Every bullish cycle in the crypto markets, a new trend emerges that contributes to the seemingly unstoppable upwards momentum. In 2017, it was the advent of ICOs that made prices skyrocket. This time around, the market has been mainly driven by the rise of DeFi and the adoption of NFT by artists, gamers, and mainstream investors.
However, the latter has stirred up some controversies. While many artists have embraced NFTs as a better, decentralized way to distribute their art, a large part of the community hasn’t been very enthusiastic about them.
One major reason behind this backlash is the undeniable environmental impact of NFTs. In an age where conserving every smidgeon of your planet’s resources seems extremely important, they stick out like a sore thumb. To top things off, many regard NFTs as an ultra-capitalist vehicle that has very little use than just making money for the already-rich.
However, all of this NFT hate often takes its source in misinformation. People are misled by falsehoods about NFTs and simply follow the “NFTs are BAD” movement because they don’t understand how they work. In this article, we try to remedy this fact and help you understand what NFTs are by exploring both their good and bad sides. We will also try to assess the real environmental impact of NFTs and whether you should be worried about an eventual mass adoption.
NFTs in a Nutshell
To understand why NFTs are valuable, let’s open a short parenthesis on how blockchain works, for those unfamiliar with the concept. Blockchain relies on an immutable, decentralized ledger that permanently records every transaction. And thanks to asymmetric cryptography, it offers full ownership of the assets that exist within its network.
At first, we could only transact with digital assets such as Bitcoin or Litecoin. However, with the implementation of smart contracts, we gained the ability to tokenize almost anything of value. Now, records on the blockchain can include advanced metadata, and contain text, visuals, audio, and other unique characteristics. And because they are unique in their metadata, these blockchain assets cannot be easily exchanged for one another. Hence the name – non-fungible tokens or NFTs. For a complete overview of NFTs, check out our previous article on the subject.
But What Does an NFT Really Do (and Doesn’t Do)?
Because NFTs are mainly used as a vessel for digital art, people think that’s their main purpose. Also, many believe that because they reside on the blockchain, they provide copyright claims to the art attached to them. However, both of these statements could not be further from the truth.
As we mentioned previously, we can use NFTs to record nearly anything of value. Art is just one of the hundreds of different applications, as an NFT can represent anything – from digital collectibles, gaming items, metaverse clothing, digital tickets for real-world events, even deeds to your vehicle. As such, it’s to no one’s surprise why many consider them as the foundation of the Internet of Assets.
Thanks to NFTs, individuals can exchange their virtual and real-world assets with one another, without having to go through an intermediary. For example, if your property deed is recorded as an NFT, you could transfer the ownership of real estate on the blockchain. The advantage here is that this transaction remains transparent and verifiable. At the same time, it doesn’t require expensive third-party involvement like brokers and won’t trigger a tedious administrative procedure. In a nutshell, an NFT provides proof of ownership to the person that holds the private key of the asset.
On another note, NFTs do not provide copyright rights when minted as digital art. The NFT acts as a certificate of authenticity, one that can be easily verified on the blockchain. While incredibly useful for collectors, this doesn’t imply that malicious actors cannot copy or pirate the artwork.
Why All the Hype?
With everyone staying at home due to the pandemic, digital art literally exploded in popularity. However, that doesn’t really paint the complete picture of why there is so much hype around them lately. To help you understand this (to an extent), let’s deconstruct the reasons behind the NFT craze.
- Artist empowerment – one of the main reasons why NFTs are so popular with artists, it because of the freedom they provide. They allow artists to monetize their art immediately, without having to go through tedious curations, biased third parties, or costly reproductions. Moreover, the NFT smart contracts allow them to program in royalties that will bring passive income from every subsequent sale of the artwork.
- Utility – as we mentioned earlier, NFTs are more than just artworks. They can have various utilities in different ecosystems and we can use them to power entire metaverse economies.
- Collectibility – thanks to the verifiability of NFTs, digital assets can be collected, with every copy recorded on the blockchain. Their origin, and owners, past and present, are meticulously documented, which adds value for collectors.
