From UPSC perspective, the following things are important :
Prelims level : Non-Fungible Tokens
Mains level : Challenges associated to Cryptocurrency
A French luxury fashion brand is suing American digital artist who created a series of NFTs (Non-Fungible Tokens), a rapidly growing part of the cryptoworld.
- An NFT is a unique, irreplaceable token that can be used to prove ownership of digital assets such as music, artwork, even tweets and memes.
- 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).
- Cryptocurrencies such as Bitcoin and Ethereum are also fungible, which means that one Bitcoin can be exchanged for another.
- But an NFT cannot be exchanged for another NFT because the two are different and therefore unique.
- Each token has a different value, depending on which asset it represents.
How does NFT transaction take place?
- 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 monetize their work.
Why are they in high demand?
- One of the other attractions is that NFTs are a part of a new kind of financial system called decentralized finance (DeFi), which does away with the involvement of institutions such as banks.
- For this reason, decentralized finance is seen as a more democratic financial system because it makes access to capital easier for lay people by essentially eliminating the role of banks and other associated institutions.
- Even so, because NFTs operate in a decentralized system, any person can sell a digital asset as one.
- This can sometimes create problems. For instance, if you were to sell someone else’s artwork as an NFT, you could essentially be infringing on a copyright.