Fractionalisation of NFTs — the newest crypto craze explained

Fractionalisation of NFTs — the newest crypto craze explained
It's the news buzzword in the crypto community and attracting the attention of regulatorsBI India
  • Fractionalised non-fungible tokens (F-NFTs) are the newest craze of the crypto art world.
  • They democratise owning a unique piece of art by allowing anyone to own a smaller piece of it.
  • There is uncertainty around what the future holds for F-NFT investors and whether or not regulators will look upon the new trend kindly.
If cryptocurrencies weren’t enough of a socialist concept, fractionalisation of non-fungible tokens (NFTs) takes it a step further. It’s the concept of splitting up ownership of something so that many people can receive the benefits. The more they own, the more their benefits.

Simply put, it’s like buying shares in a company. Each share is a portion of the company that anyone can own. These shares, in turn, provide the investors with voting rights.

Mutual funds work the same way too. Investors pool money into a fund, and that money is used to buy assets. Each investor owns a fraction of the entirety of the fund.

“Fractionalisation is a really cool idea. It’s a more affordable way to own NFTs,” Rahul Pagidipati, the CEO of crypto exchange Zebpay, told Business Insider during the IAMAI-BACC HODL 2021 conference. “It’s almost like a fraternity.”

How do fractionalised NFTs get their value?

A normal NFT gets its value from four components — utility, ownership history, future value and liquidity premium. The fundamentals aren’t very different from how prized works of art get their value in the real world.

Fractionalised NFTs, or F-NFTs, alter the four fundamental values. Ownership history is now divided among the masses, the resulting utility from the fractionalised tokens varies, liquidity is now higher — instead of just one asset, there are many little bits and pieces — and the future value will change according to the other three features.

“The way I look at it, it’s like you’re owning a print… of the original copy,” said Pagidipati. The iconic Doge meme NFT that sold for $4 million in June is now speculated to be worth $220 million after getting split up into 17 billion pieces.

In technical terms, the original NFT was minted as an indivisible ERC721 token. The fractionalised version, however, is 17 billion ERC 20 tokens, which are fungible — they can be exchanged for one another since they all are a part of the same NFT.

Why does the world need fractionalised NFTs?

As the hype around NFTs soars, so does the demand. This culminates in the prices of NFTs becoming more expensive with each passing day, making them too pricey for many to afford.

With fractionalisation, investors with limited funds can own a part of the NFT without emptying out their pockets. This adds liquidity, and more importantly, accessibility to a larger base of investors.

“It is the development of a technology that will hopefully make them [NFTs] more accessible to people,” said David Carlisle, the director of policy and regulatory affairs at venture platform Ellipti.

The tokens that are created as a result of the fractionalisation can also be traded on exchanges to further add liquidity.

What are the possible problems of owning a F-NFT?

Fractionalised NFTs are becoming more common in the crypto world. Considering that the concept is even newer than NFTs, legal and regulatory guidelines around the burgeoning asset are unclear — this include issues of intellectual property, financial categorisation, rights of publicity and other complications.

It’s also not super clear when it comes to what rights an F-NFT investor gets, and the benefits seem to vary from project to project.

“Fractionalisation starts to raise a number of questions around things like are people participating in the purchase through fractionalisation ultimately functioning like an ‘investment syndicate’ where they’re expecting a return on their investment,” explained Carlisle. “When that happens it can trigger things like security laws.”

If F-NFTs are seen as investment contracts by law makers, then they will need to be regulated by other securities markets, according to him.

The concern is that NFTs are high risk assets. F-NFTs are tokens based on those high risk assets, making them even more volatile.

Remember, remember the 7th of September — Bitcoin, El Salvador, and the crypto drop

Doge meme NFT's value flies from $4 million to $220 million overnight after getting split into 17 billion pieces