- Exclusive access and bragging rights – owning a rare NFT gives the collector bragging rights. However, these rights can extend to VIP access to exclusive clubs frequented by Hollywood celebrities and social media personalities.
- Speculation – with the hype going through the roof, so did the prices. With some creations selling for millions of dollars, speculators flocked the markets to find “the next Cryptopunks”.
- Possible money laundering – one of the most deplorable aspects of NFTs is that they have often been linked to money laundering schemes. Unscrupulous “collectors” buy NFTs at pumped-up prices to get rid of dirty money. They then sell them to blur traces of their misdoings.
All of these factors combined have contributed to NFTs becoming one of the most talked-about trends in crypto and beyond. However, this increase in popularity unearthed some of their worst aspects and spurred up the environmental impact of NFTs debate.
Environmental Impact of NFTs – The Dark Side of NFTs
Just like cryptocurrencies, NFTs have the stigma of being bad for the environment. While this aspect doesn’t apply to all cryptocurrencies (mainly to Bitcoin and Ethereum), it’s a huge problem in the NFT ecosystem.
This is because artists mint most NFTs on the Ethereum network, which currently relies on a proof of work (PoW) consensus mechanism. Consequently, minting a single NFT requires ungodly amounts of electricity. Then there’s the transactions, listings on marketplaces, sales, purchases, transfers between users or wallets… Every single of these actions requires a separate transaction that the Ethereum network needs to compute and record on its blockchain.
As a point of reference, Digiconomist’s ongoing study about Ethereum’s energy consumption is showing a huge increase in power consumption since the beginning of 2021. This eerily coincides with the increase in popularity of the NFT and DeFi markets.
But Why do NFTs Consume So Much Power?
The main culprit in this narrative is Ethereum’s proof of work consensus mechanism. You see, Ethereum relies on miners to validate its transactions on the network. In PoW, miners compete with each other to solve increasingly complex mathematical problems using powerful computer hardware. Once the puzzle is solved, a consensus between the miners is reached and a new block of transactions is added at the end of the blockchain.
The protocol rewards the miner with new ETH tokens, as well as the gas fees in that block of transactions. This process serves two essential objectives: to validate the transactions, and secure the network from hacker attacks.
While PoW is a great consensus model for decentralization, it’s far from optimal from a scalability point of view. Ethereum is supposed to serve as a global supercomputer, which means that millions, even billions of users should be able to access it at all times. However, as the number of users increases, so does the number of transactions that need to be validated.
The algorithm adјusts as more miners join the network, requiring more powerful machines and more electricity to solve each puzzle. As a result, the hardware reaches a saturation point, where it becomes excessively expensive to validate transactions.
How Much Carbon Does an NFT Produce?
What’s more, various studies show how much electricity a single Ethereum transaction consumes. And the results are quite alarming, with more than 220kWh used for a single transaction on the Ethereum network. To put this into perspective, this equates to the electrical consumption of an average household over a period of 7 days. Or, in transaction terms – to more than 100.000 Visa transactions!
Let’s assess how much CO2 a single NFT generates during its lifetime with a quick example.
- Minting transaction: 220kWh
- NFT sale on the marketplace: 220kWh.
- Payment on the network: 220kWh.
We spent a grand total of 660kWh to create and sell a single NFT. Rensmart’s handy Carbon Emissions Calculator equates this to a whopping 153Kg of CO2 released in the atmosphere.
Considering that the voluntary target for PACA (Personal Annual Carbon Allowance) is around 4660 kg CO2 per person per year, a single NFT will already spend 3% of that amount. Now, imagine a single artist creating a collection of 1000 NFTs on Ethereum, with all of them getting sold within minutes. The PACA of that artist would go through the roof, and so would those of everyone involved in the process.
That said, you should take these numbers with a grain of salt. None of the studies we encountered take into consideration the percentage of Ethereum mining done through sustainable energy sources. Consequently, estimates might be on the higher end of the spectrum and not reflect reality.
Should You Avoid NFTs Altogether?
NFTs have some undeniable benefits for those that use them. Now, whether these benefits justify their usage, is a matter of personal opinion. Not all people are willing to do their part in reducing greenhouse gas emissions. Some consider that NFTs add too much value and that they cannot ignore this potential wealth indefinitely.
