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Fractionalization 101

By TheOasians | The Oasians | 15 Aug 2022


I hope you’ve had your coffee already Oasians, cause this is gonna be a long one. Have you ever imagine if we could fractionalize Da Vinci’s masterpiece Mona Lisa? Suppose the painting was valued at $1 billion. Since the artwork is expensive, only a small number of major investors could ever bid for it. If a smart contract fractionalizes the Mona Lisa NFT, each fraction would then represent fungible tokens. Every fraction owner could then use their tokens to buy, sell, or auction off their share of the NFT. That sounds amazing right? Let’s dive right into it!

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Source: algorand.com

Table of Contents
1. What is Fractional NFT?
2. Benefits of Fractional NFT
3. Future of Fractionalized NFTs
4. Concluding Thoughts

Part 1. What is Fractional NFT?

When an NFT is fractionalized, it is first locked in a smart contract. That smart contract then splits the token into multiple fractions tokens. Each fraction represents partial ownership of the NFT.

Shareholders will possess a fraction of the NFT, equal to the value of their tokens divided by the total number of those tokens produced when the NFT was locked in the smart contract.

Fractions are typically put up for sale at a fixed price for a period of time or until they are all sold out. Fractional NFTs offer a variety of benefits compared to traditional NFTs.


Part 2. Benefits of Fractional NFT

Price Discovery
One of the most significant advantages of fractional NFTs is that they can help you quickly assess the market value of your NFTs. Fractionalization involves taking NFTs, dividing them into fungible tokens, and then selling those tokens on the open market. This process generates an estimated price for each token. We can then use these price estimates to assess the price of the tokenized asset.

More liquidity
When NFTs are fractionalized, the tokens that represent the fractions can be traded on decentralized or centralized exchanges. Instead of artists waiting weeks for NFTs to sell, many investors can immediately buy these fractioned NFTs at lower prices to address market liquidity issues. Fractionalized NFTs can also be traded between family and friends, auctioned, used for mortgages or foreclosures.

Democratizes Ownership
Most of the time, the market price of NFTs prevents smaller investors from participating, and only a few investors can buy the more expensive NFTs. Fractionalizing expensive NFTs into chunks lowers the cost of ownership and makes expensive NFTs accessible to a broader range of investors. It is important to note that if the price of the entire NFT increases, so does the cost of all the fractionalized pieces. However, if someone resells or buys the fractionalized pieces, it won’t affect other pieces owners. As a result, the fractional mechanism facilitates general market activity by democratizing investor ownership.

Curator Fees
The original NFT owner who splits the NFT into fractionalized NFTs will receive a curator fee each year. While the curator fee can be set and updated by the NFT owner, the cost is capped at a maximum price set by the governance to prevent high fees.


Part 3. Future of Fractionalized NFTs

1*-BKwXg23gDSVAXwpb_FiMA.png Source: DappRadar

In a little over a year, Fractionalized NFTs have grown to a total market cap of $91,348,248. That’s awesome right? However, the NFT fractionalization landscape is still relatively new, and if a winner is going to emerge in the space, factors like curator fees/incentive structures for NFT owners, artists, investors, etc. will determine the winner. These protocols can also co-exist in harmony, each with a rich, diverse and unique collection of NFTs on its platform, with new investors entering and leaving the space frequently.

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NFTs themselves are also being leveraged for new and exciting use cases. For example, DAOs. DAOs are gaining traction by enhancing accessibility to rare, expensive NFTs through forming a community around a piece of artwork that few singular individuals could afford.

The Doge NFT was bought in June 2021 for 1,696.9 ETH by PleasrDAO (around $4m at the time) On Sep 2nd 2021, the NFT was fractionalized into 16,969,696,969 $DOG tokens. On Sep 4th 2021, the value of the NFT skyrocketed to roughly $336m! Doge F-NFTs seem to be leading the pack, accounting for more than half of the total value of fractional NFTs.

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The Feisty Doge NFT’s $9.98 million places it second. Feisty Doge NFT was sold for 13 ETH in June 2021 (around $43K at the time) On Aug 19th 2021, it was fractionalized into 100 billion $NFD tokens. On Aug 22nd, 2021, the price of $NFD soared more than 700%. The two fractionalized NFTs make up the largest share of the value of fractionalized NFTs.


Part 4. Concluding Thoughts

Even with the tremendous growth that the NFT space has seen this year, the means to unlock and utilize the financial value of NFTs have remained the same. We are still forced to sell NFTs in their entirety in order to see a profit, gain some liquidity, or discover an NFT’s true price.

With the introduction of NFT fractionalization protocols like Particles (curates iconic 1/1 art and fractionalizes them for their members) NFTs and DeFi are finally colliding. Now equipped with an easy way to turn an NFT, or collection of NFTs, into fungible tokens, we can finally free up the massive amount of capital that has been stuck inside of them and put it to use.

Disclaimer:

This article is for educational purposes only. We have no relationship to these projects, and there is no endorsement for these projects. The information provided through The Oasians does not constitute advice or recommendation of investment or trading. The Oasians does not take responsibility for any of your investment decisions. Please seek professional advice before taking financial risks.

Sources:
https://medium.com/bridgesplit/fractionalized-nfts-the-next-wave-of-nft-adoption-b17db6fea650
https://medium.com/@bdharris/an-overview-of-the-nft-fractionalization-landscape-83487874926b
https://www.cnbc.com/2021/09/01/fans-can-buy-a-fraction-of-original-doge-meme-nft-owned-by-pleasrdao.html
https://medium.com/@arbenk/fractionalized-nft-f-nfts-all-that-you-need-to-know-46bc06ea486d

Joe signing off~

 

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TheOasians
TheOasians

From beginner 101s to deep dives, we create content for crypto projects. Join us and discover the limitless possibilities of crypto.


The Oasians
The Oasians

From beginner 101s to deep dives, we create content for crypto projects. Join us and discover the limitless possibilities of crypto. We also write an Oasian's Digest newsletter that rounds up daily crypto news straight from crypto twitter, so make sure to subscribe on our Twitter profile for that. https://twitter.com/theoasians

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