NFT fractionalization aims to allow multiple co-owners to have access to high-value, expensive, and unique NFT assets and belong to various people simultaneously. The owner of this NFT asset can create several tokens that are components of the original NFT and distribute them to interested parties.

Breaking down an NFT into smaller pieces makes it more accessible to those with less financial resources. Fractionalization is beneficial to investors and NFTs in general, as it adds liquidity to the market. A win-win atmosphere for all.

Asset fractional ownership isn’t a new concept. The concept has been successfully used in various industries, from real estate to fashion, and for various physical assets, including stock, designer items, and high-end assets such as yachts and private jets. 

It is no longer news that some NFTs were listed and sold for huge prices, such as Beeple’s “Everydays — The First 5000 Days,” which goes for $69.3 million, “Human One” sold for $28.9 million,  and “CryptoPunk #7523” sold for $11.75million. Given that many NFTs are sold for large sums of money, making it accessible to the average person is challenging; this has thrown the idea of fractionalizing NFTS, or F-NFTs for short, into the spotlight.

ERC-721 is the most common token standard for NFTs. To fractionalize the purchase on Ethereum, the NFT owner divides the ERC-721 token into numerous ERC-20 tokens. As a result, each ERC-20 token represents a percentage of the asset’s NFT.

Benefits of Fractionalized NFTs

Democratization

Smaller investors or investors with little financial resources may be unable to participate due to the high pricing of some NFTs. Fractionalizing a costly NFT lowers ownership expenses and barriers and opens it up to a wider group of investors. It’s also worth noting that when the price of an NFT rises, the value of all of its fractions rises, and  if its value falls abruptly, the value of all fractions falls with it.

Liquidity

As it stands now, only a few handful wealthy investors have access to the most valuable NFTs. Because ERC-20 tokens may be freely sold in secondary markets, F-NFTs alleviate  liquidity limitations for NFTs. Instead of waiting weeks or months for a single NFT to sell, many investors may be more eager to acquire fractions of an NFT right away, at a lower price, addressing market liquidity difficulties.

Collateral

Fractionalized NFTs can be used as collateral for a loan. Innovative concepts of earning through staking and yield farming are also possible with fractionalized NFTs.

A Word of Caution

Although we have outlined the benefits of fractionalized NFTs, please take heed that in some countries, such as the US, the legality of fractionalized NFTs is very much a grey area. You can find out more about the SEC and NFTs here.