Are NFTs Bad for the Environment?

We recently had a conversation with an aspiring artist about the possibility of him uploading his digital drawings onto the blockchain as non-fungible tokens (NFTs).  We learned about him through the beautiful work he shared on his social media accounts.

We thought he was the kind of person who would find the concept of NFTs interesting and even liberating. Instead of sharing his digital drawings on Instagram, Twitter, and Facebook, he could more securely publish them on the blockchain through digital assets known as Non-Fungible Tokens or NFTs.

An NFT is a unique one-of-a-kind tradeable token using smart contract technology that can’t be replaced. An NFT is also attached to something like pictures, videos, artwork, music, or even physical assets making it quite an interesting and exciting development in the digital asset space.  

Blockchains are public platforms on decentralized networks. They give artists and investors full control of published artworks, maintain rarity, and provide transparent and secure means to determine original copies.

On social media, the artwork could be duplicated into many copies as other users download and upload. It might be difficult to tell the original copy, especially if the artist loses their social media account or when they choose to sell the artwork, which then changes ownership numerous times.

Besides, the blockchain can expose an artwork to a wider global market and more monetization options.

For example, the artist can design the underlying smart contract so that they automatically receive a percentage of the price every time the artwork is traded anywhere in the world, which is more traditionally known a royalty fee.  That could be an infinite source of revenue, especially as it gains value with time and exposure.

The artist we talked to turned out to know all this about NFTs. He believed it was great technology that could improve how things are done in the art industry. However, he had a major concern and was not willing to put his art on the blockchain.

He believed that blockchain technology, especially when used to support NFTs, posed a danger to the environment. He did not want his artwork’s storage, sharing, and trading to contribute to greenhouse emissions.

This was not the first time we heard about this concern. However, it was the first time we heard it from an artist. The media is littered with many articles and news pieces explaining how NFTs are dangerous to nature.

For example, in March 2021,  Wired published an article titled ‘NFTs Are Hot. So Is Their Effect on the Earth’s Climate.’ In April of the same year, The New York Times published its own article headlined ‘NFTs Are Shaking Up the Art World. They May Be Warming the Planet.

Indeed, this is also a topic on many online and offline forum.

But is it true that NFTs are a danger to the environment?

In a nutshell, this is both true and false.

The part that is true

NFTs are seen as a threat to the environment because of the effort required in their uploading (minting) and transferring (trading) on the blockchain.

On a centralized platform such as Instagram, uploading and sending a digital asset like an image or video is carried out or guided by a single computer (server). The process is controlled from a single point.

On the blockchain, however, numerous independent computers on a peer-to-peer network, often thousands in number, have to form a consensus on every transaction.

Blockchain can consume a lot of energy to form a consensus on how each transaction is processed. The computers on some peer-to-peer networks compete to solve a difficult mathematical problem. A process that consumes a significant amount of electricity.

The winning computer is assigned the responsibility of updating the shared public ledger on behalf of the network. In return, it is awarded the newly released coins in that period.

This form of consensus mechanism is known as Proof of Work (PoW). Meanwhile, the entire process of competing to solve a mathematical problem, updating a shared public ledger, and getting rewarded with newly released native digital currency is known as mining.

Proof-of-Work was the first-ever consensus mechanism to be used on blockchain networks. Nevertheless, it predates blockchains.

The concept of having computers find a solution to a complex mathematical problem and, in the process, consumes a significant amount of energy was invented in 1993 by computer scientists Cynthia Dwork and Moni Naor.

The system was initially designed to help stop denial-of-service and spam attacks on computer networks. It created a time and electricity cost for anyone who decided to launch such attacks.

In 1997, the British cryptographer and computer scientist Adam Back built on top of it under the name Hash cash. But the phrase proof-of-work (PoW) was coined in 1999 by Markus Jacobsson, a computer security researcher, and Ari Juels, a computer engineering professor at Cornell University.

When designing the Bitcoin blockchain architecture, Satoshi Nakamoto decided to use proof-of-work as the mechanism through which consensus on how the shared public ledger is updated. At the same time, the technology offered a security layer that protects the Bitcoin network from external attacks.

Overall, Proof-of-work is highly effective because it incentivizes the computers on the network to perform in the best interest of the network and, at the same time, penalizes those who may choose to attack the network by having them spend costly energy and time.

Indeed, thanks to proof-of-work, new coins are released into circulation in the form of a mining reward. The hope is that the cost of energy is never more than the reward received. When that is the case, mining is profitable to those who provide computer resources to the network.

