Non-Fungible Tokens (NFTs) mark the beginning of a new era of digital asset ownership, with the benefits of transparency and decentralization. So what are Fractional NFTs and Use cases of fractional NFTs? Let's find out by reading this article.
What are fractional NFTs?
As interest in NFTs increases, we further see an exponential rise in token prices. At times, NFTs representing works of art have sold for millions of dollars. Also, heads of famous collectibles like the Bored Ape Yacht Club have become relatively expensive. Increased demand and rising prices have made buying NFTs prohibitively expensive. The high price creates a huge barrier to entry in the market, as not everyone can afford NFTs. One way to solve this problem is through the fractionalization process, which is where fractional NFTs come into the picture.
Fractional NFTs are non-fungible tokens that have been split into smaller pieces, as their name suggests. However, what exactly does this mean? This essentially means taking NFTs and splitting a non-fungible token into several fungible tokens that represent a stake in the original asset.
The segmentation process is done using smart contracts. The contract creates a specified number of fungible tokens, which are interlinked with the indivisible original token. Each portion (or fractions) provides the holder with a percentage of the original NFT ownership. A fungible token representing a fraction of the NFT stake can later be traded on an exchange or market for a fraction of the cost.
Use cases of fractional NFTs
F-NFTs and gaming
Most earn-to-play crypto games allow you to buy, sell, and own various in-game items, some of which are NFTs. Such multiplayer games could use F-NFTs to bring players together to buy and sell expensive in-game assets by investing their dispersed stake. NFT-based online video game Axie Infinity has tested the viability of F-NFT transactions by selling decentralized ownership of ultra-rare Axies, one of its most popular in-game NFT assets.
F-NFTs and the metaverse
As the idea of Metaverse enters the mainstream, we can expect a lot of investment to pour into Metaverse-related projects. Companies like Decentraland and Sandbox have already ventured into the space. F-NFTs can be used to allow investors, conglomerates and even groups of individuals to come together to buy virtual land and other similar digital assets in a virtual world.
F-NFTs and real estate
NFTs can significantly speed up the property buying process by replacing intermediaries with smart contracts, enabling simple and secure transfer of ownership. Converting real estate to NFTs also has other key advantages, such as instant title settlement and a simplified overall transaction process. Furthermore, since ownership and entitlement history can be recorded directly on the blockchain, verification of transaction details is often quick and easy. F-NFTs are similar to NFTs in that they allow property to be bought and sold without the involvement of an intermediary. The only difference is that F-NFTs allow multiple parties, not just one party, to share ownership of the property. Although F-NFTs are not yet an integral part of the real estate industry,it is easy to foresee that their use will make future real estate investments easier and more affordable.
How Do Fractionalized NFTs work?
The core of an NFT is actually just a token using the Ethereum ERC-721 standard. Before an NFT becomes fragmented, it is first locked in a smart contract, which is simply a program stored on the blockchain that is coded to execute automatically when predetermined conditions are met.
The smart contract then splits the ERC-721 token into parts in the form of ERC-20 tokens based on instructions provided by the NFT owner. The owner outlines the quantity, price, metadata and other properties of the ERC-20 tokens that will be created. Each fraction or ERC-20 token represents fractional ownership of the entire NFT. The pieces are then sold at a fixed price for a period of time, or until they are sold out.
It is important to note that NFTs and hierarchical NFTs are not limited to the Ethereum blockchain. Fractionation can work on any blockchain network that supports smart contracts and NFTs. Alternative networks such as Polygon (MATIC), Cardano (ADA), and Solana (SOL ) all support smart contracts and can facilitate the creation and transfer of NFTs. These networks have the added benefit of fast transaction times and no gas fees.
I hope this article will help you to learn what are fractional NFTs and Use cases of fractional NFTs. Decentralization brings more liquidity to a notoriously illiquid market, as expensive NFTs can be traded in small fractions. NFT holders can sell some of their NFTs in exchange for cryptocurrency while retaining majority ownership. For investors, some NFTs can provide asset exposure without having to purchase the entire asset.
