Is Fractional Ownership The Future Of NFTs?

Is Fractional Ownership The Future Of NFTs?

Fractional ownership is in the spotlight with some big sales. There's an increasing buzz around lowering the entry price for collectors, but is it really the future of digital art?

The good news

Bluechip NFTs are expensive. Fractionalization solves this affordability problem by allowing collectors to buy part of an NFT (a fraction) rather than the whole. Ownership is then shared between all the collectors, dramatically lowering the entry cost and making NFTs more accessible to non-whales. This democratizing force of fractionalized NFTs fosters vibrant communities. From a seller’s perspective, fractionalization also solves the liquidity problem associated with high-value NFTs, which sometimes struggle to sell.

One of the most valuable fractional NFTs in the world.

Fractionalized NFTs are pragmatic and egalitarian. Smart contracts make fractionalization automatic and ensure that royalties are distributed fairly and instantaneously to all holders. It can serve a humanitarian end, too. In the wake of Russia’s invasion of Ukraine, UkraineDAO auctioned a Ukrainian flag using PartyBid. This allowed investors to pool their resources and bid for fractions of the flag. The result was a $6.75 million donation, proof of the power of community. The flag is now communal owned by 3,200 people. Other recent high profile fractionalized pieces are Andy Warhol’s $1.8 million "1 Colored Marilyn," split between 1,300 wallets, CryptoPunk #3042 which has 56,000 owners and ‘The Doge NFT’ (worth $14.5 million) has 10,014 unique owners.

The Bad News

Fractional NFTs carry their own set of risks and downsides. Decision making and control are more difficult. When you own the whole NFT you decide what to do with it, how to value it, when to sell and when to hold. Collective decision making is obviously more complex. Fractionalizing an NFT is also an expensive, gas intense process and only justified if the piece is extremely valuable.

3042 could run afoul of the SEC.

There’s an even more worrying side effect of fractionalization: SEC interference. Owning fractions of a whole is (at least in the mind of Gary Gensler) similar to owning stocks. This would put fractionalized NFTs firmly in the SEC’s sight, reclassifying them as security. Unlike simple assets, securities have much stricter regulation in the US. As we all know, regulation and crypto don’t make a happy mix, with the markets routinely tanking on every SEC intervention. US citizens might want to exercise extra caution before committing to a fractionalized NFT purchase.

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