Bringing democratization, liquidity, and price discovery in the NFT market opens up new opportunities for investors. Several constraints like a high price, less liquidity, non-interchangeability have stunted the growth of NFTs.
A Non-Fungible Token (NFT) is a digital token representing the ownership of a unique item like a digital artwork, collectibles, a domain name, etc. As the name suggests, non-fungible is a term given to things that cannot get interchanged with other items as they have unique properties. For example, digital artwork, real estate, event tickets, etc., can also be non-fungible assets. On the other hand, dollars are fungible. You can easily exchange a $1 bill with another $1 bill. NFTs provide authenticity and ownership of real-world assets in a blockchain network. Every NFT must have only a single owner at a time, and no two NFTs are the same.
Some of the unique features of NFT are:
- NFTs are indivisible
- NFTs are indestructible
- NFTs guarantee absolute ownership
- NFTs are verifiable
- NFTs are typically Interoperable, i.e., NFTs can be traded, purchased, or sold
Limitations of the Non-Fungible Token (NFT)
NFTs have gained massive popularity because of their unique characteristics and Ethereum backing. However, the NFT arena is still a work in progress, and it will take some measures for NFTs to gain ground in the mainstream financial world. Some potential limitations include:
- Speculative Market: Currently, the value of NFTs is purely based on aesthetics and sentiments. Even though the blockchain network backs it, it is not seen as a long-term investment. Hence, the NFT market currently stands on the pillars of speculation. For example, assume you are buying an NFT backed by digital artwork. But if there is no market or buyers for the digital painting, you risk spending money on an unsellable item.
- Regulation & Copyright Issues: NFTs are not regulated, and hence you only need to invest your money based on trust. An investor needs to research a lot about the real-world asset backed by the NFT. Chances are there that you would end up buying an NFT representing a duplicate digital artwork. Therefore, they are not entirely free of copyright issues.
- Lack of Security Protocols: NFTs have been the target of a few security breaches, especially from threat actors who don’t believe they’re “real” investments. Many exchanges have outdated or inefficient security protocols in place to prevent such incidents from happening.
- Environmental Sustainability: One major deterrent in using Ethereum blockchain is power usage. Any transactions like adding/removing, or updating a record involve a significant amount of energy to be spent. With climate change and other environmental issues prevailing, some blockchain technologies pose ecological sustainability issues.
Storage: While NFT data is tracked and maintained in a blockchain network, you need a marketplace like Open Sea, Mintable, and Rarible to create and list your NFTs. Since the market is not regulated, if the regulatory authorities decide to shut them down for some reason, then your NFT material may be gone forever.
What is a Fractionalized NFT (F-NFTs)?
NFTs are unique and have only a single owner at a time. Hence, the concept of F-NFTs came into existence to allow NFT owners to mint tokenized fractional NFTs and share the ownership of the asset with others. At times, a high-value asset like real estate or a luxury yacht will be impossible for everyone to own. It is where the fractional NFTs play a massive role in allowing people to invest a small sum of money to gain fractional ownership of a high-priced asset.
With Fractional NFTs, anyone can own a high-value asset at a low cost. For example, on Ethereum, to fractionalize a purchase, the NFT owner divides the ERC-721 token into multiple ERC-20 tokens. Hence, each ERC-20 token becomes a fractional NFT of the asset.
Key Benefits of NFT fractionalization
Fractional ownership has created a revolution, opened up new horizons in the NFT sector, and allowed more people to invest in NFTs. Some more benefits of NFT fractionalization are:
- Price Discovery: One of the most significant advantages of F-NFTs is that they can help you assess the market value of the NFT quickly. Say if you have digital artwork and need to understand the market value. All you need to do is fractionalize the NFT and sell 10–20% on the market.
- Enhanced Liquidity: NFT fractionalization solves the liquidity issues that come with NFTs. When you are selling a high-priced NFT, you need to wait for some time as only a few investors can afford to buy a high-value asset. But with F-NFTs, you can segregate the ERC-721 token into multiple ERC-20 tokens and sell each token individually. Hence, one can generate a lot of interest for the asset and address the liquidity issue to a large extent.
