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May 17, 2022

Binance, What are Fractional NFTs? How do they change the NFT markets?

Fractional NFTs explained. Dividing a complete NFT into multiple small pieces.

Fractional-NFTs-explained.-Dividing-a-complete-NFT-into-multiple-small-pieces. Fractional-NFTs-explained.-Dividing-a-complete-NFT-into-multiple-small-pieces.

How does Fractional NFT change the NFT landscape?

Fractional NFT refers to dividing a complete NFT into multiple small pieces.

Fragmentation lowers the threshold for NFT purchases, allowing more people to participate.

In addition, fragmentation can improve market liquidity, improve valuation rationality, and promote democratization.

If you want to invest in popular NFT collectibles, but feel that the price is too high, you might as well choose Fractional NFTs.

While some NFT collectibles are growing in popularity, the reserve price is also rising.

This is naturally good news for investors, collectors and artists who entered the field early.

But what about those who want to enter the market now? Most people cannot afford to buy expensive NFTs, but they can choose Fractional NFTs for investment or collection.

Holding NFT shards is similar to holding company stock. Fragmentation allows multiple collectors to share ownership of the same NFT.

This approach lowers the purchase threshold and makes NFTs no longer exclusive to giant whales.

In this post, we will introduce you to the concept of NFT sharding, how it works, holding advantages and much more.

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What is Fractional NFTs?

Fragmentation of NFTs refers to the splitting of a complete NFT into smaller pieces, allowing multiple people to obtain partial ownership of the same NFT.

You can think of NFT as a cake, and splitting is cutting the complete cake for multiple people to enjoy.

NFTs originally had unique and unrepeatable characteristics, but Fractional NFTs achieved pioneering innovation through ownership division.

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How does Fractional NFTs work?

ERC-721 and ERC-1155 are the two most commonly used token standards when creating NFTs on the Ethereum blockchain, both of which can generate unique non-fungible tokens.

The opposite ERC-20 standard is used to create altcoins and other homogenized tokens.

Fungible tokens are interchangeable with each other, and each unit has the same utility and intrinsic value.

Thus, you can deploy smart contracts that generate multiple ERC-20 tokens linked to indivisible ERC-721 NFTs.

This way, anyone holding these ERC-20 tokens can have fractional ownership of the associated NFT.

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Can NFTs be restored after splitting?

Fractional NFTs is a reversible process, that is, it can be reassembled into a complete NFT after splitting.

A buyout option is included in the Fractional NFTs smart contract.

Holders of NFT shards can buy all shards to unlock the original NFT.

Typically, holders of Fractional NFTs can transfer a certain amount of ERC-20 tokens back to the smart contract, triggering a buyout option.

After triggering, a repurchase auction will take place within a fixed time frame.

Other NFT shard holders have a period of time to make a decision.

If the buyout is successful, the fragments will be automatically transferred back to the smart contract, and the buyout will have the complete NFT.

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What are the benefits of Fractional NFTs?

1. Promote democratization

The prices of some hot NFTs are climbing day by day, beyond the reach of most people.

This makes it difficult for small investors or collectors to enter the NFT space.

Fragmenting expensive NFTs can reduce purchase costs and allow more people to participate.

2. Improve liquidity

With the growing popularity of NFTs, the prices of popular collectibles tend to skyrocket.

Only a handful of wealthy investors have the ability to buy certain NFTs at high prices.

After the emergence of Fractional NFTs, you can split ERC-721 or ERC-1155 tokens into multiple ERC-20 tokens, thereby lowering the purchase threshold.

3. Price discovery

High-priced NFTs change hands with little or no transaction history, making it difficult to estimate accurately.

Fragmentation reduces the cost of purchase, allows more people to participate in transactions, and facilitates buyers to evaluate the actual value of NFTs.

4. Increase creator exposure

Fragmentation can improve market liquidity, expand audience reach, and allow digital creators to gain more exposure online.

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What are the benefits of holding NFT shards?

Complete NFTs are expensive, and holding Fractional NFTs means partial ownership.

This is obviously the biggest benefit.

After purchasing shards, holders can also join the exclusive NFT community and gain exclusive rights such as voting rights.

It depends on the NFT purchased and the purchase platform.

Some Fractional NFTs projects also provide staking functions. Holders can lock Fractional NFTs on the platform or protocol to earn staking rewards or other benefits.

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What are the disadvantages of Fractional NFTs?

NFT shards are based on smart contracts, and their security depends on the code quality of the smart contracts.

In some cases, potential buyers or holders of NFT shards can transmit the total amount of all shards to a smart contract, triggering a buyout auction.

If other shard holders bid higher than the party that triggered the auction, then they can keep their shards but pay a higher price.

If the party that triggered the buyout wins the auction, the amount paid will be distributed in proportion to each party’s holdings.

All other shard holders will be compensated accordingly.

But that means you may be forced to sell your share.

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Conclusion

Fragmentation of NFT gives more people the opportunity to enter the NFT field, which is very likely to become the next hot spot.

If you are paying close attention to a certain NFT collectible, but do not want to buy the full amount because the price is too high, you might as well try to buy NFT shards.

But before buying digital assets, be sure to do your own research (DYOR).

Want to dive into the NFT world to find out?

Follow Binance NFT’s Twitter and Telegram accounts for the latest news on weekly IGO launches and exclusive blind box releases.

Also, browse various NFT collectibles in our secondary market.

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