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What are Fractional NFTs? – The Ultimate 2022 F-NFT Guide

NFTs (non-fungible tokens) inaugurate the next stage in asset ownership characterized by transparency and decentralization. Furthermore, NFTs have grown extremely popular in the last couple of years, and tokens are selling for astronomical amounts. Moreover, two defining attributes of traditional NFTs are their uniqueness and the inability to replicate/forge these digital assets. However, the one-of-a-kind exclusivity of these tokens somewhat limits an NFT holder’s possibilities. This has led to innovation within the NFT space and resulted in two exciting concepts: dynamic NFTs and F-NFTs. In this article, we’ll direct our attention to the latter and answer the question,” what are fractional NFTs?”.

The simplest explanation of fractional NFTs is that they are non-fungible tokens that have been divided into fragments. However, if you’d like to learn more about F-NFTs, follow along as we’ll dive deeper into the intricacies of fractional NFTs. Herein, we’ll explain the tokens, how they work, and their benefits. Moreover, if you want to learn more about creating your own tokens, we’ll briefly explore the process of minting NFTs using the Moralis operating system. 

If you’re looking to develop dapps, tokens, or any other Web3 projects, you should most definitely check out Moralis. Moralis is the premier Web3 development platform, and with tools such as Moralis Speedy Nodes and the NFT API, you’ll be able to create – not only NFTs – but fungible tokens alike with ease! 

As such, do you have ambitions of becoming a blockchain developer? If that’s the case, sign up with Moralis today. You can create your account free of charge and begin your development journey in just minutes! Now, without further ado, let’s get started by addressing the main question of our article, “what are fractional NFTs?”. 

What are Fractional NFTs? 

With the increased attention towards NFTs, we have further seen token prices surge exponentially. On occasion, NFTs representing artwork have sold for millions and millions of dollars. Moreover, avatars from famous collections such as Bored Ape Yacht Club are becoming relatively pricey. This increase in demand and price escalation makes it prohibitively expensive to purchase NFTs. The high price tags result in significant entry barriers to the market, as not everyone can afford to acquire NFTs. One way of solving this issue is through the process of fractionalization, which is where fractional NFTs enter the picture. 

So, what are fractional NFTs? Fractional NFTs are non-fungible tokens that have been fractionalized into several smaller pieces, which the name reflects. However, what exactly does this mean? This essentially means taking an NFT and splitting the non-fungible token into several fungible tokens representing a stake in the original asset. 

The fractionalization process is done using smart contracts. A contract creates a specified number of fungible tokens that are interconnected with the indivisible original. Each part – or fraction – provides the holders with a percentage of ownership of the original NFT. It is later possible to trade the fungible tokens representing a stake in the fractional NFT on an exchange or marketplace at a fraction of the cost. 

To summarize, this basically suggests that a fractional NFT is a token that has been divided into several pieces allowing multiple different people to claim ownership of parts of the same NFT. 

Now that we’ve answered the question “what are fractional NFTs?”, let’s take a look at how the fractionalization process work. 

How Do Fractional NFTs Work? 

In its bare-bone state, an NFT is a token that implements a particular standard. Two examples are Ethereum’s ERC-721 and BNB Chain’s BEP-721 standards, and both are used to regulate NFTs on the various networks. Before the process of fractionalizing an NFT, the tokens must first be locked in a smart contract. Smart contracts are programs on a blockchain that can automatically execute functions when someone fulfills the predetermined conditions.

Once the original NFT is locked in the smart contract and the predetermined rules are met, the contract splits the token into smaller fractions – represented by fungible tokens – based on the instructions specified in the smart contract. The number of pieces is specified by the NFT’s owner, along with the price, metadata, and other properties of the newly created fractions.

Each of the fractions, or tokens, then represents partial ownership of the entire original NFT and can be put up for sale over a set period or until they are sold out. The number of fractions can vary depending on the owner of the original NFT. As such, it’s possible to divide an NFT into 1,000, 10,000, or even 10 million individual shares. All shares or fragments can then be sold on secondary markets, and it won’t directly influence the value of the original NFT.  

This suggests that, in practice, it would be possible to tokenize a valuable painting, such as Vincent van Gogh’s “The Starry Night”, which is valued at over $100 million. Once tokenized, it would further be possible to fractionalize the NFT and split it into thousands or even hundreds of thousands of fractions. As a result, the average person would be able to buy parts of the artwork since it would make each share more affordable.  

NFTs vs F-NFTs

At this point, you should be able to answer the “what are fractional NFTs?” question with confidence. As such, let’s compare NFTs vs F-NFTs. Based on the explanation from one of the previous sections, the distinction between traditional NFTs and F-NFTs is quite apparent. An NFT is a whole; meanwhile, fractional NFTs are fractions of the same entirety. The primary difference between the two is the percentage of the original NFT they represent. However, this further means that NFTs and F-NFTs are closely related as the latter results from the fractionalization process of a traditional token. 

Once an NFT is fractionalized, it’s possible to reverse the process. As such, it’s possible to transform fractional NFTs back into their original state. The smart contract responsible for dividing the NFT in the first place generally has a buyout option. This allows an F-NFT holder to purchase all fractions and ultimately unlock the original token. 

The buyout process can often be initiated by transferring a specific amount of tokens from a collection to the smart contract, which would trigger a buyback option. If this occurs, F-NFT holders would be provided with a decision to sell their shares. If the buyout passes, all fractions will autonomously return to the smart contract, and the buyer receives ownership of the original NFT.

