14 March, 2022
It is clear that the demand for NFTs is nowhere near slowing down; however, there are still important challenges that need to be dealt with within the digital world. Fractional ownership or the democratisation of NFTs has recently been upheld as a solution to these challenges. In this article, I outline who would be interested in NFT fractionalisation, what it involves, and how it can help individuals build stronger art collections. Is it anchored in the future of art collection?
Importantly, not every work of NFT art is worth fractionalising. The expensive cost of gas to perform these transactions throughout the process means that it isn’t something you would look to do if the value of your NFT is quite low. Therefore, at the time of writing fractionalising an NFT only makes sense for high-value pieces.
To begin with, we need to ask who may want to fractionalise an NFT? There are several reasons why an artist or a third party would want to do this, and I’ve listed the main ones below.
Maintaining a balanced portfolio
Someone may be interested in collecting a high-valued piece but lacks the funds to be able to buy the NFT while still maintaining a solid balance within their portfolio. In this case, they may look to buy the NFT outright and then proceed to fractionalise it. In turn, they can decide what percentage they would like to continue to hold and can sell the remaining amount. This allows the collector to gain exposure to the collection without shifting the balance of their total portfolio.
Not enough capital
A group of collectors may decide to rally funds together to buy a high-value NFT which they otherwise wouldn’t be able to afford. The safest way to do this is through fractionalising the NFT. In my opinion, this is one of the main benefits, as it allows collectors with lower budgets to add high-end pieces to their portfolios, thus lowering the entry-level and increasing audience size.
De-risking/Liquidating a percentage of an investment, to take advantage of a short-term opportunity
A collector may already hold a high-value piece. They still believe in the project/artist long term, but they see an opportunity elsewhere that they think will outperform in the short term and need to liquidate some funds to do so. They might look to fractionalise a portion of their NFT to take advantage of this opportunity.
Whilst these are some of the main reasons encouraging individuals to adopt fractionalisation, there are still key factors to consider, the first of which is ‘utility’. This can be one of, if not the biggest factor in what makes a particular NFT valuable. Many NFTs will airdrop additional tokens to holders as part of their utility. This is often an airdrop, but sometimes, you may have to connect your wallet to verify ownership and/or to claim. This becomes a difficult task if there are multiple fractions/owners of the NFT. Until this problem can be fixed, I think that the idea of fractionalizing an NFT should only be considered if the value of your NFT is derived from the history or the art of the piece. If utility is the biggest value factor of your NFT then you should avoid fractionalisation as to not miss out on any claims you might be otherwise eligible for.
Overall, I think that the idea of being able to fractionalise a valuable NFT is fantastic. It offers many benefits that I have stated above. As long as the NFT is valuable enough and the value isn’t derived from its utility, then it’s a great way to diversify into some top artists/projects. Whether low- or high-liquidity, everyone stands to benefit from fractionalisation, if used correctly. It is only a matter of time until the tech develops to the point that concerns are overcome and more people consider fractional NFTs as a means of collecting art. So, to answer my initial question, whilst it’s still too early to tell whether it will outperform outright sales, I think it’s evident that the fractionalisation of NFTs is here to stay and I expect it to continue to grow steadily over the upcoming years.