Why are NFTs bad for the environment?

With global concern over the environmental impact of non-fungible tokens (NFTs), there is a growing movement to limit energy-intensive mining and trading of crypto-assets on the blockchain.

Manoj Phatak, Founder & CEO, ArtRatio

Manoj Phatak, Founder & CEO, ArtRatio

In a Nutshell

In a nutshell, NFTs are currently bad for the environment because the energy expended by mining and trading them on underlying blockchain technologies requires enormous amounts of electrical power.

And, by enormous, I mean country-sized.

And by countries, I am referring to Finland or Belgium.

This data comes from the University of Cambridge – Centre for Alternative Finance (CAF), which states that Bitcoin currently (as of July 2022) consumes more electricity than Finland or Belgium.

Let that sink in for a moment.

The other big (open source) blockchain is Ethereum, which according to Digiconomist faces a similar problem:-

“A single NFT transaction on the Ethereum platform emits approx. 81 kg of carbon dioxide, equivalent to the carbon footprint of 180,743 VISA transactions or 13,592 hours of watching Youtube” [as calculated in July 2022].

It gets worse:

If we sum Bitcoin and Ethereum, their total energy consumption currently sits in between Thailand and Indonesia.

Let’s Dig Deeper

However, and as Cambridge CAF themselves say, these country-comparison statistics are often taken out of context and ignore the benefits created by the crypto industry, such as new jobs, new wealth and new opportunities.

The above data also ignores the fact that, according to British Petroleum’s Statistical Review of World Energy, 82% of all that darned electricity currently comes from fossil fuels.

(Not the kind of thing you would expect BP to be shouting from the rooftops.)

So, what if we were to succeed in moving all electricity-generation to renewables?

Poof !!

The energy used by NFTs would be clean.

Great, right?

Not so fast.

This still does not resolve the fact that energy-hungry NFTs will be competing with households, hospitals and schools trying to keep us warm, care for us and feed our kids.

Feeling guilty yet?

Google: Please translate the above to English

OK, I am getting ahead of myself, so let’s get some jargon out of the way:-

Firstly, an NFT is a “non-fungible token”.

By “Non-Fungible”, I mean “Unique” (like the Mona Lisa).

(Yes, I know there are at least three other Mona Lisa’s painted by Leonardo da Vinci or his students, apart from the one at the Louvre, but you get the point, right?)

As I was saying:

By “Non-Fungible”, I mean “Unique”.

By “Token”, I mean a “digital asset”, i.e. a digital file that can be stored on a device, like a JPEG image.

So an NFT is simply a “unique digital asset”, which happens to be stored on something called a ‘blockchain’.

And, unless we (and I mean you) have been living under a rock for the past 10 years, we (you) should know that a blockchain is just a database.

A database that does not reside on just one computer though, but rather one that is ‘distributed’ across many computers (each computer having its own copy).

Hence, a blockchain is a ‘distributed database’.

And this database uses some damn-fancy security to ensure that all data is converted into seemingly-random strings of characters (i.e. ‘encrypted’) with some Matrix-like numbers that drip down your screen.

Really?

OK, maybe I made up the ‘dripping numbers’ thing.

Anyway:

This ‘cryptographic’ (read: ‘fancy’) encryption ensures that a fraudulent change to one copy of the blockchain database (on one computer) will be flagged among the entire community of ‘peers’ who have a copy of that same blockchain database.

And since each peer can view the entire blockchain, we no longer need a central authority (like a central bank) to verify ownership of the assets stored on the blockchain.

All peers now have that visibility vested in them.

What was the question again?

Ah yes, the environment.

But before we talk about that, let’s take a further look at ‘blockchains’.

Wait, you say – there is more than one??

Yes, there is more than one – just as there is more than one database out there.

A word about Block chains

Firstly, blockchains can be Public (i.e. available to all and self-governed) or Private, which means they are owned by a corporation, who need to give you permissions to use their blockchain.

The ‘new kid on the block’ (could not resist that one) is the ‘Permissioned Blockchain’, which mixes characteristics of both Public and Private blockchains to allow more customisation.

