What Are Fractional NFTs (FNFTs), and How Do They Work?

Fractional NFTs (FNFTs) are tokens representing shared ownership of a single, expensive NFT, making it more accessible to a wider range of investors. Discover how the world of Fractional NFTs is revolutionizing digital art ownership and investment in our comprehensive guide.

Fractional NFTs (FNFTs) are emerging as a transformative trend in digital assets, reshaping the concept of ownership in the NFT space. These innovative tokens democratize access to highly valuable NFTs by enabling collective ownership. This approach is akin to sharing a prized piece of artwork among a group, where each person owns a portion, thereby dividing both the cost and the experience.

The concept of FNFTs makes previously unattainable assets, like owning a fraction of the Mona Lisa or a rare CryptoPunk, accessible to many. This has sparked significant interest not only within the NFT community but also across the broader tech industry. By unlocking new investment opportunities and making high-value NFTs more accessible, FNFTs are rapidly gaining traction and becoming a focal point of discussion in the digital asset landscape.

As its name suggests, Fractional NFTs are fragmented non-fungible tokens. The fractionalization of NFTs is self-executed by smart contracts on the blockchain. The original NFT owner determines the number of smaller NFTs (fractions) to be created, their individual price, and other relevant details.

FNFTs fundamentally alter traditional NFTs, which are unique and indivisible. These fractions can then be easily traded on NFT marketplaces, just like regular NFTs. Their price is a fraction of the original NFT, making them much more accessible to a wider range of investors and enhancing their liquidity on the NFT marketplace.

An Example of How a Fractional NFT Works

A prime example of fractional NFTs in action involves the collaboration between KuCoin, a global cryptocurrency exchange, and Fracton Protocol, a platform designed to enhance NFT liquidity through fractionalization.

Fracton Protocol introduces a two-step fractionalization process (ERC721-ERC1155-ERC20) that converts a single NFT into up to 1 million ERC-20 token fractions, aiming to release liquidity and facilitate easier ownership. The protocol offers innovative features such as a Fractions Vault for joint liquidity pools, decentralized fundraising for partial ownership of top NFTs, and the Meta-Swap, which allows for the swapping of multiple standards tokens, enhancing the traditional exchange paradigm.

One of the first applications of this concept by KuCoin and Fracton Protocol is the hiBAYC token, which represents 1/1,000,000 ownership of a Bored Ape Yacht Club (BAYC) NFT within the Fracton Protocol's Meta-Swap. This fractionalized NFT allows users to own a share of a high-value NFT, which would otherwise be out of reach for the average investor due to its high cost.

How Big Is the Fractional NFT Market?

NFT fractionalization has grown into a multi-million dollar enterprise, with most of its growth in 2021. In February 2024, the total market cap of the NFT sector stands at $50.51 billion, of which fractional NFTs account for just over $268 million.

We could expect a higher market valuation and activity over the coming months as the crypto industry eases out of one of its worst bear cycles.

Owning a highly-coveted digital art or a rare collectible might seem like a distant dream for many investors. But fractional NFTs (FNFTs) are changing the game, offering a wealth of opportunities to explore.

Increased Accessibility and Diversification: Imagine owning a fraction of a million-dollar NFT, like a piece of digital real estate or a legendary CryptoPunk. Fractionalization makes this possible, lowering the barrier to entry for smaller investors and allowing them to diversify their portfolios with a variety of exciting assets.
Enhanced Liquidity: Most NFTs, built on the ERC-721 standard, are unique and irreplaceable. While they offer bragging rights, this uniqueness creates a liquidity nightmare. FNFTs address this by fragmenting the asset into smaller, more tradable units. This increases liquidity and opens up the market to a wider range of participants. Take the infamous Jack Dorsey "First Tweet" NFT. Sold for a staggering $2.9 million in 2021, the owner tried to resell it for $48 million a year later. The highest bid? A measly $30,000! Splitting expensive NFTs like the Jack Dorsey tweet into smaller bits through fractionalization would
Fairer Market Valuation: Fractionalization can also help gauge the true market value of an NFT. By observing the demand and price points of individual fractions, owners gain valuable insights into the collective interest in the underlying asset.
Reversibility to Its Original NFT: Through a smart contract function, a community can collectively choose to reconstitute the original NFT by merging all existing fractions.
Expanded Monetization Options: For creators, fractionalization opens doors to new revenue streams. Artists can sell portions of their works, allowing them to reach a broader audience and earn more from their creations. Similarly, NFT marketplaces can attract new investors and boost activity by incorporating FNFTs into their platforms.
Integration with DeFi Solutions: FNFTs, built on standard tokens like ERC-20 and BEP-20, have the potential to be seamlessly integrated into the DeFi ecosystem. This opens doors for speculative trading, staking, and yield farming on decentralized exchanges (DEXs), further expanding investment opportunities.

