Fractional NFTs are obtained by dividing a single NFT entity into smaller parts. Partitions allow partial ownership of NFTs. In this way, investors who cannot buy the total assets can acquire a portion of it. The process works similarly to buying basic inventory. That’s why fractional NFT apps make sense especially for precious assets such as real estate, art, luxury goods and all kinds of oddities. This allows you to acquire, for example, a cryptopunk that costs more than R$380,000, for much less, earning a share of the NFT and allowing you to own a fraction of it. However, we need to understand how this works and the uses of this tool.
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How to create a fractional NFT?
We can create fractional NFTs on any blockchain capable of running smart contracts and using non-fungible token formats. Ethereum is the most widespread blockchain. So let’s see how this process works. As a first step you create an individual asset prototype as an NFT in ERC-721 format, it is also possible to use ERC-1155 although it is less common.
Then you lock your assets in a smart contract so that no one can transfer them.
Then specify parameters such as the total number of fractions, the price of each portion and other information that will be included in the metadata.
The code splits the original ERC-721 asset into a predefined number of fractional tokens such as ERC-20, which are tokens tradable like cryptocurrencies. Consequently, each embodies an equivalent portion of the original NFT.
You can then sell or transfer the newly generated ERC-20 tokens to others. Allows you to own some of the original assets.
Fractional NFT use cases
Although it is a comparatively new concept, some web3 platforms, protocols, DAOs and other NFT-related decentralized applications have already implemented fractional NFTs. For example, with Fractional.art you can transform your NFTs as fractional NFTs, as well as buy and sell NFTs from historical collections as fractions. The platform hosts one of the most iconic NFTs of all time, Doge. This unique digital asset was acquired by PleasrDAO, a well-known crowdfunding DAO, in 2021 for R$22 million through an NFT auction. PleasrDAO then broke it down into 16,969,696,969 pieces that you can buy at Fractional.art. At the moment the valuation of the entire asset is approximately R$62.8 million and there are more than 10,000 individual owners.
Not just for art
Another fractional NFT platform is Otis. In addition to art, it houses other collectibles, such as sneakers and rare books. Notable examples of fractal NFTs hosted by Otis include the Chromie Squiggle #2241, a first-project feature on the creative arts platform Artblocks, the Jordan 1 Metallic Red sneakers, and the first edition of Harry Potter and the Book of Philosopher’s Stone. Real estate is another area where asset separation can help. Vesta Equity, the home equity marketplace, allows homeowners to tokenize their assets and investors to create home equity portfolios through fractional NFTs powered by the Algorand blockchain. The wine and beverage industry is also a pioneer. For example, UniCask divides its premium whiskey barrels into NFTs. The first UniCask collection was released on expensive old single malt Scotch whiskey casks in 1991. Another beverage related platform that uses partial NFTs is Crurated. The platform will release selected drops of NFT from a variety of fine wine barrels.
Solving NFT liquidity issues
Another important function of fractional NFTs is to provide liquidity to illiquid markets. This is because it is much easier to sell or buy small amounts of expensive assets. As a result, NFT asset classes become more accessible. And more participants means better liquidity. There are also new ways By reducing NFT liquidity through fractional counterparties. On Unicly, it is possible to convert NFTs into partial ERC-20 tokens, known as uTokens, and provide liquidity on the DEX protocol by blocking them. How to restore original NFT? It is theoretically possible to reverse the splitting process and recover the original single NFT. To that end, you can add a “buy” option to the smart contract that created the individual fractions in the first place. This allows any fractional NFT holder to purchase all other existing fractions and unlock the original individual NFT.
