. ASAs functionalities can be customized in smart contracts based on specific needs.
ASA supports both fungible and non-fungible tokens, which enables the creation of fractional NFTs. You can use Algorand to build an NFT and then divide it into any number of parts represented by fungible assets. A good example from the above is the Mona Lisa, which could be fractionalized and deployed as an NFT within moments on the Algorand Blockchain.
Moreover, Algorand protects your NFTs through a unique protocol that relies on the Pure Proof of Stake (PPoS) algorithm, which makes the network unworkable, decentralized, and secure. Thus, your NFT can never be duplicated as a result of a fork or replicated in any way, and will not lose its value due to any replication that may happen on other blockchains. Algorand provides a full range of developer tools to customize fungible and non-fungible tokens.
There’s so much justification to show that NFT Fractions can go a long way in determining more use cases of these tokens in many various industries.