FNFTs represent a significant leap forward in the NFT space, fostering greater accessibility, liquidity, and innovative financial possibilities. They offer increased potential for asset appreciation and integration with broader financial landscapes.

NFT sales are picking up again after a period of lull as the crypto market sentiment improves in early 2024. Ethereum introduced a brand new ERC-404 token standard to enable fractional ownership of NFTs, and this sector is already making waves with some groundbreaking sales. Let's dive into a few projects that are shattering records and redefining ownership in the NFT space:

1. CryptoPunks: From Millionaires' Club to Everyone's Playground

Remember those exclusive CryptoPunks selling for millions? They used to be a status symbol for the NFT elite. Now, thanks to fractionalization, owning a piece of a Punk is possible for just a few cents.

In April 2022, 50 Punks were shattered into 250 million "uPunk" tokens, opening the door for anyone to join the club. These micro-ownerships trade for around $0.046 on Unicly, making them super accessible to new investors.

2. Grimes' Art: From Million-Dollar Collection to $20 Bites

Canadian artist Grimes made a splash in 2021 with a $6 million NFT collection sale. But not everyone could afford a piece of her digital masterpieces.

That's where fractionalization came in! Two pieces from the collection, Newborn 1 & 3, were divided into 100 pieces each and sold for just $20 per fraction. This ingenious move allowed fans to own a piece of her art without breaking the bank.

3. Mutant Cats: The DAO Powerhouse Bringing the Big Guns to Everyone

Meet the Mutant Cats, a community-driven DAO that collects and fractionalizes some of the hottest NFT collections around, like Cool Cats, CryptoPunks, and Bored Ape Yacht Club.

This project uses a token called $FISH, which gives holders a share of the ownership of these coveted NFTs. Not only do you get a piece of the pie, but you also gain exclusive access to the DAO community, voting rights, and special NFT drops.

4. Doge Meme Token: From Viral Sensation to $220 Million Powerhouse

Remember the iconic Doge meme that became the mascot of Dogecoin? It was sold as an NFT for a whopping $4 million in 2021. But the story doesn't end there. The owner, PleasrDAO, took the innovative leap of fractionalizing the NFT into 17 billion pieces called $DOG tokens.

This opened the door for mass participation, and within months, they managed to raise $44.6 million through the sale of these fractions. Today, each $DOG token is worth $0.0032, proving that even a meme can become a valuable asset in the fractionalized NFT world.

These are just a few examples of how fractional NFTs are shaking up the industry, making high-value NFTs accessible to a wider audience and unlocking new possibilities for investment and community participation.

The fractional NFT revolution is in full swing, and with it comes a diverse landscape of trading platforms. Each marketplace offers unique features and benefits to cater to various investor needs. Here's a glimpse into some popular destinations for your fractional NFT exploration:

1. KuCoin

KuCoin recently made waves with the hiBAYC project, offering investors a chance to own a piece of a prestigious Bored Ape Yacht Club NFT. This platform allows fractional ownership through ERC-20 tokens and boasts features like guaranteed liquidity reserves and hassle-free redemption options.

KuCoin revealed that hiBAYC is the standard ERC-20 token and fractionalized into 1 million fractional tokens, with each hiBAYC going for 0.13 USDT ($0.13) at the time of launch and the original BAYC in the digital currency’s exchange collection vault. The digital asset exchange also guarantees a 100% liquidity reserve. Investors can redeem a BAYC token from KuCoin's ‘Fracton Protocol’ without hassles.