What are Fractional NFTs? – Use Cases

Based on the above, it’s fair to assume that several interesting ways fractional NFTs can be used will emerge shortly. As such, this will add to the already large amount of use cases that are connected to traditional NFTs. If you’d like, you can check out the Moralis blog and learn more about NFT utility. This guide provides insight into how NFTs can be used as membership exclusivity, music NFTs, and digital art, to name a few. So far in our “what are fractional NFTs?” journey, we’ve looked at traditional NFTs vs F-NFTs, how fractional NFTs work, and what fractional NFTs are. Thus, let’s now explore what benefits fractional NFTs bring!

Benefits of F-NFTs

This section will present three of the most significant benefits of fractional NFTs. First, we’re going to explain how F-NFTs open up the market to a broader range of investors. Following this, we’ll also cover how fractional NFTs can benefit owners and solve liquidity issues. Lastly, we’re going to look closer at how F-NFTs can contribute to price discovery. Nonetheless, let’s initiate and take a closer look at how F-NFTs democratize the NFT space.

Democratization

In a previous section, we briefly mentioned that F-NFTs provide more accessibility to the NFT space. To further elaborate on this point, fractional NFTs help democratize the NFT space as it allows for a gateway for smaller investors to participate in the market. 

The increase in popularity has driven up the prices of NFTs, making it difficult for people to enter the space. However, it’s possible to tear down these high entry barriers by using fractionalization. This suggests that fractional NFTs open up the market for a broader range of people and provide further access to the blockchain industry. 

Increased Liquidity

The issues of accessibility aren’t only affecting potential buyers of NFTs but can also influence owners of expensive tokens. As accessibility issues limit the market, it reduces the number of potential buyers and the amount of liquidity. This further suggests that the more expensive a non-fungible token is, the harder it will be to sell the asset. However, by fractionalizing the NFT, it becomes possible for several smaller investors to purchase fractions of the NFT immediately. Fractionalization, therefore, expands the market and is one way of addressing problems with liquidity. 

Price Discovery

People generally trade more expensive NFTs less since the market of pretty expensive tokens is relatively smaller. The lack of transactions makes it difficult to pinpoint the exact market value of an NFT due to inadequate data. So, by fractionalizing the token, it becomes less expensive. As a result, it allows more people to trade and bid on the fractionalized asset making it easier to find an NFT’s actual value. 

Create NFTs with Moralis

With a better understanding of F-NFTs and you being able to answer the “what are fractional NFTs?” question, we will cover the basic steps of creating an NFT using Moralis in this section. We’re going to provide an outline of the process to give you an idea of how easy blockchain development is when working with Moralis. As such, it’s possible to break down the process into the following five steps:  

  1. Initialize Moralis and Find a Smart Contract
  2. Create an HTML Index File
  3. Make a Simple Login Function
  4. Create an Upload Function
  5. Build a Mint Function

Following these five steps will result in an NFT minting dapp where users can continuously mint NFTs with a few clicks. However, if you’d like a more elaborate guide explaining the entire process in further detail, please check out our guide on how to create your own NFT in five steps! 

Moreover, if you have additional interest in NFT development, you can also learn to create your own collection of NFTs similar to that of CryptoPunks. So, if you’d like to get into NFT collectibles, feel free to take a closer look at the following guide: ”How to Mint 10,000 NFTs”. In addition, you can further learn how to build an NFT trading interface and develop your own NFT marketplace with the platform. As such, this illustrates that Moralis makes it possible to get into several aspects of NFT development. 

Lastly, Moralis does not limit you to NFT development but allows you to create fungible tokens alike easily. You can, for example, learn how to create your own ERC-20 token or how to create a BSC token

The possibilities with Moralis are endless and provide you with everything you’ll need for both token and dapp development! 

What are Fractional NFTs? – Summary

NFTs have quickly emerged as one of the crypto industry’s most prominent features. As such, developers are directing their attention towards NFTs, and we have seen new, creative innovations within the field. Two examples are dynamic NFTs and fractional NFTs. In this “what are fractional NFTs?” article, we focused on fractional NFTs and set out to answer the question, ”what are F-NFTs?”. 

Fractional NFTs are NFTs that have been divided into smaller fractions using smart contracts. We can refer to this process as “fractionalization”. Moreover, it provides the NFT realm with more accessibility as it makes it possible for more than one person to own a stake in an NFT.  

Fractional NFTs provide loads of benefits such as democratization, increased liquidity, and price discovery. As such, they have the potential to influence several aspects of the entire market positively. For example, F-NFTs make it possible for smaller investors to purchase more sought-after NFTs; meanwhile, it also provides a larger market for potential sellers.

Moreover, we further briefly covered the process of creating your own NFT using Moralis – the ultimate Web3 backend platform. However, what we looked at is far from the limitations of Moralis. In fact, the platform makes all blockchain development projects more accessible. Further, the system’s tools and the underlying infrastructure allow you to build dapps in minutes! 

You can also browse Moralis to find great and relevant content that can make you more proficient in blockchain development. For example, you can learn more about the best languages for blockchain development and the metaverse. Also, you can explore Web3 wallets and learn how Moralis’ web3uikit makes blockchain development feel like a breeze! 

So, if you’re looking to become a blockchain developer, sign up with Moralis and begin your Web3 journey today! 

May 2, 2022
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