What Are Fractional NFTs?

Since their introduction in the 1600s, stocks have revolutionized finance: They’ve helped democratize asset access, allowed investors to diversify their bets, and improved returns across the board. Now in the early 2020s, fractional NFTs are doing the same for the crypto market — and those interested in this space should take notice.

From the basics to the nitty gritty technicalities, here’s everything you need to know to start investing in fractional NFTs.

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What are fractional NFTs?

What are the benefits of fractional NFTs?

How are fractional NFTs made?

Where can I find fractional NFTs?

How to start collecting fractional NFTs

What are fractional NFTs?

A fractional non-fungible token (NFT) is a discrete, ownable digital asset that is part of a larger digital asset. As mentioned above, fractional NFTs function much like fractional securities, allowing collectors to participate in a potentially lucrative investment without dealing with the risk (or funding) involved in acquiring the entire asset outright. Since their introduction in 2020, fractional NFTs of all kinds  — from art to trading cards — have become available. Consequently, several fractional NFT marketplaces have emerged to provide investors and collectors with more opportunities to trade these digital collectibles.

What are the benefits of fractional NFTs?

Fractional NFTs have numerous advantages over traditional NFTs. These benefits include reduced financial risk, greater market inclusivity, and increased asset liquidity.

• Risk reduction: Traditionally, owning a popular NFT entailed significant risk.  As the sole owner of the digital asset, a buyer could lose the full value of their initial investment in a severe market downturn. In finance, this is known as a high “exposure” investment. Fractional NFTs, on the other hand, give market participants the option to lower their exposure by allowing them to buy in at the level they are most comfortable with.
• Market accessibility: The rising costs involved in trading NFTs have kept many potential investors from participating in this market: They simply do not have the disposable funds at hand to justify the high price tag attached to many of these digital assets. Fractional NFTs solve this problem by breaking expensive tokens into numerous smaller, more affordable pieces.
• Increased liquidity: “Liquidity” is a term in finance that describes how easy it is to turn an asset into cash. The greater the demand and the lower the price of a given asset, the higher that asset's liquidity typically is. Houses, for example, are typically not that liquid, while t-shirts are usually more liquid. Fractional NFTs increase the liquidity of the NFT market by making it easier for investors to buy and sell NFTs.

Are you a brand or media business looking for new ways to engage with and monetize your audience? Get in touch with us to learn how you can partner with Dibbs to unlock the full value of your physical and intellectual assets through the power of fractional NFTs.

How are fractional NFTs created?

On a technical level, fractional NFTs are not literal segments of a single digital asset. Instead, each fractional NFT is its own token representing a portion of the higher value token on the blockchain.

Fractional NFTs are created on the Ethereum blockchain using the ERC-721 and ERC-20 token standards. Token standards are the guidelines that allow for the creation of cryptocurrencies, NFTs, etc., on different blockchains. ERC-721 is a popular standard for developing NFTs on the Ethereum blockchain, and ERC-20 is often used to create cryptocurrency variants known as altcoins. Fractional NFTs are made using a smart contract that connects a set of ERC-20 tokens to a single ERC-721 NFT. Each ERC-20 token represents a piece of the ERC-721 on the Ethereum blockchain, conferring partial ownership of the larger digital asset to the holder.

It’s important to note that the fractionalization process can also be reversed, transforming the divided digital asset into a single NFT. Reversal requires one of the fractional NFT owners to trigger an auction, informing the other owners of the option to sell. If they sell, the ERC-20 tokens are reunited with the ERC-721 NFT, unifying the asset on the blockchain.

Where can I find fractional NFTs?

Those looking to explore (and possibly buy) these unique digital asset fractional NFTs should begin their search with a fractional NFT marketplace. These hubs give market participants easy access to some of the web’s desirable collectible NFTs. Fortunately, collectors and investors now have a list of excellent marketplaces to choose from, including Fractional.art and Otis.

• Fractional.art: With almost 200 vaults filled with art from Cryptopunk, Etherrock, and more, Fractional.art is one of the best NFT marketplaces on the web. In addition to receiving its approval from industry-leading blockchain security authorities like PeckShield, the marketplace gives its participants peace of mind with features that stop rug pulls, boost investment control, and increase access.
• Otis: Backed by investors like Maveron and Next View, Otis is a top NFT marketplace built for mobile investors. With its streamlined iOS or Android app, market participants can trade art, sneakers, and other high-value crypto-collectibles. Like Dibbs and Fractional.art, Otis takes steps to ensure the stability of its marketplace — including keeping all its digital assets under lock and key and covered by Aspen Insurance.

How to start collecting fractional NFTs

Fractionalization is a game-changing technology that allows anyone to own top NFT collectibles. It reduces the risks and costs of investing — democratizing what was once a relatively exclusive market.

If you’ve been curious about entering the NFT marketplace, now is an ideal time to make your move. Reach out to us today!