But is there a way to … "funge" NFTs? Well, indirectly, yes! Fractional NFTs represent shared ownership in NFTs, and it’s possible to cut up an NFT into millions of fungible tokens by locking them in the vaults of decentralized platforms.
The fractionalization of assets is common in traditional finance for high-value assets like vacation homes, aircrafts and luxury cars. This allows an investor to expose his portfolio to an expensive asset without having to own it outright. Put another way, fractionalizing an asset also fractionalizes the risks and costs associated with investing in that asset. The same logic applies to NFT fractionalization.
Some NFTs are known as blue chips, as the most expensive collections such as the Bored Ape Yacht Club, CryptoPunks and Moonbirds sell for hundreds of thousands of dollars or even for millions. Fractionalization reduces the cost of entry for investors who are normally priced out of these blue-chip assets.
Fractionalization of NFTs involves creating fungible tokens, which, in the case of the Ethereum blockchain, means ERC-20 tokens tied to underlying NFTs (ERC-721 tokens). But the price doesn’t necessarily track those NFTs: Investors and traders can trade them at a discount or a premium to the original valuation.
What are fractional NFTs?
A fractional NFT refers to a set of fungible tokens tied to a whole (e.g. one Bored Ape Yacht Club NFT) or a set of NFTs (e.g. several CryptoPunk NFTs). As the name suggests, it implies fractional – or proportionally shared – ownership of an NFT.
When an NFT is fractionalized, the original NFT is locked up in a vault, and someone issues a limited supply of fungible tokens that represent ownership over that NFT. These fungible tokens can be bought on fractional NFT platforms such as fractional.art and can also be traded on secondary markets such as Uniswap.
Some NFT projects also issue fungible tokens, such as the APE token from Yuga Labs, the creators of Bored Ape Yacht Club. These tokens don’t represent fractional ownership over the collection. Instead, they offer utility in some of Yuga Labs’ projects, such as the recent metaverse land sale where the token was used to pay for the NFTs.
What is the relationship between NFT fractionalization and valuation?
Fractionalization brings more liquidity to a notoriously illiquid market, because expensive NFTs can be traded in small portions. NFT holders can sell part of their NFT for crypto while retaining majority ownership. For investors, fractional NFTs offer exposure to an asset without having to buy the whole thing.
But the traded portion – as represented by fungible tokens – can also cause an NFT’s valuation to go up or down, as happened to the doge meme NFT.
There’s no mechanism to stop a fractional NFT from deviating from the price of the underlying asset, and so investors should think carefully before making a trade.
What are some fractional NFT platforms?
There aren’t many tools and platforms to choose from, but a few stand out and can serve the needs of the current maturing NFT market.
Unic.ly is a popular platform. To fractionalize an NFT on Unic.ly, NFT holders need only to connect their wallet to create a fungible uToken – an ERC-20 token that represents ownership in a single NFT or a collection of NFTs. Users can trade those tokens or bid on the fractionalized asset through the platform.
Fractional.art is another popular platform. It is similar to Uni.cly in the way it lets NFT holders fractionalize their assets and redeem ETH in return. Although it has no bidding and staking options, like Uni.cly, the platform offers more flexibility for developers through a basic and permissionless protocol design. Anyone who wants to build on top of Fractional’s protocol can do so, while Uni.cly’s more complex set of smart contracts is more limiting for developers.
NFTX is another platform for fractionalization, but it significantly differs from Uni.cly and Fractional. It allows pooling NFTs of equal value – for example, NFTs with similar rarity sitting at the floor price – into index funds. NFT holders receive ERC-20 tokens when they add an NFT to an index or buy a portion of the index. Users receive a vToken, which is a 1:1 redemption claim on an NFT in the index a user’s NFT was added into. This means the users won’t necessarily receive the NFT they deposited because all NFTs deposited are considered of equal value. After recent criticism, NFTX introduced the option of paying a 5% premium on the token price and letting the user choose the NFT he or she wants out of the index.
Other ways of exposing your investment portfolio to NFTs include the Index Co-Op’s The JPG NFT Index (JPG), which tracks a wide NFT basket that includes fractional NFTs such as $DOG but also other assets relevant to the NFT market.
Read More: 5 Ways to Earn Passive Income From NFTs
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