Fractional NFTs (F-NFTs) are a new concept in the NFT space that allow people to own a fraction or percentage of an NFT, rather than having to purchase an entire NFT. This opens up NFT investing and ownership to more people by lowering the barrier to entry.

NFTs allow digital items like artwork, collectibles, music, videos, and more to be tokenized on a blockchain like Ethereum, providing proof of ownership and scarcity. Each NFT is unique and not interchangeable with other NFTs. The vast majority of NFTs sell for thousands or even millions of dollars, pricing most average investors out of participating in this new market. This gave rise to the concept of fractional NFTs.

What Are Fractional NFTs?

Fractional NFTs, sometimes referred to as F-NFTs, allow multiple investors to own percentages or fractions of a single NFT. For example, an NFT worth $100,000 could be split into 10,000 fractions at $10 per fraction. Investors could then purchase fractions based on the amount they want to invest. Someone investing $50 would own 500 fractions or a 5% share of the NFT.

This opens up NFT investing to more people by lowering the buy-in cost. Someone who could never dream of affording a $100k NFT may happily invest $20 for a small ownership percentage. It also allows groups to purchase more valuable “blue chip” NFTs together.

Platforms like Niftex, Fractional.art, and PartyDAO spearheaded the fractional NFT movement by offering platforms to invest in fractions. Meanwhile, Ethereum scaling solutions like EIP-4337 provided standards for projects to follow when issuing fractional NFTs on-chain.

Benefits of Fractional NFTs

There are several key benefits fractional NFTs provide:

Lower Barrier to Entry - The main benefit of F-NFTs is lowering the barrier to investing in NFT markets. Even blue chip NFTs with huge price tags can be accessible with fractional investing.

Shared Ownership - Groups can purchase valuable NFTs together and share ownership based on the percentage each person owns. Communities like DAOs often use this approach.

Smaller Investments - New investors wary of spending thousands on an NFT can start with small $5, $10 or $20 investments to test the waters.

Tradeable Shares - Most platforms allow fractional owners to trade their factional shares on secondary markets at any point.

Fractional NFTs Explained Through An Example

Let’s walk through a fractional NFT example to better understand the concept:

1) A famous digital artist named Vitalik creates an NFT called EtherRock. Only one edition of EtherRock is minted.

2) Vitalik lists EtherRock for auction with an opening price of 100 ETH (around $100k).

3) Platforms like Fractional.art and Niftex decide to offer EtherRock fractions to allow more people to invest. They work with Vitalik to “tokenize” EtherRock into 10,000 fractions available at 0.01 ETH each (around $10).

4) Through Fractional.art and Niftex, investors can buy as many EtherRock fractions as they want. The fractions essentially represent ownership shares of the full EtherRock NFT.

5) Smaller investors who could never afford the full 100 ETH NFT happily buy fractions instead. Whale investors might buy a few thousand fractions.

6) If EtherRock later sells in its auction for 150 ETH, all fractional owners benefit. The fractions retain their percentage claim on the NFT’s value.

In this manner, fractional NFT platforms split up ownership of NFTs into smaller pieces. This allows more investors to participate in the market with smaller individual investments.

How Do Fractional NFTs Work Under the Hood?

There are a few leading technical implementations of fractional NFTs emerging:

Centralized Fractional Platforms

The easiest way to offer fractional NFTs is through centralized platforms like the examples above (Fractional.art, Niftex, etc). These platforms centrally manage splitting up NFTs into ERC-20 tokens or other fractional shares they control. Users must trust these centralized services to manage the fractions properly.

While easy to implement, centralized management goes against the ethos of blockchain and has limitations:

• Requires trusting the platform (single point of failure risk)
• Fractional owners don’t control the underlying NFT
• Can only redeem fractions on the platform

Decentralized Fractional Standards (EIP-4337)

A decentralized fractional standard called ERC-4626 was created to allow fractioning NFTs directly on the blockchain in a trustless way.

The standard has owners “wrap” their NFTs into a special smart contract. This contract splits ownership of the NFT into fungible ERC-20 tokens. You can think of these tokens as fractional ownership shares anyone can trade or redeem.

For example, wrapping a Bored Ape NFT into an ERC-4626 contract would issue 10,000 fractional tokens. Investors could buy these tokens representing fractional ownership.

The key advantages of decentralized fractions:

• No centralized platform risk - fractions live directly on the blockchain
• Maintains the permissions/utilities of the actual NFT
• Fractions are interoperable across different DApps and wallets
• Allows creating dynamic fractions with customizable rules

The downside is increased complexity for the average user. However, as this standard matures, it should become easier to leverage.

Hybrid Models

Some projects take a hybrid approach by offering a simple centralized interface that connects to smart contracts on the back-end. For example, a project may allow buying fractional shares via their website which then mints blockchain tokens representing those shares.

Additional Fractional NFT Models

Projects are continuing to experiment with different ways to allow fractional NFT ownership, including:

• Issuing fractional vouchers or receipts rather than tokens
• Using pooled ownership models like PartyDAO's Smart Pools
• Multi-sig models where fractions are controlled by a signer group
• Domain specific fractional models like for NFT licenses, 3D assets, metaverse land, etc.
• Yield-bearing fractions that give holders a portion of the NFT revenue

The space is still rapidly evolving. But there seems to be strong momentum behind allowing broader, fractional ownership of NFTs.

