Q. With reference to 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 are correct?
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
Correct Answer: a) 1 and 2 only
Question from UPSC Prelims 2022 GS Paper
Explanation :
Non-Fungible Tokens (NFTs)
Non-Fungible Tokens (NFTs) are indeed a unique and interesting development in the world of blockchain and digital assets. Let’s go through the statements one by one:
1. Digital Representation of Physical Assets
They enable the digital representation of physical assets. This statement is correct. NFTs are often used to represent unique items, both digital and physical, in the digital realm. This could include artwork, collectibles, and even real estate. By tokenizing these assets, they can be bought, sold, and traded more easily while maintaining a clear record of ownership.
2. Unique Cryptographic Tokens
They are unique cryptographic tokens that exist on a blockchain. This statement is also correct. NFTs are unique because they are not interchangeable with other tokens on a one-to-one basis, which is what “non-fungible” means. Each NFT has a distinct value and properties, unlike cryptocurrencies like Bitcoin or Ethereum, which are fungible and can be exchanged on a one-to-one basis. NFTs are stored on a blockchain, which is a decentralized digital ledger that records all transactions.
3. Trading and Exchange Equivalency
They can be traded or exchanged at equivalency and therefore can be used as a medium of commercial transactions. This statement is incorrect. The key characteristic of NFTs is that they are non-fungible, meaning they do not have a set equivalency with other tokens or assets. Each NFT is unique and cannot be exchanged on a like-for-like basis, unlike fungible tokens such as Bitcoin or traditional currencies. While NFTs can be bought and sold, their value is subjective and determined by factors such as rarity, desirability, and the market demand for that particular asset.
Therefore, the correct statements are 1 and 2 only, making the correct answer “1 and 2 only.” NFTs enable the digital representation of physical assets and are unique cryptographic tokens that exist on a blockchain, but they cannot be traded or exchanged at equivalency like fungible tokens.