Moreover, with the upcoming metaverse revolution, the adoption of NFTs seems like an inevitable outcome. They will be crucial at allowing individuals to conserve the value of their digital items in the real world. Conversely, they will be able to tokenize real-world items into the virtual world.
Consequently, avoiding NFTs all together might be a personal choice but would equate to trying to put out a bushfire with a spoonful of water. There are, however, some developments in the technology that allow us to have high hopes for a more sustainable NFT future.
How Can We Reduce the Environmental Impact of NFTs?
Not everything is bleak in the NFT ecosystem. Below are some existing and upcoming solutions that can allow us to adopt NFTs in an ethical and sustainable manner.
Scalable Layer 1 Eco-Friendly Blockchains
With all this in mind, you might be tempted to quickly jump on the hate bandwagon, grab a pitchfork and join the anti-NFT crusade. However, not all NFTs are equal regarding their environmental impact. Remember how we pointed out that “Bad NFTs” reside on Ethereum?
There are other blockchains out there that use much more scalable consensus mechanisms than Ethereum’s PoW. In the past couple of years, we’ve seen the emergence of eco-friendly blockchains such as Tezos, Cardano, Solana, Binance Smart Chain, and Polkadot just to name a few.
All of these use scalable and sustainable consensus models that require a fraction of the energy cost needed to mint NFTs on Ethereum. As such, they provide eco-conscious NFT artists with an environmentally friendly alternative. At the same time, they provide metaverses with a platform for sustainable microtransactions, providing speed, and low energy consumption.
Ethereum 2.0 in 2022
But despite all that, migrating established NFT marketplaces onto a new blockchain is costly, and often impossible. Fortunately, we are getting closer to the Ethereum 2.0 update every day. During this highly anticipated event, the entire PoW Ethereum blockchain will migrate to a more scalable proof-of-stake (PoS) consensus. Transactions will become much cheaper, faster, and won’t depend on the size of the userbase anymore.
However, the most important aspect of this narrative is we can expect the energy consumption of the network to drop by 99%. This should finally put the entire environmental impact of NFTs debate to rest.
Layer 2 Scaling Solutions
In the meantime, there are additional solutions to increase the computational output of Ethereum, while simultaneously reducing its energy consumption. Layer 2 Solutions like Polygon compute transactions off the Ethereum chain and alleviate the weight from the main chain.
This means that they batch thousands of transactions using a sustainable consensus model, then roll up the result of the computation in a single transaction. Consequently, the computational effort on the initial blockchain (in this case, Ethereum) is minimal.
Some of the best NFT marketplaces like OpenSea have already integrated Polygon into their offering. They allow artists to directly benefit from this scalable solution when creating and selling NFTs.
As a last resort, we can fall onto carbon offsetting to negate the carbon created by NFT minting. In this process, NFT artists and marketplaces can purchase carbon credits to match the expected emissions and become carbon-neutral.
However, as we already debated in our Toucan Protocol review, carbon offsets are a controversial mechanism. They can be an incentive for companies to continue polluting instead of making the effort of switching to a more sustainable solution. In this day and age, we should be thinking about reducing emissions first and foremost. Compensation with carbon credits should be a last-ditch effort when everything else has failed.
The climate crisis is becoming increasingly alarming. We should consider detrimental any little thing that contributes to undermining humanity’s efforts to fight climate change. This, unfortunately, includes NFTs, no matter how much we like them for their potential benefits.
Their current usage is nothing short of wasteful as digital art has very little use and ultimately favors the rich. What’s worse, everyone and their mother is creating NFTs. Regardless of the quality of the art itself or the strain on our natural habitat, people are pumping out NFTs with the hope to make a buck. As such, we can’t really blame all the naysayers for taking a firm stance against NFTs and everything they stand for.
Even with that in mind, the future doesn’t look as grim. There are palpable solutions out there that allow artists and developers to launch green NFTs. You can already check out our previous article on how to sell NFTs ethically. And with the upcoming PoS update for Ethereum in 2022, the environmental impact of NFTs should be greatly reduced in the immediate future.