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?

  • 1 and 2 only
  • 2 and 3 only
  • 1 and 3 only
  • 1, 2 and 3

Answer: (a) 1 and 2 only

Non-Fungible Tokens (NFTs)
  • Non-Fungible Tokens (NFTs) are unique cryptographic tokens that exist on a blockchain and cannot be replicated.
  • They can represent digital or real-world items like artwork, photograph, song,  video, real estate, individuals’ identities, property rights, and more.
  • Thus, NFTs are assets that have been tokenized via a blockchain. They are assigned unique identification codes and metadata that distinguish them from other tokens.
  • The term ‘non-fungible’ simply means that each token is different as opposed to a fungible currency such as money (a ten-rupee note can be exchanged for another and so on).
  • NFTs can be traded and exchanged for money, cryptocurrencies, or other NFTs—it all depends on the value the market and owners have placed on them.
    • Physical money and cryptocurrencies are “fungible,” meaning they can be traded or exchanged for one another. They’re also equal in value—one dollar is always worth another dollar; one Bitcoin is always equal to another Bitcoin. Crypto’s fungibility makes it a trusted means of conducting transactions on the blockchain. NFTs are different. Each has a digital signature that makes it impossible for NFTs to be exchanged for or equal to one another (hence, non-fungible).
  • NFT transactions are recorded on blockchains, which is a digital public ledger, with most NFTs being a part of the Ethereum blockchain. 
  • NFTs became popular in 2021, when they were beginning to be seen by artists as a convenient way to monetise their work.
Blockchain Technology
  • A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. 
  • Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger.
  • Decentralized blockchains are immutable, which means that the data entered is irreversible. 
  • This means if one block in one chain was changed, it would be immediately apparent it had been tampered with.