Sun, 03 Apr 2022 11:15:27 +0000
Fractional asset ownership isn’t a new concept. The concept has been successfully used in various industries, from real estate to fashion, and for a variety of physical assets, including stock, designer items, and high-end assets such as yachts and private jets.
It is a popular strategy for individuals to collectively and affordably purchase homes in the real estate business. Owners who buy fractional ownership of property receive a deed indicating their part. Fractionalized NFTs function in much the same way.
It is no longer news that some NFTs have sold for high-end prices, such as Beeple’s Everydays — The First 5000 Days, which was sold for $69.3 million, Human One sold for $28.9 million, Cryptopunk #7523 sold for $11.75million, to mention a few. Given that many NFTs are being sold for large sums of money, making it out of reach to the average person is a huge entry barrier for everyone to participate and own a prestigious NFT; this has thrown the idea of fractionalizing NFTs into the spotlight.
Breaking down an NFT into smaller pieces democratizes NFTs, making them more accessible to those with little financial resources. This is beneficial, not only to investors but also to NFTs in general, as it adds liquidity to the market. A win-win atmosphere for all.
NFT fractionalization aims to allow multiple co-owners to have access to high-value and unique NFT assets, which belong to several people at the same time. The owner of this NFT asset can create a number of tokens that are components of the original NFT and distribute them to interested parties.
ERC-721 is the 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.
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 likewise, if its value falls abruptly, the value of all fractions falls with it.
As it stands now, only a few handful wealthy investors have access to NFTs, especially the most valuable ones, due to their rarity. Because ERC-20 tokens may be freely sold in secondary markets, fractionalized NFTs alleviate the lack of liquidity, which is a limitation in 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.
As the issue of liquidity is addressed, fractionalized NFTs can thus be used as collateral for a loan. Innovative concepts of earning through staking and yield farming are also possible with fractionalized NFTs.
Although there are some benefits of fractionalized NFTs, they can also be problematic. In some countries, such as the US, the legality of fractionalized NFTs is very much a grey area, so proceed with caution and do your research before investing into fractionalized NFTs, or creating your own. You can find out more about the SEC and NFTs here.
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*All investment/financial opinions expressed by NFT Plazas are from the personal research and experience of our site moderators and are intended as educational material only. Individuals are required to fully research any product prior to making any kind of investment.