Non-Fungible Tokens

Why in the News?

The sales of Non-Fungible Tokens (NFTs) surged $25 billion in 2021, according to market data tracker DappRadar data analytics.

Probable Question

With the onset of non-Fungible tokens and cryptocurrencies, the financial architecture of the world is poised to make a shift. Discuss

Key Points

About Non-Fungible Tokens

• A Non-Fungible Token or NFT is a unit of data that is stored on a digital ledger (blockchain) and can be sold and traded.
• NFT ledgers claim to provide a public certificate of authenticity or proof of ownership.
• Digital art, images, videos, text, music, and even virtual real estate and in-game items can be bought and sold as NFTs.
• It is backed by Blockchain technology.
• Terra Nullius was the first NFT on Ethereum Blockchain.
• Anyone who holds a cryptocurrency wallet can buy an NFT without going through KYC norms.
• Some of the largest NFT marketplaces of NFTs are: OpenSea.io, Rarible.

What do the terms ‘Fungible’ and ‘Non-Fungible’ Imply?

• Money is an example of a fungible entity, which means that one rupee can be exchanged for another.
• By definition, a non-fungible token is not comparable to another non-fungible token which means that each NFT is either one-of-a-kind or part of a very limited run, and each has its own unique code. 

How do NFTs Work?

• NFT works on blockchain as it gives users complete ownership of a digital asset. 
• NFTs can have only one owner at a time. 
• Apart from exclusive ownership, NFT owners can also digitally sign their artwork and store specific information in their NFT’s metadata.

Also read: Best Way To Prepare Economy For UPSC Prelims

Difference Between NFT and Cryptocurrency

• Cryptocurrency is a currency and is fungible, meaning that it is interchangeable.
  •  For instance, if you hold one crypto token, say one Ethereum, the next Ethereum that you hold will also be of the same value. 
• However, NFTs are non-fungible, which means the value of one NFT is not equal to another. Every art is different from others, making it non-fungible, and unique.

Risks Involved in NFTs

• The emergence of fake marketplaces, unverified sellers often impersonating real artists, and selling copies of their artworks for half prices are major challenges.
• Trading NFTs involves technical processes that are sometimes misunderstood -- and that can lead to investors not knowing quite what they are dealing with.
• NFTs can have a negative impact on the environment.
  • In order to validate transactions, crypto mining is done, which requires high-powered computers that run at a very high capacity, affecting the environment ultimately.

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Importance of Non-Fungible Tokens

• Non-fungible tokens are an evolution over the relatively simple concept of cryptocurrencies.
• Modern finance systems consist of sophisticated trading and loan systems for different asset types, ranging from real estate to lending contracts to artwork.
• By enabling digital representations of physical assets, NFTs are a step forward in the reinvention of this infrastructure.

News Source: The Indian Express

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