Fractional NFTs Are Changing The NFT Space
NFTs have exploded this year. With a staggering total sales volume of more than $15 billion in 2021, compared to just $340 million in 2020, it would seem that NFTs have to be reaching a peak…..right?
Even with the tremendous growth that the NFT space has seen this year, the means to unlock and utilize the financial value of NFTs have remained the same. We are still forced to sell NFTs in their entirety in order to see a profit, gain some liquidity, or discover an NFT’s true price.
This is in stark contrast to the world of DeFi, which has seen unprecedented growth in both TVL and innovation. Trading, lending, staking, and other yield-generating activities have become plentiful and easy to access. This has led to an increase in users, TVL, and liquidity, which in turn, has brought even more people into the space. It’s a wildly productive flywheel, but one that NFTs have yet to tap into.
Want to invest in a popular NFT collection but feel it's too expensive? Fractional NFTs could be an alternative.
As some NFT collections rise in popularity, so do their floor prices, which is great for investors, collectors, and artists who got into the space early. But what about those trying to get into the market now? Most can’t afford to buy the more expensive NFTs, but they could certainly explore the possibilities offered by Fractionalized NFTs. The concept of fractionalization is similar to owning shares of a company. It opens up NFT ownership to multiple collectors, making them accessible to anyone instead of just NFT whales.
What Are Fractional NFTs?
A Fractional NFT is simply a whole NFT divided into smaller pieces, allowing different people to claim partial ownership of the same NFT. Think of it like a cake – where a whole cake can be sliced to serve multiple people. Given that an NFT is unique and cannot be duplicated, fractional NFTs push boundaries by making it possible to divide their ownership.
How Does NFT Fractionalization Work?
The ERC-721 token standard is one of the most common standards used for creating NFTs on the Ethereum blockchain (along with the ERC-1155). While these two standards can generate unique non-fungible tokens, the ERC-20 standard, in contrast, is used to make altcoins and other fungible tokens. Fungible tokens are interchangeable, meaning that each unit has the same utility and intrinsic value. As such, you can deploy a smart contract to generate multiple ERC-20 tokens linked to an indivisible ERC-721 NFT. This way, anyone who holds any of the ERC-20 tokens generated can own a percentage of the linked NFT.
Benefits Of Fractional NFTs?
The increasingly high prices of some of the most popular NFTs are unaffordable for many, shutting out smaller investors or collectors from participating in the NFT space. Fractionalizing an expensive NFT lowers costs and makes it accessible to more people.
With the rising popularity of NFTs, popular collections tend to increase greatly in price. This makes some NFTs accessible to only a few wealthy investors. With Fractional NFTs, you can divide the ownership of ERC-721 or ERC-1155 tokens into multiple ERC-20 tokens, making them more affordable.
It can be difficult to accurately determine the right price for a more expensive NFT with very limited or no transaction history. Fractionalizing the NFT makes it more affordable and allows more people to trade the asset, making it easier for buyers to find the NFT's actual value.
Increased visibility for creators
With fractionalization, digital creators can get even greater exposure online because they are able to reach a wider audience in a more liquid market.
NFTs Are Just Getting Started
As NFTs expand beyond art and collectibles into in-game assets, memberships, off-chain cash-flows, and more, it is imperative that they integrate smoothly into the wider DeFi ecosystem. This will give these assets access to the robust liquidity that they need, and pave the way for the next wave of crypto adoption.
As the potential for non-fungible tokens continues to come into focus, it becomes increasingly clear that the NFT space is still preparing for take off.