Today’s edition of the Current Affairs Dialog box comprises a discussion on Non-Fungible Tokens, and how it is relevant to UPSC exam preparation.
Its relevance For Prelims: Non-Fungible Tokens, and
For Mains: Difference between Non-Fungible Tokens and Cryptocurrencies, Importance of 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.
With the onset of non-Fungible tokens and cryptocurrencies, the financial architecture of the world is poised to make a shift. Discuss
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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