Governance and Management of Fractional NFTs

An important consideration with fractional NFTs is how governance and decision-making works. Some questions that need to be addressed:

• Who manages the day-to-day responsibilities like listing, pricing, etc?
• How are decisions made around accepting offers, sending to auction, or redeeming?
• What powers do fractional owners have vs the creators/original minters?
• How do owners vote on these key decisions?

Many fractional NFT platforms start with centralized management, allowing the platform owners to administer everything initially. But newer models are trying to push control and voting abilities to the token holders via features like:

• Embedded governance abilities directly in the fractional tokens
• Allowing fractions to "unlock" governance once a threshold is met
• Using snapshot voting tools available to fractional holders
• Transitioning ownership from creators to DAO structures over time

Embedding governance abilities can ensure fractional owners feel they have a voice and that token holders retain an appropriate level of control.

Current Limitations Around Fractional NFT Solutions

While fractional NFT solutions offer great potential, there are still some limitations in these early days:

• Still a nascent technology. Standards and best practices are emerging but not mature yet.
• Adds complexity for users around concepts like tokenization and redemption.
• No native wallet support yet on popular wallets like Metamask.
• No native marketplace support yet, requires using fractional platform sites.
• Very experimental stage for fractional governance. Real world usage is still developing.
• Risk around centralized fractional platforms, though this is improving.

However, as blockchain standards improve and fractional NFT platforms refine the user experience, many of these limitations should dissolve over time.

Notable Fractional NFT Offerings & Platforms

Here are some initial fractional NFT projects and platforms to watch:

Niftex - One of the earliest and most popular fractional NFT platforms. Offers fractions of blue chip NFTs from top collections like BAYC, CryptoPunks and more. Uses a centralized model initially.

Fractional.art - Another early mover in launching a fractional NFT exchange. Uses a centralized model with plans to move towards trustless blockchain fractions over time.

Ethernity Chain - Offered tokenized fractions of their NFT drops, allowing small investors to participate by buying ETNY tokens.

PartyDAO - Pioneered the idea of Smart Pools to allow groups to pool funds and co-own top NFTs. Integrates on-chain governance and treasury management tools.

DXdao - Using tokenized fractions via the ERC-4626 standard to fractionalize metaverse land parcels and other NFTs.

Various DAOs like FlamingoDAO and DeepDAO are fractionalizing coveted NFTs to allow ownership by DAO token holders and members.

We are still in the early days, but expect this list to grow substantially in 2023 and beyond.

Risks To Consider Around Fractional NFT Investing

While fractional NFTs open up new opportunities, they also come with risks to consider:

Platform Risk

When buying fractions from a centralized platform, you must trust the platform to properly store, manage and secure the underlying NFT. Issues with the platform could put your investment at risk.

This is why new decentralized solutions are working to empower token holders rather than middlemen. Review each platform carefully and move towards trustless protocols over time.

Liquidity Risk

If trading fractional shares on secondary markets, you may be exposed to low liquidity challenges. The markets are still relatively small, so it could be difficult finding buyers for less popular fractions.

Governance Risk

As covered earlier, fractional ownership and governance is still often ambiguous. Make sure to review rights around voting, management and decision making before investing.

Regulatory Risk

Like most areas in crypto, regulations around fractional NFTs are still being worked out. Future laws could impact projects, especially more centralized platforms.

While these risks do exist, they tend to diminish over time as technology and governance models mature. But careful evaluation is still recommended in these early stages.

The Future Possibilities of Fractional NFT Investing

Allowing fractional ownership of NFTs opens up tremendous possibilities when you consider the potential scale and use cases.

Some possibilities this unlocks includes:

• Millions of smaller investors afforded access to blue chip NFT markets
• Metaverse real estate split into accessible fractions
• Fractionalized artwork co-owned by fan communities
• Patron ownership programs issuing fractions of an artist’s portfolio
• Iconic moments from entertainment history co-owned by thousands
• Fractionalized rare artifacts, collectibles and digital heirlooms
• Shared ownership of IP like characters, stories and creative universes
• DAOs efficiently pooling capital to purchase Tier 0 NFT assets
• Partial ownership of gaming assets like virtual worlds and in-game items
• Internet icons and memes collectively owned by the crowds that made them viral
• Partial interest in exclusive access passes and memberships

And these are just a few ideas around digitally native ownership schemes. Once you add the coming shift to Web3 and blockchain-based business models, fractional NFT investing could dramatically transform private equity, real world asset ownership, royalties, and much more.

The pace of innovation shows no signs of slowing in the NFT space. And fractional ownership models sit at the intersection of that momentum. The opportunities seem endless from here as fractional solutions enhance capital efficiency and unlock higher velocity value capture.

While certainly still early days, the foundation is laid for revolutionary disruption to ownership models across many pillars of society. Watch this space closely in the years to come!

Conclusion

For all these reasons, fractional NFTs deserve your attention today despite their nascency. Because years from now, fractions will be viewed as an important milestone that connected NFT investing back to its community roots.

If you enjoyed this article, please read my previous articles

How do newbies participate in DeFi projects?
The Basics of Yield Farming: How to Earn Passive Income in DeFi
Four elements of DeFi value discovery
Decentralized Liquidations: Critical Knowledge for DeFi Borrowers
What are the risks in DeFi opportunities?
The Power of Automated Market Makers in DeFi
Asset Management in DeFi

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