Non-Fungible Tokens (NFTs) UPSC pre 2022

It Was a medium-level question because though NFTs were in the news but question require the application of basics.

Concerning Non-Fungible Tokens (NFTs), consider the following statements :

1. They enable the digital representation of physical assets.

2. They are unique cryptographic tokens that exist on a blockchain.

3. They can be traded or exchanged at equivalency and therefore can be used as a medium of commercial transactions.

Which of the statements given above is correct?

(a) 1 and 2 only

(b) 2 and 3 only

(d) 1, 2 and 3

Solution- For a Better understanding see the video.

Trick

Statement 3 is wrong Because Non-fungible items cannot be used as a medium of exchange because they will not be divisible easily.

What is a Non-Fungible Token[NFTs]?

NFTs are unique cryptographic tokens that exist on a blockchain and cannot be replicated.

For Example

A GIF, Digital Image, Music File etc stored Using Digital Technology.

NFTs can represent real-world items like artwork and real estate.

"Tokenizing" these real-world tangible assets makes buying, selling, and trading them more efficient while reducing the probability of fraud.

What Fungible Means?

To understand whether a thing is fungible or not we need to answer 2 questions

1. Can it be subdivided into smaller units?

2. Is Mutual substitution possible in terms of value?

For Example

$500 can be divided into smaller units of $100 and

5 notes of $100 can buy the same quantity of Goods as a single $500 note.

So, We can Say that $500 is Fungible in nature.

But a Digital Image does not have the same value When it is Divided into Parts.

Extra For Mains

Mock - Critically Analyse NFTs?

+ = Pros/benefits / Positives

-= Cons/Negatives / Drawback

+	-
Easier to trade Digital Asset. So, It's helpful for Multimedia Creators	Money Laundering & Terror Finance
Easier to Verify Ownership. So, Prevent Plagiarism.	Investment Bubble will collapse and Investor will lose money. For Example In November 2022, cryptocurrency exchange FTX collapsed over a period of 10 days.
E Admin.	Cyber security issue
	Environment Issue - Energy Intensive Co2 ↑