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? (UPSC Prelims 2022)
Answer: 1 and 2 only
Notes: The correct answer is [A] 1 and 2 only. Non-Fungible Tokens (NFTs) are unique digital identifiers recorded on a blockchain that certify ownership and authenticity.

• Statement 1 (Correct): NFTs enable the digital representation of physical assets, such as real estate, artwork, or collectibles. By "tokenizing" these physical assets, they can be bought, sold, and traded more efficiently while reducing the probability of fraud.
• Statement 2 (Correct): NFTs are unique cryptographic tokens that exist on a blockchain (most commonly Ethereum). Unlike cryptocurrencies, each NFT contains specific identifying information or metadata that makes it distinct from any other token.
• Statement 3 (Incorrect): This statement describes "fungibility." NFTs are non-fungible, meaning they cannot be traded or exchanged at equivalency. For example, one Bitcoin is equal to another Bitcoin (fungible), but one NFT of a digital painting is not equal to an NFT of a different video clip. Therefore, they cannot be used as a standard medium of commercial transactions like currency.

The core value of an NFT lies in its scarcity and indivisibility. While you can send someone 0.5 Bitcoin, you generally cannot send someone a fraction of an NFT (unless using specific fractionalization protocols, which are not the standard definition).