What is a fractional NFT?
- A fractional NFT is simply a whole NFT that has been divided into smaller fractions, allowing different numbers of people to claim ownership of a piece of the same NFT. The NFT is fractionalized using a smart contract that generates a set of tokens linked to the indivisible original.
- These fractional tokens give each holder a percentage of ownership of an NFT, and can be traded or exchanged on secondary markets.
How does it work?
To break this NFT into fractions, it must first be locked in a smart contract, which will split the ERC-721 token into multiple ERC-20 tokens as per the instructions the NFT owner has given. The owner specifies everything, from the number of ERC-20 tokens to be created, to their prices, to the metadata to be used, to any other property they deem important. Each fraction or ERC-20 token created represents partial ownership of the NFT. The fractions can then be put up for sale at a fixed price for a particular time or until they get sold out.
Benefits of fractional NFT
- Price discovery: the asset is extremely valuable and they want help finding price discovery, fractionalizing the item and selling 20% on the market can be a valuable tool to help understand how the market values the NFT.
- More liquidity: owners have significantly better exit liquidity than if they owned the NFT themselves. This can be achieved through on-chain exchanges such Uniswap.
- Curator incentives: an NFT owner who divides their asset into fractions receives a curator fee from their chosen NFT marketplace. Although the owner can set and update the amount of this fee, it is subject to a maximum price limit to prevent reckless pricing.
