Insights into fractional NFTs for real-world investments

Key points: 

• Fractional NFTs spread the cost of owning assets among a wide range of users, allowing a group of investors to own a portion of a larger asset.
• Accessibility is one of the main benefits of NFT fractionation, as it is more affordable for investors, thereby lowering the barriers to entry for owning certain assets.
• The most expected use cases, for now, are real estate and play-to-earn. 
• The main concerns on fraction NFT are about the market condition and regulation policy.

While non-fungible tokens (NFTs) are currently in the depths of a bear market, some are using this time to build and innovate new concepts with the technology.

One such new concept is fractional NFTs — iterations of NFTs that allow multiple investors to own a single token.

These NFTs differ from regular NFTs in that they use smart contracts to break up the token into parts specified by the owner or issuing organization, which then sets a floor price.

When applied to real assets, these NFTs present an interesting use case for investors planning to own valuable real assets.

Fractional NFTs spread the cost of owning assets among a wide range of users, allowing a group of investors to own a portion of a larger asset.

David Shin, head of the global group at the Klaytn Foundation, told that they are “giving more people access to the benefits of asset ownership while reducing the amount of up-front capital required per user, and, creating more inclusivity. "

Tokenized ownership is not a new concept. Before NFTs, tokenization was a way for users to divide up real-world assets. However, some NFTs offer investors a new way to share costs and transfer ownership of certain assets.

More accessible assets

Accessibility is one of the main benefits of NFT fractionation, as it is more affordable for investors, thereby lowering the barriers to entry for owning certain assets.

The collective ownership that accompanies some NFTs allows a group of investors to own assets that traditionally have high barriers to entry. For example, owning real estate or art requires certain requirements for investors, whether it be a specific asset or certain legal requirements.

By using fractional NFTs, it is possible for ordinary people to bypass these barriers. Walken co-founder and CEO Alexei Kulevets said:

“No matter whether you are a builder, a collector, or a consumer, with fractional NFTs, you can co-own any fragment of an art piece or an NFT project you work on. Or, it could be something entirely different, where ownership is verified by an NFT (e.g., real estate). Think of it as an exchange-traded fund, only without intermediaries and management fees. I think it’s a beautiful concept, fully worthy of being called the new era of the internet. The era of co-creating and co-owning.”

This sentiment was echoed by oel Dietz, CEO of MetaMetaverse, a metaverse creation platform, telling, “It makes it easier and, more importantly, more accessible. Asset segmentation is nothing new, but it entered the NFT space not too long ago —  one way is to make expensive tokens more accessible to different investors with different leanings — and it makes it easier to price NFTs and even unlock monetization opportunities through DeFi platforms.”

Asif Kamal, founder of Web3 art investment platform Artfi, told that this accessibility could also bring more investors into the blockchain space.

"Factional ownership is the way forward to significantly scale up the market and help with wider audience acceptance and access, making it easier and simpler to invest in the asset class," he said.

What use cases are there?

Real estate is a popular use case for fractional NFTs, where the underlying blockchain technology provides additional transparency. For example, blockchain explorers allow users to view previous buyer and investment activity.

Dietz said: “The usual scenario that everyone is very excited about with fractional NFTs right now is the possibility of one person transferring ownership of real estate (an IRL asset) – storing the information on the blockchain with seamless and immutable transfers."

“By owning a fraction of the NFTs that represent real-world assets, investors can withdraw funds from their crypto assets without having to completely exit the decentralized financial ecosystem. Right now the hype is mostly focused on real estate, but these fragmented high-engagement items could be very interesting in the form of watches, paintings, boats, planes, etc.," he continued.

Play-to-earn games are another use case for fractional NFTs, allowing multiple players to jointly purchase expensive in-game assets. In-game NFTs can become very expensive due to demand, and allowing players to split the cost makes it easier for them to use the same assets. For example, the P2E NFT game Axie Infinity is currently testing the idea of ​​fractional NFTs by selling scores for the rarest Axie NFTs.

Barriers to adoption

While fractional NFTs may make it easier for people to invest in certain assets, market conditions may hinder their adoption.

"However, given the current market, we'll either see more developers and marketplaces take advantage of these fractional NFTs and gain popularity through this medium, but unless things change, I doubt fractional NFTs will develop further," said Dietz. ." At least for this moment. Who knows what the market will look like in the next three months, let alone three years from now? "

Regulators and lawmakers may also slow adoption. Because some NFTs allow people to own a portion of an asset, they can be classified as stocks by the U.S. Securities and Exchange Commission (SEC).

Yaroslav Shakula, CEO of Web3 venture studio YARD Hub, told: “As an idea, fractional NFTs sound promising, but on a practical level, there are certain difficulties in owning them and regulation is paramount. Fractional NFTs can be Like stocks, as they also confirm ownership of equity in an asset (NFT in this case).”

Shakula also said that the current legislation is unclear on the legal status of fractional NFTs used to own a fraction of a physical asset. “In many cases, this type of NFT ownership is not clearly defined in legislation, and it is difficult for projects and users to figure out how the SEC or other agencies will handle this ownership. Therefore, at present, fractional ownership only applies to specific parts of the applicable law field."

Shin similarly explained, “The success of fractional NFTs that allow investors to leverage real assets also depends on a combination of regulations. For example, inconsistencies arise when fractional NFTs and traditional title deeds represent competing legal claims over real assets. ."

Temporary ownership may be safer in the short term due to the uncertainty behind taxation and the legal status behind some NFTs.

Adding to this, Shakula said: “At this point in time, a more viable and viable approach is to transfer timeshare/temporary ownership through NFTs. Examples of use cases are the right to rent a car or stay in a hotel. In this way, the NFT owner doesn't need to decide who pays taxes or who pays for the damage. However, until these issues are resolved, fractional NFTs look better on paper than the general use case.”

Regulatory issues aside, some argue that fractional NFTs represent the value of a decentralized internet. Kulevets sees some NFTs as a catalyst for Web3 adoption, stating:

“If you look at it closely, fractional NFTs represent the very essence of the Web3 concept. We call Web3 the next era of the internet for a reason: decentralization, security, ownership and creation without intermediaries are among its fundamentals. Everyone who shares the vision, skills and expertise can co-create and co-own the new reality and be a part of many projects.”