Question
GSMediumPrelims 2022Science & Technology

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?

Explanation

Statement 1 is Correct: NFTs enable the digital representation of physical assets through a process called tokenization. This allows real-world items such as real estate, physical artwork, or luxury goods to be represented by a digital token on a blockchain, facilitating easier transfer of ownership and reducing fraud.

Statement 2 is Correct: NFTs are unique cryptographic tokens that exist on a blockchain, which is a distributed ledger technology. Unlike cryptocurrencies like Bitcoin, which are fungible, each NFT has a unique identification code and metadata that distinguishes it from any other token.

Statement 3 is Incorrect: NFTs are "non-fungible," meaning they cannot be traded or exchanged at equivalency. Fungible assets, like fiat currency or Bitcoin, are identical to each other and can be used for commercial transactions. Because every NFT is unique and has a different value, they cannot function as a standard medium of exchange.

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