NFTs are starting to play a more important role in the digital economy. But how does ownership work? Will it be owned by one person or can it be shared amongst multiple individuals?
Most NFTs will have just one owner. But there is a new variant that has multiple owners, this is commonly called a fractional NFT. The core NFT will be split into pieces, with each owner getting a percentage of it. This has been proposed as a way of democratizing the process of owning an NFT, making it more affordable for regular investors or art fans.
If you are planning on investing or collecting NFTs, you must understand the concept of fractional ownership and how it works. The potential is limitless and you could potentially own a piece of the most popular pieces of digital art, memes, music catalogs, poems, baseball cards, sports clips, and even digital flowers. Keep reading to learn about this area.
What is Fractional Ownership?
In most cases, an NFT will be held by one person. But there is a greater rise of fractional ownership. Under this model, the ownership of the NFT will be split amongst multiple parties. Each person will own a small percentage of the NFT.
This was designed to make the NFT world more akin to the real world. For example, it’s common for real estate trusts to allow multiple people to pool their money together. This allows them to work together to purchase a property and divide the profits.
The number of pieces that the NFT will be split into can vary. Some fractional ownership NFTs can be split into billions of pieces. Others might only be split into a handful of pieces.
This will often depend on the creator’s intentions. How many potential rewards or profits you receive will depend on what percentage of the NFT you own.
Each of these pieces will be fungible. This simply means that they are all treated as the same and can all be exchanged for each other. As a result, you will be able to buy and sell them like any other NFT. Another way to conceptualize this is like shares in a company.
These tokens will use smart contracts, so all the owners of an NFT can see the effects of fractional ownership instantly. These will run using if/then statements. Once a condition is met, the blockchain will be updated to record the transaction. For example, imagine a dividend being paid to all members of the fractional NFT. Using a smart contract will ensure that all tokens get the same payment at the same time when the NFT sells.
Smart contracts also help standardize the way that fractional NFTs can be traded. This ensures that it will be an even playing ground for everyone.
It should be noted that if a single entity purchases all of the individual pieces of the NFT, they would technically be the sole owner. Though this situation is unlikely.
And I do need to mention that there is a difference between minting an NFT and buying an NFT. Read this for the details:
Benefits of Fractional Ownership
There are a few reasons why people are starting to gravitate towards fractional ownership. Some of these benefits can include:
- Ability to afford more expensive pieces. There have been mumerous examples of high-priced NFTs being sold for extremely high prices. For example, millions have been paid for Beeple NFTs. This will be out of the price range for most people. Breaking down the art into smaller chunks will help to lower the price, allowing anyone to own a piece of the art.
- Better able to represent real-world situations. Fractional ownership allows for a more realistic view of ownership and creation. For example, each member of a band will be able to get a percentage of the NFT, so they can all share in the profits.
- Instant access. Unlike buying a house or piece of art, you won’t need to wait weeks for the deal to close. With a fractional NFT, you’ll be able to buy a share and have it added to your portfolio instantly. This allows investors to respond instantly to global risks.
- Improve price discovery. This is a concept from the share market. The more participants there are, the easier it will be to buy and sell an item. This allows investors to get a better idea of what it might be worth.
- More liquidity. As it will be easier for people to buy and sell NFTs, the number of transactions occurring will increase.
- Fairer market. If it is harder for one person with deep pockets to control the market, it will be harder to manipulate NFTs.
Downsides of Fractional Ownership
While fractional ownership might seem like a great idea, there are a few downsides to consider. Some of these negatives include:
- Can make decision-making trickier. If you are the sole owner of an NFT, you will get the right to decide how it is used. This won’t be possible when there are hundreds of owners. It will likely be put to a vote that all owners will be able to participate in. The percentage of the NFT that you own will determine how much sway your vote will have.
- Risks of legislation. Fractionalized ownership of NFTs is relatively new. Because of this, it’s unknown how lawmakers will react to them. However, they may view them as securities, like stocks. In this case, the NFTs will be subject to the same regulations as the stock market, which can limit utility.
- Increased risk. The NFT market is very volatile. The more expensive an NFT, the more potential for large price swings.
- Unclear rights. At present, it isn’t clear what rights owning a fraction of an NFT will provide. For example, will you get the right to use that image? This has the potential to lead to a lot of legal issues.
- Gas fees. To fractionalize an NFT, there will be gas fees. These can be very expensive, so it only makes sense if is a valuable asset.
Where to Buy Fractional NFTs?
It should be noted that this technology is still in its infancy, so there aren’t too many fractional NFTs available. But if this trend starts to gain momentum it might start to become more widespread.
There are a few platforms that are starting to allow users to make or purchase fractional NFTs. One of the most popular options is fractional.art. You can also find some on Opensea.
Future of Fractional NFTs
At the present, fractional NFTs are available for you to purchase. However, there is still a lot of debate in the community about how they should function going forward. Because of this, the approach might change going forward.
The future of fractional NFTs looks bright though. It can be a good way of democratizing the market, allowing more people. It might also bring more types of investments. For example, it can become a viable way for properties to be turned into NFTs.
Verifying Ownership of an NFT
It will be relatively easy for you to verify who owns an NFT. This is because they are all stored on the blockchain. They each have a unique public hash number. This will allow you to find which wallet currently has the NFT plus the smart contracts can also help to verify ownership of a fractional NFT.
There are a few sites that can help you with this element. One of the most common is Etherscan. As long as you have the hash number you should be able to get basic information about the token like where it is and how much it is worth.
Fractional NFTs are still in their infancy and will face a lot of hurdles. They might face legal challenges and regulatory issues but they also have a lot of potential.
There is a chance that they will be able to change the future of finance, making it easier for regular people to invest in expensive assets like art, music albums, houses, and wines.
It’s highly suggested to dive into these articles to get better prepared for the NFT universe!