NFT Market Limitations
![FRACTIONAL NFTs]()
Everyone would be aware of NFTs and these NFTs are booming in the market. There is a number of challenges that the sector faces that will limit its ability to gain the main steam adoption. Up until now uniqueness and provable scarcity have been NFTs main selling point but despite their unprecedented success, the NFT market remains a rather illiquid one. This extensive illiquidity inherent in the NFT is major issue. This is because NFT which are mostly represented by Ethereum based erc-721 token standards are non-interchangeable with one another which makes the process of trading natively complex.
The majority of high-end NFT assets are either too expensive or more often not off-limits for most investors in the space. Apart from liquidity, the NFT ecosystem faces many other drawbacks that are limiting its widespread adoption namely
- Market speculation
- Regulation and copyright issues
- Lack of security protocols
- Environmental sustainability
- Lack of efficient storage systems.
But the new model of NFT that I’m about to shed light on could be a solution to these limitations and that is fractionalized NFTs or fNFT.
Fractional NFTs
NFTs fractionalization is a relatively young concept in the digital asset space. The concept of fNFTs came into existence to allow NFT owners to mint tokenized fractional NFTs and share the ownership of the asset with others. This can play a role in enabling individuals to invest a small sum of capital to gain partial ownership of a high-priced asset. A process that could potentially ignite and open up an entirely new economic framework based on shared democratic ownership of valuable assets
When an NFT undergoes its fractionalization process, the underlying asset is first locked in a smart contract. This smart contract then splits the originally indivisible erv721 NFTs into multiple fractions in the form of fungible erv20 tokens with each fraction representing partial ownership of the erc721 NFTs. Shareholders will now be able to own a fraction represented by an erc20 token of the NFT which equates to owning a percentage of the original erc721 asset.
Benefits of Fractional NFTs
There are three major benefits to NFTs fractionalization.
- price discovery
- Asset liquidity
- Democratization of investment
With NFT fractionalization a new price discovery procedure can be put in place to produce a price estimate for each and every erc20 fraction which then allows for an overall valuation of the underlying erc721 asset.
Secondly NFT are distinguished by the fact that they possess unique one-of-a-kind characteristics. However one of the most pressing issues when it comes to NFTs and NFT marketing trading is the generally illiquid market that encapsulates them.
Thus NFT fractionalization was created and designed to address the lack of liquidity that exists in secondary NFT market and when an NFT is fractionalized the erc20 tokens representing each NFT fraction could be traded on dexes or even centralized exchanges thus increasing the asset liquidity of the NFT itself.
Thirdly, given the high prices for some top-tier NFT collections this naturally inhibits smaller investors and collectors from participating in NFT auctions.
Thus, breaking up a high-end expensive NFT into multiple fractions lowers the barrier to entry and ownership costs essentially enabling more investors to gain exposure to the market of prestigious NFTs.
Issues with Fractional NFTs
The distinction should be made between storing an asset off chain and using it as an investment vehicle. Certificate of ownership wrapped within NFT contracts are static rights and they do not change, so custody solutions for NFTs are not necessarily subjected to securities. However, buying a piece of artwork and storing it in a crypto wallet is completely a different story. This is because the investor is actively allocating capital to an asset with the expectation that it will rise in value and that they can then trade it on for a profit.
Furthermore, the chances are the investor wouldn’t just be acquiring one NFT multiple fractions that would then be assembled in their portfolio just like stocks and bonds. Now when aspects of an NFT become revenue and value producing it quickly moves into the security realm covered by federal laws where the same rules apply to digital assets as if the right of ownership was being recorded in the real world.