Irrespective of the type of blockchain, it is on them that we create and trade NFTs.

What can NFTs represent?

NFTs can represent anything, from a collage of digital art, to Jack Dorsey’s first Tweet, to pictures of bored apes.

They could also represent sounds, smells, and tastes (as long as they can be digitised).

So, perfume manufacturers and Michelin-starred chefs – have you woken up yet to the possibilities?

There is nothing stopping you from making an NFT of the scent adorned by some Hollywood diva while she received her Academy Award.

Or making an NFT of the sumptuous meal you served to a head of state at a crucial, world-changing summit.

Your perfume (or your meal) would be encoded into history.

And that is worth collecting.

Coming back to the collage of digital art, and to put the economics of NFTs in context, it was the digital artist called Beeple (otherwise known as Mike Winkelmann), whose creation entitled “Everydays: The First 5000 Days” sold in 2021 at Christie’s for a blockchain-thumping $69 million.

Assuming some ‘environmental guilt’ then set in, Mr. Winkelmann now intends to invest his money in renewable energy and conservation projects that remove CO2 from the atmosphere.

Getting the picture?

But, is this really so different from corporate CEOs who claim carbon-neutrality across their 500,000-strong workforce whilst also flying around (alone) in private jets?

How does carbon get into NFTs anyway?

The carbon is not really ‘in’ the NFT, but gets generated when creating or trading them.

We have talked about the energy-intensive process of creating NFTs, but we need to dig a little deeper to understand ‘operational carbon’ vs ‘embodied carbon’, terms that the construction trade is hearing a lot of lately.

We don’t however hear these terms when talking about NFTs.

The ‘embodied carbon’ associated with an NFT represents the carbon emissions resulting from its creation.

The ‘operational carbon’ refers to the energy consumed during the lifetime of the NFT, i.e. when it is traded on an exchange, like OpenSea, which is built on Ethereum.

So we must sum ‘embodied’ and ‘operational’ carbon to understand the whole picture about carbon emissions due to NFTs.

In both cases though, the problem comes down to the set of rules (or ‘consensus protocols’) used to ensure security and transparency on the blockchain.

The two most popular mechanisms are ‘Proof of Work’ and ‘Proof of Stake’:

Proof of Work (PoW)

In the case of the Ethereum blockchain, Proof of Work currently consumes about 73 TeraWatt-hours of energy every year, which is approximately the energy consumed by Austria.

Why so much?

Because the proof involves asking a computer to perform some arbitrary but (very) sizeable number-crunching, which consumes A Lot of Energy.

Proof of Work (PoW) is based on computers (called ‘miners’) that run software to compete for the ‘pot of gold at the end of the blockchain’, comprised of some cryptocurrency (e.g. Bitcoin) in return for being the first to solve this number-crunching operation.

Don’t forget, the reason we need Proof of Work to be difficult, both in money, time and effort, is to dissuade Any Old Joe with fraudulent intentions from trying to tamper with the process.

A bit like putting a lock on your front door.

The harder it is to break or prise open, the less likely any passing stranger will be tempted to try to break into your house and steal your digital device holding all your NFTs.

Or worse – the Mona Lisa hanging on your wall.

(Yeah, right!)

The trouble is, this particular consensus protocol does require large complicated equipment to consume very large amounts of electricity.

Hence the problem.

But there are other ways to reach consensus, such as Proof of Stake.

Proof of Stake (PoS)

The Proof of Stake (PoS) consensus protocol requires no such number-crunching.

Rather, it requires each ‘worker’ to put down a ‘deposit’ (of cryptocurrency) in order to be eligible to create ( i.e. ‘mine’ or ‘mint’) a new block on the chain.

With Proof of Work (PoW), the workers (‘miners’) do not need to deposit their own cryptocurrency to take part.

So unfortunately, PoS is seen by some to favour richer participants, since you need to put some ‘skin in the game’, and this can be interpreted as reducing the ‘democratisation’ of blockchains.

On the flip side, PoW does require a large investment in specialised equipment, so one could also counter that PoW reduces the democratisation of blockchains.

To complicate things further, the very design of PoW favours mining pools, or clusters of mining servers, which tilts the balance further against the very decentralisation that blockchain aims to achieve.