- Democratizing Investment: The NFT market has largely deterred small and medium investors from participating in NFT auctions. Since NFT assets are mainly high-priced and high-valued items, only a few investors can afford to buy those assets. The emergence of fractionalized NFTs has opened up more opportunities for small and medium investors in the NFT market, which were previously exclusive to a small set of people.
- Curator Fees: The original NFT owner who divides the NFT into fractionalized NFTs stand to receive a curator fee annually. 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.
- Easy Monetization: Artists and NFT owners can easily monetize their assets through fractionalized NFTs.
Industries F-NFTs Can Potentially Disrupt
Below given are some industries that are set to get disrupted due to the emergence of F-NFTs:
- Art: Digital Artists and NFT owners can easily break up their NFT into multiple F-NFTs and quickly sell individual F-NFTs to investors. In this way, emerging artists can sell their digital artworks rapidly in the market. Grimes sold his NFT backed artwork for USD 6 million in just under 20 minutes.
- Gaming: Trading game cards offers a massive NFT market potential. For instance, rare pokemon cards, such as Charizard, can go for an enormous sum. Imagine you can sell all your in-game items like your rare skins, guns, and armors through F-NFTs. F-NFTs can help you sell your rare item by fractionalizing it and selling it to multiple people.
- Collectibles: The Collectible market is also huge, as seen in collectibles like crypto kitties sold for more than $1 million. Recently, a collection of 50 CryptoPunks have been fractionalized and put for sale. They were previously trading at high prices; however, with fractionalization, even a small investor to buy a share in the 50 CryptoPunks collection.
- Domain Names: Recently, .eth and .crypto domain names are selling like hotcakes as the crypto market is on the rise. Rare and popular domain names can be fractionalized and sold to multiple investors.
- Real Estate: F-NFTs can play a massive role in the real estate industry as people can easily own a piece of a luxury property that was not possible before. A high-priced luxury property can be fractionalized into multiple F-NFTs to allow various people to invest in the F-NFTs. It will also eliminate the need for mortgages to buy a property as tenants can hold parts of the property together.
- Music: The music industry is buzzing with the concept of NFTs and F-NFTs. In the current streaming model, the record labels share the major profits. F-NFTs can help artists fractionalize their music albums and sell them directly to their fans without intermediaries. With fractionalized NFTs, it could solve an age-old problem of the direct artist-to-fan relationship to a large extent.
Future of Fractionalized NFTs
While many exchanges offer liquidity to ERC-20 and ERC-721 tokens, a new exchange needs to be developed for F-NFTs to validate the NFTs that need to be fractionalized. A new exchange created specifically for F-NFTs could help in asset authentication, smart contract fractionalization, and listing on the exchange.
F-NFTs have emerged because NFTs were selling for vast sums of money, which reduced the market to only a small group of investors. Hence, the fractionalized NFTs were created to offer more liquidity and allow smaller investors to buy fractional NFTs of high-valued assets. But still, there is a lot of debate going on about the future of NFT.
SEC Commissioner Hester Pierce has recently stated that issuing fractional NFTs will be considered investment contracts under the securities law. The so-called “Crypto Mom” Pierce further noted that the Howey test to authenticate digital assets as securities may not hold good for real-world assets. Hence, there is still a long way for the F-NFT market, but the future looks promising given its vast real-world applications.
The concept of fractional ownership is not entirely new. Complete ownership of high-value tangible assets such as real estate, private jets, etc., is next to impossible for retail investors without taking out a massive portion of their life savings. Fractional ownership of assets has made this more accessible, as now even small-time investors can get a piece of the asset that has the potential to provide many-fold returns in the near future.
Similarly, in the DeFi world, the ownership of NFT-based assets has remained been whole until now. Fractionalized NFTs help solve this problem and provide investors with numerous benefits, as discussed in this article. Besides, it will encourage more people to start their NFT investment journey, as now they need not have thousands or millions lying around to invest in a popular NFT piece.