2. Otis

Art enthusiasts can turn to Otis for their fractional NFT fix. This platform allows you to build your NFT portfolio by acquiring fractionalized shares of digital art collectibles and engaging in real-time trading. Some notable mentions include CryptoPunk #543, Chromie Squiggle #524, and the Grimes NFT Collection, alongside physical collectibles like the 1st Edition Charizard Pokémon Card, Super Mario 64, and the Kobe Bryant Last Game Ticket. This diverse range indicates Otis's commitment to offering a wide spectrum of cultural assets, from digital art to memorabilia and beyond.

Otis has integrated with Public.com, a move that positions Public.com as the first investing platform where investors can build a diversified portfolio that includes stocks, crypto, and alternative investments like those offered by Otis. Otis has been innovative in transforming real-world items into digital collectibles, providing a unique blend of the physical and digital realms for collectors. The platform's approach to fractional ownership has made it a significant player in the NFT and collectibles market, broadening access to high-value assets that might otherwise be out of reach for the average investor.

3. Unicly

Unicly is a decentralized NFT platform that revolutionizes the way NFTs are fractionalized and traded. It allows users to tokenize their NFT collections, transforming them into tradable assets with guaranteed liquidity. The platform combines the yield-generating features of decentralized finance (DeFi) with NFT tokenization, offering a unique blend of opportunities for collectors, investors, and creators alike. Unicly enables the fractionalization of NFTs into manageable, fungible tokens known as uTokens, which represent a stake in a collection of NFTs.

Unicly's use of an automated market maker (AMM) model for trades and its integration with liquidity farming through its native UNIC token further bridges the gap between NFTs and DeFi. The platform incentivizes participation by offering rewards for liquidity provision and staking, making it an attractive ecosystem for yield farmers and casual investors alike. A key feature of Unicly is its flexibility in managing NFT collections, allowing users to create, trade, and govern fractionalized NFTs efficiently. This opens up new possibilities for NFT launches, DAO tooling, and the creation of liquid markets for financial NFTs. The platform's design addresses the challenges of fractionalization and un-fractionalization, ensuring that each fraction accurately represents the value of the NFTs within a vault and providing a fair and transparent mechanism for NFT sales and auctions.

These are just a few examples, and as the fractional NFT ecosystem continues to evolve, we can expect to see more innovative platforms emerge, each offering unique features and functionalities. Researching and comparing these marketplaces is crucial to find the one that best suits your investment goals and preferences.

While fractional NFTs (FNFTs) present exciting possibilities, it's crucial to acknowledge their potential drawbacks before diving in. Here are some key considerations:

Regulatory Uncertainty: The fractional NFT space is largely unregulated, similar to many crypto assets. This creates potential risks for investors as regulations can evolve and jurisdictional issues may arise. FNFT investments are not subject to the same protections as traditional financial instruments, so buyers beware.
Intellectual Property Concerns: Remember, digital art can be subject to intellectual property (IP) rights. When investing in an FNFT, conduct thorough due diligence to ensure the seller holds the necessary rights to the underlying asset. Thankfully, proof of ownership is often verifiable through the metadata associated with the FNFT smart contract.
Smart Contract Vulnerabilities: An FNFT's security is directly tied to the security of its underlying smart contract. Contracts built on insecure blockchains are more susceptible to exploits or hacking. As always, comprehensive due diligence is crucial to understand the potential risks involved.
Market Volatility: Like most crypto assets, fractional NFTs can be highly volatile compared to traditional investments. This asset class is inherently prone to price fluctuations, so approach it with caution. Learning volatility-hedging strategies, such as staking, can help mitigate potential losses during market downturns.

By understanding these potential drawbacks, investors can make informed decisions when considering fractional NFTs. Remember, risk management and thorough research are critical for navigating any new asset class.

The concept of fractional ownership might not be new, but its application in the NFT space has ignited a revolution. Fractional NFTs (FNFTs) are shattering barriers and unlocking new possibilities for investors and creators.

From bite-sized access to coveted assets and improved liquidity to exciting DeFi integration, FNFTs are reshaping the NFT landscape. However, the industry still faces challenges, with regulation and investor protection requiring closer attention.

One thing's for sure: FNFTs are here to stay, and their impact on the future of digital ownership is undeniable. Whether a bull or bear market lies ahead, FNFTs are poised to drive innovation and accessibility, unlocking a new era for the dynamic world of NFTs.