And to put the icing on the NFT, since PoS is relatively ‘easier’ to implement, it is said to raise concerns about security, as it is more likely to be hacked.

A bit like putting a ‘smaller lock’ on your door.

So, you see, there is no easy answer.

Anyone who says there is, is telling “porky pies” (Cockney rhyming slang for ‘lies’).

What are we doing about this?

The private-led initiative, the Crypto Climate Accord, inspired by the Paris Climate Agreement, is focused on decarbonising the cryptocurrency industry, and has the backing of such players as KPMG, Salesforce and some 200 other companies and individuals.

NFT-system-change-not-climate-change

The initiative called Change the Code, Not the Climate, has the backing of Greenpeace and the Environmental Working Group, and intends to lobby crypto-influencers, such as Elon Musk of Tesla and Jack Dorsey of Block, to promote greener consensus protocols such as Proof of Stake (despite the concern over its lack of security).

‘Change the Code’ also claims that Bitcoin could reduce their energy usage by 99% by moving to PoS.

Since Ethereum also currently uses PoW, this also applies to them.

However, Ethereum has stated their intention to move to a PoS-compliant algorithm during 2022.

So, watch this space.

I mean, not literally.

Please scroll down.

Should Governments not be getting involved in this?

Glad you asked.

In fact, in 2021 the Swedish Financial Supervisory Authority and the Swedish Environmental Protection Agency claimed that rising energy usage, due to cryptocurrencies, is threatening Sweden’s ability to meet their obligations under the Paris Climate Agreement.

They are now calling for the European Union to ban energy-intensive crypto-mining based on Proof of Work.

They are also calling for companies that trade and invest in crypto assets to be prohibited from describing their business activities as ‘environmentally sustainable’.

Pretty strong stuff.

Even if the EU followed through on this though, we may see the same result as when China banned all dealing in cryptocurrencies in 2021.

This only resulted in miners moving away from China to Kazakhstan and to the USA, replacing the hydropower-based electrical consumption from the Chinese provinces of Sichuan and Yunnan with coal and gas in Kazakhstan and the USA, respectively.

So the carbon-hungry nature of NFTs actually got worse when China banned cryptocurrencies.

In Sept 2020 the European Commission proposed the ‘Markets in Crypto Assets’ (MiCA) legislation to govern digital assets.

It was not until 30th June 2022 though that the European Parliament finally reached a provisional agreement on the MiCA proposal, “requiring actors in the crypto-assets market to declare information on their environmental and climate footprint”.

Furthermore, by 2024, the European Commission has agreed to “provide a report on the environmental impact of crypto-assets and introduce mandatory minimum sustainability standards for consensus mechanisms, including proof-of-work”.

That sounds like a win to me.

Cryptic Summary

In conclusion, NFTs do currently consume very large amounts of energy.

Of that, there can be no doubt.

The numbers do not lie.

But how much is too large?

By criticising NFTs, are we not just jumping on the bandwagon without looking at all the data?

Are initiatives to offset NFT-driven carbon emissions by planting new trees, or investing in carbon capture technologies not an equitable countermeasure?

Can trading in crypto assets ever be environmentally ethical?

Can the airline industry ever be environmentally ethical?

What did Johnny Depp say to Amber Heard when he finally spoke to her?

These questions might seem pointless, until the next time we hear of cyclones in Fiji, sandstorms in China, flooding in Australia, soaring temperatures in the US or record-breaking snowfall in Spain.

And that was just in 2021.

References

NFTs and the Environment: Why the Anger Is Unjustified – NFT Now

The Climate Controversy Swirling Around NFTs – The Verge

NFTs and the Environment – Investopedia

Are NFTs bad for the environment? – Dept Agency

A single change in Bitcoin’s coding could reduce its carbon footprint by 99% – Euronews

Europe must ban Bitcoin mining to hit the 1.5C Paris climate goal – Euronews

Bitcoin mining is actually worse for the environment since China banned it – Euronews

Digital finance: agreement reached on European crypto-assets regulation (MiCA) – European Council Press Release

Share this post