Unlocking the Power of Fractionalized NFTs: Innovative Ways to Leverage Fractional Ownership

Fractionalized NFTs are a way to segment an NFT. But why break up a thing meant to be singular and unique?

Fractionalization of an NFT collection or single piece of intellectual property brings smaller investors into the NFT space by allowing them to buy and sell what was previously unaffordable.

Also, NFTs aren’t liquid. If you own a valuable NFT and want to realize some value from that NFT without selling it then fractionalization is a great option—you can parcel it out, so to speak, and sell portions. This allows a holder to create liquidity from their asset.

Fractionalized NFTs are realized in the blockchain space in a couple of ways. There are exchanges where people can come together to own a piece of an NFT. Think of this as a platform that facilitates collaborative buying and oversees voting by owners on how to manage the asset. Then there are programs that allow the owner of an NFT to break up an asset and sell pieces.

In each of these instances an NFT (an ERC-721 token) is being portioned up and the smaller pieces are represented by ERC-20 tokens.

What is Fractional Ownership?

Fractional ownership, especially when powered by blockchain technology, refers to the division of ownership in an asset into smaller, purchasable shares, allowing multiple individuals or entities to share in the ownership and benefits of that asset.

This concept is particularly appealing in the context of expensive or otherwise inaccessible assets, such as real estate, art, and collectibles. Blockchain technology enhances fractional ownership by providing a transparent, secure, and efficient platform for recording and transferring these shares.

The use of blockchain ensures that each share is represented as a unique digital token, typically an NFT (non-fungible token), which can be bought, sold, or traded with ease and integrity, thus democratizing access to valuable assets and investment opportunities.

By powering fractional ownership with blockchain, institutions realize several key advantages, including increased liquidity, reduced transaction costs, and the elimination of intermediaries.

By tokenizing assets into shares represented on the blockchain, owners can sell portions of their assets without having to find a buyer for the entire property, making it easier to access the value of illiquid assets. Also, blockchain's inherent characteristics—decentralization, immutability, and transparency—enhance trust among participants, as every transaction is securely recorded and publicly verifiable.

This not only simplifies the process of ownership transfer but also opens up investment opportunities to a wider audience, fostering a more inclusive financial ecosystem.

How Can Fractionalized NFTs Help Businesses

Use cases for fractionalized NFTs in the consumer space are clear, as they’re often used to purchase expensive items as a group. But there are also ways to apply this technology in a business setting. Let’s look at a few examples.

Generate revenue

Like many NFT business applications, fractionalized NFTs offer companies the ability to open new revenue streams. If an enterprise breaks a holding into approachable pieces, they can seek smaller investors. This might apply to a piece of art, collectible, or real estate.

For example, a building could be represented by an NFT and broken into pieces so the community could buy a share. Maybe there is a buyout option in the contract to allow the company to buy back its building when cash is available or the fractionalization is left in place to build a relationship with shareholders. RealT.co is a company experimenting with this model, though it’s only available to accredited investors in the United States.

Fractionalized NFTs could be an interesting way for businesses to raise capital, or crowdsource funding, outside of traditional capital channels.

There’s also potential to connect royalties to the resale of pieces, as well, further generating value for a company as pieces are sold on the secondary market.

Price discovery

One interesting application of fractionalized NFTs is price discovery. Say we have a piece of intellectual property or we want to gauge the value of our name, maybe for naming rights or licensing. We can represent this thing as an ERC-721 token and make fractions of it available to the public. This helps us crowdsource a market price, better understand interest and demand, and attach a value to their holding.

Raise capital

We talked about turning the community into shareholders of a real estate holding, but this could extend in a number of directions. What if we used a fractionalized NFT to raise capital? While there are traditional vehicles for finding investors, Web3 offers us new ways to access communities, unlock audience, and crowdsource involvement to fund new projects. If we represent the share in our project via NFT, we can then trigger automatic payments or rewards to shareholders as the company grows—a Web3 version of dividends.

Create exclusivity

The NFT market creates exclusivity via technology, as ensuring uniqueness increases value. Fractionalized NFTs are an interesting mix of exclusivity and inclusion, as the breaking up of a unique asset into affordable pieces allows more people to enter the market. It’s a similar technique we’ve seen in fashion, with pop-up clothing stores and sneaker drops. Limited releases generate demand.

So how could enterprises apply the lessons learned with fractionalized apes and Jordans?

Say we’re in media and entertainment and releasing an album. It’s a highly-anticipated release from our star artist—and we want to create buzz. We can represent the album as an NFT then sell a limited number of shares. Shareholders get to listen to the album, get exclusive tickets, unique merchandise, and access behind-the-scenes content. They can then sell their share to a friend who gets to listen. Each time the share is sold, we are paid a royalty. For a time, our album that was once delivered straight to box store shelves operates like an underground, viral letter, and by the time we make it available to the public we’ve created a community with an interest in supporting the art.

How to Fractionalize an Asset or NFT

Fractionalizing an asset involves breaking down its total value into smaller, purchasable units or shares, making it possible for multiple investors to own a portion of the asset. This process can be applied to various types of assets, including real estate, artwork, and even digital assets.

The steps to fractionalize an asset, particularly when leveraging blockchain technology or NFTs, generally include the following:

1. Asset Valuation and Legal Structuring: The first step involves assessing the asset's total value. This may require professional appraisals, especially for tangible assets like real estate or art. Alongside valuation, the legal structure for the fractional ownership needs to be established, which may include creating a legal entity to hold the asset and defining the terms of ownership, rights, and responsibilities of the shareholders.
2. Tokenization: Once the asset's value is determined and the legal framework is in place, the next step is tokenization, where the asset's value is converted into digital tokens on the blockchain. Each token represents a share of the asset. This process is facilitated by smart contracts, self-executing contracts with the terms of the agreement directly written into code, which govern the issuance, ownership, and transferability of these tokens. A tool like our asset tokenization platform can make this process much simpler at scale.
3. Offering and Distribution: The tokens are then offered for sale to potential investors, often through a platform or marketplace that specializes in fractional ownership or digital assets. This can involve private sales, public offerings, or auctions, depending on the asset and legal considerations. Interested buyers can purchase tokens up to the amount they wish to invest, thus acquiring a fractional ownership stake in the asset. Institutions may also want to create their own marketplace, especially if selling financial products.
4. Management and Trading: After the initial sale, token holders can manage their investment through a digital wallet, and these tokens can often be traded on secondary markets, providing liquidity to an otherwise illiquid asset. Smart contracts can facilitate automatic distributions of any earnings or dividends derived from the asset, proportional to the number of tokens each investor holds.

Throughout this process, blockchain technology ensures transparency, security, and efficiency. It provides a tamper-proof ledger of ownership and transactions, reducing the need for intermediaries and lowering transaction costs.

By fractionalizing assets in this way, it opens up investment opportunities to a broader audience, allowing for smaller investments in assets that were previously out of reach for the average investor.

Popular Fractional NFT Platforms

Popular Fractional NFT Marketplaces include Unicly, Fractional.art, and Otis. Each takes a different approach to fractionalizing NFTs. For an enterprise looking to build an NFT platform or deploy them to create stickiness in the market, we can learn from these consumer facing platforms. Fun applications of the technology give us ideas for how we can apply blockchain technology to do better business.

Final Thoughts

In the blockchain space, there is a new, innovative application of the technology everyday. If applied thoughtfully, fractionalized NFTs are a way to generate revenue, build community, and create exclusivity. Our NFT platform makes it easier than ever for businesses to create NFTs at scale, gas free.

If you're interested in learning more, start with this tutorial on how to mint an NFT using the Kaleido platform.