Can you divide NFTs into a fraction and buy them? Fractional NFTs Explained

Generally, NFTs by meaning it non-fungible, but there are ways to make them fractional NFTs. It’s pretty convenient for splitting up the prices of heavily expensive NFTs.

Non-fungible tokens, or NFTs, are different from fungible cryptocurrencies like bitcoin (BTC), where one Ethereum is always worth one Eth.

But is it possible to “funge” NFTs? Well, sort of, yes! Fractional NFTs show shared ownership of NFTs, and an NFT can be split into millions of fungible tokens by locking them in the vaults of decentralized platforms.

What are Fungible/Fractional NFTs?

In traditional finance, high-value assets like vacation homes, planes, and luxury cars are often split into smaller pieces. This lets an investor add a pricey asset to his portfolio without buying it outright. In other words, dividing an asset into parts also divides the risks and costs of investing in that asset. NFT fractionalization follows the same line of thought.

Some NFTs are called “blue chips” because the most expensive collections, like the Bored Ape Yacht Club, CryptoPunks, and Moonbirds, sell for hundreds of thousands of dollars or even millions. With fractionalization, investors who would normally be priced out of these blue-chip assets can get in at a lower cost.

For NFTs to be fractionalized, fungible tokens must be made. On the Ethereum blockchain, this means ERC-20 tokens tied to the underlying NFTs (ERC-721 tokens). But the price doesn’t always move in the same way: Investors and traders can buy and sell them for less or more than what they were originally worth.

How do fractional NFTs work?

A fractional NFT is a group of fungible tokens tied to a whole (like one Bored Ape Yacht Club NFT) or a group of NFTs (e.g., several CryptoPunk NFTs). As the name suggests, an NFT is owned in parts or proportionally.

When an NFT is fractionalized, the original NFT is locked up in a vault, and a limited number of fungible tokens representing ownership of that NFT are given out. You can buy these fungible tokens on fractional NFT platforms like fractional.Art and trade them on secondary markets like Uniswap.

Some NFT projects also make fungible tokens, like the APE token from Yuga Labs, the company that made Bored Ape Yacht Club. These tokens don’t give you a small piece of the collection. Instead, they can be used in some of Yuga Labs’ projects, like the recent land sale in the metaverse, where the tokens were used to pay for the non-fungible tokens (NFTs).

How do NFT fractionalization and valuation fit together?

Because expensive NFTs can be traded in small amounts, fractionalization makes a market known for illiquid more liquid. NFT owners can sell part of their NFT for cryptocurrency while still owning most of it. Investors can get a piece of an asset without buying the whole thing with a fractional NFT.

But the traded part, which is shown by fungible tokens, can also make the value of an NFT go up or down, as it did with the doge meme NFT.

PleasrDAO bought the doge NFT in June 2021 for 1,696 ether, which was worth about $4 million at the time. And in September 2021, the decentralized autonomous organization split the NFT into $DOG tokens and then sold 20 percent of them at auction. Due to the high demand, the NFT is now worth $225 million.

There is no way to stop a fractional NFT from moving away from the underlying asset price, so investors should think carefully before making a trade.

What fractional NFT platforms are there?

There aren’t that many tools and platforms to choose from, but a few stand out and can meet the needs of the growing NFT market.

A lot of people use Unic.ly. To fractionalize an NFT on Unic.ly, NFT holders only need to connect their wallet to make a fungible uToken, which is an ERC-20 token that represents ownership of a single NFT or a collection of NFTs. Through the platform, users can trade these tokens or bid on the asset that has been split up.

The platform guarantees liquidity through liquidity pools, where investors can provide liquidity and also stake tokens to earn yields. This is similar to how liquidity pools and yield farming work in decentralized finance, or DeFi.

Unic.ly

Fractional.art is also a well-known site. It works like Uni.cly in that NFT holders can split their assets into smaller pieces and get ETH in return. Even though it doesn’t have bidding and staking options like Uni.cly, the platform gives developers more freedom by using a simple protocol that doesn’t require permission. Anyone can build on top of Fractional’s protocol, but developers are limited by Uni.cly’s more complicated set of smart contracts.

NFTX is another fractionalization platform, but it is very different from Uni.cly and Fractional. It lets NFTs with the same value, like those with the same rarity sitting at the floor price, be put together into index funds. When NFT is added to index or a piece of the index is bought, the person who owns the NFT gets ERC-20 tokens. The user gets a vToken, which is a claim to redeem an NFT in the index where the user’s NFT was added. 

This means that users might not get the NFT they deposited since all NFTs are treated as having the same value. After recent criticism, NFTX added the option for users to pay an extra 5% on the token price and pick any NFT they want from the index.

The Index Co-The Op’s JPG NFT Index (JPG) is another way to include NFTs in your investment portfolio. This index tracks a basket of NFTs that includes fractional NFTs like $DOG as well as other assets that are important to the NFT market.

While it sounds like the dream come true, but do proper research and only take action when you are comfortable with it.

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