What is Fractional? How to Buy and Sell Fractionalized NFTs
by Justin Perri
Most people who collect NFTs are now priced out of the blue-chip projects that command notable respect and clout. But what if you could own a small piece of CryptoPunks, Fidenzas, a Bored Ape, or more without paying hundreds of thousands of dollars for the privilege? Fractional.art, a new platform for decentralized ownership of any NFT, allows you to buy a portion of these assets and access their exclusive communities — with the possibility for your fractional share to appreciate over time.
Founded in early 2021 by Andy Chorlian — known as @andy8052 on Twitter, Fractional officially launched on June 26. The platform hosts a smart contract through which anyone can take an NFT (ERC-721) they own and splinter it into a desired amount of fractionalized tokens.
In August, Fractional announced it raised $7.9 million in seed funding to expand its team, including more smart contract and front-end development. The future of fractional NFTs is likely just getting started, and Fractional.Art is leading the charge.
How do Fractional NFTs work?
After the fractional tokens are created, the tokens (ERC-20) are listed for sale at an initial valuation along with a buyout reserve price. The fractionalized NFT is sent to a temporary wallet through the smart contract and is held there until a collector comes to the site and submits a bid for the collectible at, or above, the reserve price.
In the meantime, users are able to browse the available offerings to see which fractional NFTs they want to buy into. These vaults, as they are called on Fractional, currently include multiple CryptoPunks, a rare black and white Fidenza, full Art Block sets, rare Bored Apes and more.
What this means for the everyday collector is that buying into some of the most prized assets and communities is no longer gated by the astronomical floor prices these collections can carry.
In fact, the way that Fractional works allows for smaller traders to take part in owning some of the most coveted assets in the NFT space and also to profit off their appreciation.
What do I do with Fractional shares of NFTs?
The tokens you receive from buying a fractionalized NFT are able to be traded on many decentralized finance platforms, like UniSwap or Sushi Swap. This adds an entirely separate level of functionality and potential for NFTs.
The tokens one receives are also able to be swapped back to Ethereum on the Fractional site by any of the holders, while acting as a governance token to set a new reserve price based on a democratic system weighted by ownership amount.
Why Fractionalize NFTs?
For those who actually own these rare NFTs, Fractional offers a way to liquidate some of their holdings as they wait for a bid to be made that meets the reserve price. Imagine someone bought a CryptoPunk and it’s now worth millions of dollars, but they don’t want to actually sell it.
With Fractional, you can fractionalize any percent of your NFT through this protocol and make it available so you can get some currency on hand for other purchases.
Once a prospective buyer makes a bid at the given reserve price — i.e 1636 ETH for EtherRock #72 — an auction begins. Once the auction timer finishes, the vault is sold to the highest bidder and all the holders of the fractions are able to cash their tokens out for Ethereum at a ratio based on the final sale price.
So let’s say a user purchases .05 percent of a vault at a 250 Ethereum valuation. If the final price is 400 Ethereum the fractional holder will return 160 percent on what they purchased the fractional NFT for.
There are fees to use the platform, which does de-incentivize some smaller purchases. So when using the system you want to take a look at the final ‘Implied Valuation’ before you hit the purchase button to understand the rate you are buying in at.
How to Use Fractional.art: Step-by-Step
Here’s a quick walk through on how to use Fractional to buy or sell fractionalized shares of NFTs.
- Go to Fractional.Art and connect your Web 3 wallet (like MetaMask) to the site
- Click Explore, then select a vault you like that has ongoing live sales.
- Examine and personally evaluate the current valuation, original owner, and market activity of the NFT in question.
- If you want to buy at the current implied valuation, enter the amount of Ethereum you want to spend on fractions.
- Re-examine the new implied valuation that includes the site fees. If it is to your liking, swap your currency for the tokens — i.e. $ETH to $HOODIE for this CryptoPunk.
- Wait for a buyout bid to be submitted at or above the reserve price — this can take weeks or longer depending on the NFT market.
- Note that you can also freely exchange your tokens in the meantime on any decentralized exchange before a buyout bid is submitted.
- When a buyout is submitted, follow along as the auction begins.
- Bids can be made over a three-day period after the initial buyout.
- When the auction ends, swap your fractional owings back into Ethereum at a ratio that’s equal to the final price. The funds will arrive in your Web 3 wallet after confirming the transaction.
The Future of Fractionalization and NFTs
At the end of the day, Fractional gives NFT collectors with smaller bankrolls a chance to get their hands on some of the most coveted assets and see returns in parallel to even the biggest NFT collectors. It is essentially taking a non-fungible asset and returning a fungible asset that has a lot more application.
Unlike physical art, fractional ownership is only possible through the blockchain technology which is foundational for NFTs and digital art.
For collectors who want to fractionalize their NFTs, Fractional.Art allows new price discovery, liquidity, and curator fees for essentially staking your NFTs. With curator fees, the owner will earn a percentage of the total fraction supply, making NFTs more useful than ever.
It will be very exciting to see how Fractional continues to develop and what use cases the community is able to find with the new technology of fractionalized NFTs.