Fractional NFTs and what they mean for investing in real-world assets

While non-fungible tokens (NFTs) are currently suffering in the bowels of a bear market, some are using this time to build and develop new concepts with technology.

Once this new concept is fractional NFTs – an iteration of NFTs that allows multiple investors to own a piece of a single token.

These NFTs differ from regular NFTs in that they use smart contracts to split the token into a number of parts pre-determined by the owner or issuing body, who then sets the minimum price.

When applied to real-world assets, these NFTs provide an interesting use case for investors considering owning valuable real-world assets.

Fractional NFTs spread the cost of owning an asset across a wide range of users, allowing a group of investors to own a portion of a larger asset.

David Shin, Global Group Head of the Klaytn Foundation – a metaverse-focused blockchain – told Cointelegraph that they “enable more people to enjoy the benefits of asset ownership while reducing the amount of initial capital. required per user, creating more inclusiveness for users who otherwise would have priced it out.

The symbolic property is not a new concept. Before the advent of NFTs, tokenization was a way for users to split real-world assets. However, fractional NFTs offer investors a new way to split the cost and transfer ownership of particular assets.

More accessible assets

Accessibility is one of the main advantages of NFT splitting as it is more affordable for investors, thus lowering the barrier to entry for owning certain assets.

The collective ownership that accompanies fractional NFTs allows a group of investors to own assets with traditionally high barriers to entry. For example, owning real estate or works of art requires investors to meet particular requirements, whether it is a certain level of net worth or certain legal requirements.

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By using fractional NFTs, these obstacles could potentially be circumvented by the average person. Alexei Kulevets, co-founder and CEO of Walken – a mobile blockchain game – told Cointelegraph:

“It doesn’t matter if you are a builder, collector or consumer, with fractional NFTs you can co-own any fragment of an artwork or NFT project you are working on. Or, it could be something completely different, where ownership is verified by an NFT (e.g. real estate) Think of it as an exchange traded fund, only with no intermediaries or management fees I think it’s a beautiful concept, fully worthy of being called the new era of the internet, the era of co-creation and co-ownership.

Joel Dietz, CEO of MetaMetaverse – a metaverse building platform – echoed that sentiment, telling Cointelegraph: “It makes it easier and, more importantly, accessible. Asset splitting isn’t new, but it entered the NFT space not too long ago – one aspect is to make expensive tokens more accessible to different investors with different appetites – it makes pecking easier of the price of NFTs and even unlocks monetization opportunities via DeFi platforms.

This accessibility could also attract additional investors to the blockchain space, Asif Kamal, founder of fine art investment platform Web3 Artfi, told Cointelegraph.

“Fractional Ownership is the way forward to massively increase the size of the market and helps drive adoption and accessibility to a much wider audience to invest in the asset class in a simpler and much easier way” , did he declare.

What are the use cases?

Real estate is a popular use case for fractional NFTs, and the underlying blockchain technology provides an additional layer of transparency. For example, users can view previous buyers and investment activity through the blockchain explorer.

Dietz said: “The usual case that everyone is enjoying right now regarding fractional NFTs is the ability for an individual to transfer ownership of real estate (an IRL asset) – by storing the information on the blockchain and transferring them transparently and immutably.”

“Owning a fraction of an NFT that represents a real-world asset, investors can withdraw money from their crypto holdings without ever leaving the decentralized finance ecosystem entirely. Now the hype is focused on real estate, but these high-involvement fractional assets could be very interesting in the style of watches, paintings, boats, planes and more,” he continued.

Play-to-earn gaming is another use case for fractional NFTs, allowing multiple players to collectively purchase expensive in-game assets. In-game NFTs can become very expensive due to demand, and allow cost-sharing players can make it easier for them to use those same assets. For example, the P2E NFT game Axie Infinity is currently testing the idea of ​​split NFTs by selling fractions of the rarest Axie NFTs.

Barriers to Adoption

Although fractional NFTs can facilitate investment in certain assets, market conditions could potentially interfere with their adoption.

Dietz said: “Given the current market, we’re either going to see more creators and marketplaces using these fractional NFTs and gaining popularity through these mediums, but if things don’t change, I doubt fractional NFTs will scale much. further., for now at least. Who knows what the market will look like in the next three months, let alone three years from now?”

Regulators and lawmakers could also slow down adoption. Since fractional NFTs allow people to own a fraction of an asset, they could be classified as stocks by the United States Securities and Exchange Commission (SEC).

Yaroslav Shakula, CEO of YARD Hub – a Web3 venture capital studio – told Cointelegraph: “As an idea, fractional NFTs look promising, but in practical terms owning them involves some difficulties, with regulation being the main challenge. more important. Fractional NFTs can be likened to shares because they also confirm ownership of a share of an asset (NFT, in this case).

Shakula also says current legislation is unclear on the legal status of fractional NFTs used to hold a share of physical assets. “In many cases, this type of NFT ownership is not clearly defined in legislation, and projects and users have difficulty understanding how the SEC or other authorities will deal with this ownership. So, for now , co-ownership is only valid in certain territories where relevant legislation is in place.

Shin also said, “The success of fractional NFTs in enabling investors to leverage real-world assets also depends on regulations working in tandem. For example, dissonance will occur if fractional NFTs and traditional title deeds pose competing legal claims to real-world assets.

Due to the uncertainty surrounding taxation and the legal status of fractional NFTs, temporary ownership might be a safer bet in the short term.

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Shakula elaborated on this saying, “Currently a much more viable and feasible approach is to transfer timeshare/temporary ownership via NFTs. Examples of use cases are rights to rent a car or stay in a hotel. This way, NFT owners don’t have to decide who pays taxes or handles damage costs. However, until these issues are addressed, fractional NFTs look better on paper rather than having common use cases.

Beyond regulatory concerns, some believe that fractional NFTs represent the values ​​of a decentralized internet. Kulevets sees fractional NFTs as a catalyst for Web3 adoption, stating:

“If you look closely, fractional NFTs represent the essence of the Web3 concept. We call Web3 the next era of the Internet for a reason: decentralization, security, ownership and creation without intermediaries are part of its fundamentals. Everyone who shares the vision, skills and expertise can co-create and co-own the new reality and be part of many projects.