What exactly are Fractionalized NFTs?

What exactly are Fractionalized NFTs?

What exactly are Fractionalized NFTs?

The notion of fractional asset ownership is not new. The idea has been effectively applied in a wide range of sectors, from real estate to fashion, and for a wide range of physical assets, including stock, designer products, and high-end assets such as yachts and private planes.

It is a common approach for individuals to buy properties in the real estate market collectively and economically. Owners who purchase fractional ownership receive a deed reflecting their stake. Fractionalized NFTs work in a similar manner.

What exactly are Fractionalized NFTs?

Some NFTs have sold for astronomical sums, such as Beeple’s Everyday — The First 5000 Days, which sold for $69.3 million, Human One, which sold for $28.9 million, and Cryptopunk #7523, which sold for $11.75 million, to name a few. Given that many NFTs are sold for enormous sums of money, keeping them out of reach for the average person is a big entrance hurdle for everyone to participate and own a prominent NFT; this has brought the notion of fractionalizing NFTs to the forefront.

NFTs are democratized when they are broken down into smaller pieces, making them more accessible to individuals with less financial means. This is advantageous not only to investors but also to NFTs in general because it increases market liquidity. Everyone benefits from a win-win situation.

The goal of NFT fractionalization is to provide numerous co-owners access to high-value and distinctive NFT assets that belong to several persons at the same time. The owner of this NFT asset can produce and distribute a number of tokens that are components of the original NFT to interested parties.

The standard for NFTs is ERC-721; to fractionalize the purchase on Ethereum, the NFT owner divides the ERC-721 token into multiple ERC-20 tokens. As a consequence, each ERC-20 token represents a portion of the NFT of the asset.

The Advantages of Fractionalized NFTs

1. Democratization

Due to the high price of some NFTs, smaller investors or investors with limited financial means may be unable to participate. Fractionalizing a pricey NFT decreases ownership costs and hurdles, making it more accessible to a broader range of investors.

It’s also worth noting that when the price of an NFT rises, the value of all fractions rises with it, and when the price of an NFT falls suddenly, the value of all fractions falls with it.

2. Liquidity

Due to the scarcity of NFTs, only a few affluent investors now have access to them, particularly the more valuable ones. Because ERC-20 tokens may be freely sold in secondary marketplaces, fractionalized NFTs address a disadvantage of NFTs: a lack of liquidity.

Rather than waiting weeks or months for a single NFT to sell, many investors may be keener to purchase fractions of an NFT right away, at a reduced price, so alleviating market liquidity issues.

3. Collateral

As the liquidity issue is resolved, fractionalized NFTs can be used as collateral for a loan. Innovative earning ideas like staking and yield farming are also conceivable with fractionalized NFTs.

Potential Issues with Fractionalized NFTs

Although fractionalized NFTs have significant advantages, they can also be troublesome. In certain countries, such as the United States, the legality of fractionalized NFTs is very much a grey area, therefore proceed with caution and do your homework before investing in or developing your own fractionalized NFTs.

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