With reference to Non-Fungible Tokens (NFTs), consider the following statements.
- They enable the digital representation of physical assets.
- They are unique cryptographic tokens that exist on a blockchain.
- 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?
Detailed Explanation:
Answer: Option 1 — 1 and 2 only
Non-Fungible Tokens (NFTs) are unique cryptographic tokens on blockchain that enable digital representation of physical or digital assets. However, unlike fungible assets, NFTs cannot be traded at equivalency since each token has a unique value and characteristics, making them unsuitable as a standard medium of commercial transactions.
✅ Statement 1 – Correct: NFTs enable digital representation of physical assets through tokenization, allowing real-world items like real estate, artwork, or luxury goods to be represented on blockchain, facilitating ownership transfer and reducing fraud.
✅ Statement 2 – Correct: NFTs are unique cryptographic tokens that exist on a blockchain with distinct identification codes and metadata that differentiate each token from others, unlike fungible cryptocurrencies like Bitcoin.
❌ Statement 3 – Incorrect: NFTs are non-fungible by definition, meaning they cannot be traded or exchanged at equivalency; each NFT has unique characteristics and value, unlike fungible assets (fiat currency, Bitcoin) that can serve as standard medium of exchange.
📝 Short Notes: Non-Fungible Tokens (NFTs)
- Definition: Unique digital identifiers recorded on blockchain that certify ownership and authenticity of specific digital or physical assets
- Key Characteristic: Non-fungibility means each token is unique and cannot be replaced or exchanged on a one-to-one basis
- Technology: Built on blockchain platforms like Ethereum, using smart contracts to enforce ownership and transfer rules
- Applications: Digital art, collectibles, gaming assets, virtual real estate, music rights, and tokenization of physical assets
- Difference from Cryptocurrency: Cryptocurrencies are fungible (interchangeable), while NFTs are unique with distinct values
- Tokenization: Process of converting rights to an asset into a digital token on blockchain
- Limitations: Cannot function as medium of exchange due to non-fungibility; high energy consumption concerns; speculation and volatility issues
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