Buying and selling fractional NFTs could be rewarding but without a clear guide, it becomes confusing and difficult. Fractionalization allows NFT sellers to easily access liquidity by either offering whole NFT in fractions or in parts to multiple traders. This increases the chances of quickly selling an NFT by reducing ticket size. While fractional NFTs promotes inclusion for traders and collectors, trading fractions may not result in financial gains.
Why is that? The answer is simple. You need to know how to navigate your way around fractional NFTs to be able to trade profitably. In this article, you shall learn through simple steps how you can trade NFT fractionals.
How fractional NFTs work
Fractional NFTs by design are smaller fragments of a whole NFT. Traders are able to buy and sell fractional NFTs for profit or collect them for HODL. NFTs are crypto tokens using the ERC-721 and ERC-1155 token standards which gives them their unique properties. A fractional NFT is an ERC-20 token representing partial ownership of an ERC-721 and ERC-1155 token (NFT). To fractionalize an NFT, the original NFT will be locked in a smart contract (which is basically a computer program with instructions to perform specific actions when a condition is met.)
Before the fractionalization commences, the owner of the NFT will provide certain information such as the number of fractions (ERC-20 tokens) to be created, their price, metadata, and other properties. But this may not be accurately done because of limited information at a user’s disposal. Quantix simplifies this process by automatically fractionalizing the NFT into a certain number of fractions based on the amount of liquidity available and other factors. Then, the smart contract splits the NFT into multiple pieces whereby many traders can buy the fractions with a smaller amount of funds (ticket size).
For example, PleasrDAO bought the original Doge NFT for $4 million in June 2021 and in september, fractionalized the NFT into 17 billion shares (ERC-20 tokens). It then went on to sell it and using the dutch auction approach raising 11,942 ETH from 1796 buyers, the NFT’s diluted market cap went for as high as $550m.
Doge NFT
ERC-721 creates unique assets that are not interchangeable for one another, but ERC-20 assets can be easily exchangeable for the other.
The Doge NFT
Fractionalizing NFTs brings the fungibility of ERC-20 tokens into the non-fungible nature of ERC-721 or 1155 tokens, enabling the non-fungible assets to utilize the properties of ERC-20 assets to reach multiple traders and increase market value.
The famous painting by Leonardo Da Vinci, the Mona Lisa believed to be worth almost a billion dollars can only be bought by one collector or a few that pool their funds together. But in fairness to the concept of fractional NFTs, there is no democracy or inclusion in this type of arrangement because collectors with relatively lower capital are likely excluded from these types of deals.
Portrait of the Mona Lisa
To financialize access to the Monalisa painting, if it were ever put on sale, a solution would be to fractionalize it into let’s say 10 billion ERC-20. This means there will be 10 billion ERC-20 (fungible) tokens of the Mona Lisa that can be traded on secondary markets like Quantix or DEXs like Uniswap. At a valuation of $900 million, each of the 10 billion Mona Lisa fungible tokens will be worth $0.09. With each priced at 9 cents, it lowers the ticket price which many retail traders can afford.
De-fractionalizing an NFT (Buyout)
Splitting an NFT into multiple parts offers a lot of benefits to both traders. How about a situation when a collector with a large high purchasing power wants to acquire the whole NFT? This is still possible through what is known as a Buyout. The smart contract responsible for splitting the NFT into multiple portions or shares generally has a buyout function. Once initiated by a collector, all the fractions (ERC-20 tokens) are purchased and the original single NFT piece is unlocked to the collector. The collector gets the whole NFT, while the fraction owners get paid based on their proportion of holdings and the current market value of the whole NFT. Through the Quantix platform, collectors can easily and quickly claim choiced fractioned NFTs at a fair market price.
What can you use to buy fractional NFTs (ETH, MATIC)
Most NFTs are on Ethereum especially, premium NFTs. To buy fractional NFTs, you’ll require ether to be able to buy and sell them. You need ETH to pay for gas as well. And if you are concerned about expensive gas fees which is usually the case when the Ethereum network is congested, Polygon helps with significantly cheaper gas options. On Polygon, you will require MATIC to pay for gas as you trade your fractional NFTs. On Solana-based marketplaces, you will need to use SOL to purchase fractional NFTs. In some marketplaces, you can also use tokens on the network to buy fractional NFTs.
Where can you trade fractional NFTs?
There are dedicated marketplaces where traders can fractionalize, buy and sell fractional NFTs. These are not like regular NFT markets like Foundation. An example is Quantix. Follow me as I lead you through the Quantix marketplace where you can buy and sell fractional NFTs.
What is Quantix?
We outlined that a fractionalized NFT is simply a whole NFT that has been divided into smaller units, allowing more than one person to claim ownership of a piece of the same NFT. The NFT is fractionalized using a smart contract that generates a set number of tokens (ERC20) linked to the indivisible original. Each fractional token gives each holder a percentage ownership of an NFT and can be traded or exchanged on secondary markets. Technically speaking, a fractionalized NFT should be an NFT owned by a re-fungible token (RFT) smart contract, a particular type of ERC20 that allows knowing who are the fractional owners of a certain NFT.
A Quantized NFT (Quantix fractionalization process) is a particular type of fractionalized NFT where instead of a simple Re-fungible token the NFT is owned by a Bonding Curve Re-fungible Token. Quantized NFTs can handle both the fractional ownership of an NFT and also a fully-liquid secondary market phase through an integrated virtual AMM further linking the price of each fraction to that of the whole NFT, without the seller having to add any liquidity.
Quantix enables you to fractionalize the whole or part of an NFT and sell to multiple traders with relative ease. As a buyer, you can also acquire a share or fractions of the NFT.
To Sell your NFT on Quantix, follow the simple steps below.
- Connect Wallet =>
- Import NFT =>
- Set Floor Price =>
- Set Shares (to keep if any) =>
- Select NFT Category =>
- Click “Confirm Quantization”
NOTE: You will be prompted to authenticate the transaction on Ethereum Network from Metamask.
The sale takes place during the quantization phase, and once it is completed, and you claim the proceeds of the sale (quantization), then the NFT fractions are transferred to the Free Market where traders can speculate on the price as in a spot market.
To Buy NFT fractions, follow the steps.
- Connect Wallet =>
- Navigate to the NFT fraction you want to buy
- Input fractions quantity =>
- Click “Buy Share”
NOTE: You will be prompted to approve the transaction with your wallet, and you have successfully bought your NFT fractions.
Note: You can initiate a buyout of the NFT fractions to claim the whole.
Trading fractional NFTs on spot market
Quantix also allows you to also trade fractions on the spot market. This is where the fair market value of an NFT or its fractions emerges by the activities of market forces, demand(buyers), and supply (sellers).
Conclusion
The NFT market has grown significantly over the past few years and will grow even bigger as the industry evolves. Fractionalization increases accessibility and facilitates inclusion in the ownership of premium NFTs. Despite the hype around NFTs and fractions, they should be treated like regular fungible crypto assets like ETH, BTC, BNB, SOL, etc analyzed to ensure they are good investments.
Innovations in the NFT space are on the rise, seeing the prices of premium NFTs rising to elusive valuation from the standpoint of retail traders, fractionalization makes it possible for more people to trade premium NFTs and contribute to the growing economy. The application of NFT is diverse, and as more traditional companies jump into the NFT train, fractionalization as an innovation may be what will save the day for retail investors who want a piece of the great pie when assets with colossal valuations come to the market.
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