As the blockchain networks grow, the cumulative consumption of power can be quite high. For example, according to the Cambridge Bitcoin Electricity Consumption Index, the Bitcoin network annualized electricity consumption is about 150 terawatt-hour (TWh).

To put this into perspective, the annualized electricity consumption of Sweden is about 130 TWh. The US consumes about 4000 TWh, and China, at the top of the list, consumes about 8000 TWh.

 Anybody intending to hack the network needs to have access to the same or more amount of energy.

That could be a very unprofitable endeavor for the attacker. They also have to contend with the fact that the rest of the network has the option to ignore their unsavoury activity through what is known as a hard fork.

The downside is that the blockchain contributes a significant amount to greenhouse emissions. Even though there are efforts to use energy from renewable and greener sources such as solar, wind, hydropower and geothermal, there are concerns that this takes away the green energy from other critical sectors of the economy.

The part that is false

The Bitcoin blockchain, which consumes the most energy through the proof-of-work consensus mechanism, cannot support NFTs. Therefore, when the conversation about the impact of NFTs on the environment happens, it should be excluded.

The blockchain that introduced NFTs to the world is Ethereum. Ethereum was designed to use proof-of-work for its consensus mechanism, just like Bitcoin.

However, even at its most active time, Ethereum has mostly consumed less than half of the amount of electricity that the Bitcoin network consumes. More importantly, though, the Ethereum community is working towards the transition to a proof-of-stake consensus mechanism, slated to happen before the end of 2022.

Indeed, Proof-of-work is now just one of the several consensus mechanisms blockchains can use to enable computers on their networks to collaborate, process transactions, and execute smart contracts.

Meanwhile, all the other consensus mechanisms that have been designed don’t need significant amounts of energy. Of all the alternatives, proof-of-stake (POS) is the most used.

In the proof-of-stake consensus mechanism, computers on the peer-to-peer network are chosen to update the ledger based on the number of native coins they hold in a wallet. It is more or less a lottery managed through a protocol.

There are over 3000 blockchains (supporting over 10,000 different types of digital assets, including NFTs). Over 98% of the blockchains today use variants of the proof of stake consensus mechanism.

Besides Ethereum, ten other major blockchains support NFTs, and all of them use consensus mechanisms that are not energy-intensive, mostly proof-of-stake and its many variants.

Let’s go through the list:

 Solana

Besides using proof-of-stake, this blockchain charges as low as $0.00025 to mint and transact NFTs. It can also process up to 65000 transactions per second with near-instant confirmations.

Its downside is low decentralization, especially when compared to Ethereum. It also does not have as robust technical documentation.

Flow

This is another POS blockchain that supports NFTs, especially gaming collectibles. It is a product of  Dapper Labs, the Canadian company behind the first-ever popular NFTs on Ethereum known as CryptoKitties.

The Flow blockchain can process over 10,000 transactions per second. It also charges less than a dollar to process the minting or transfer of an NFT.

BNB Chain

This is a POS blockchain launched by the Binance crypto exchange. Many see its control by the exchange as an issue.

Nevertheless, it is blockchain becoming popular with NFT minters, in particular, because it can process up to 100 transactions per second. It charges  0.005 BNB (around $4) to mint or transact an NFT.

Cardano

Cardano is another PoS blockchain with a high transaction capacity. It can process up to 2 million transactions per second, especially with its layer 2 Hydra scaling protocol.

You need about 0.16 ADA (less than a dollar) to mint or transfer an NFT on the blockchain.

EOS

The team behind this blockchain raised over $4 billion in a 2017 initial coin offering (ICO). It uses a variant of POS known as delegated proof-of-stake (DPoS).

The blockchain can process as many as 4,000 transactions per second with an average confirmation time of 0.5 seconds. It is one of the few blockchains that don’t charge a fee to mint or transfer an NFT.

However, to carry out an NFT transaction on the network, you must have a stake in EOS coins.

WAX

Worldwide Asset eXchange (WAX), launched in 2017, uses the delegated proof-of-stake (DPoS) consensus. The founders have claimed the blockchain consumes 125,000x less energy than Ethereum.

The WAX network charges 2% transaction fees and processes up to 8,000 transactions per second.

Algorand

The Algorand blockchain uses a variant of POS known as the Pure Proof-of-Stake (PPoS). You need to pay 0.001 ALGOs (less than a dollar) to mint or transact an NFT on the blockchain. The blockchain can process over 1,000 transactions per second with a confirmation time of about 5 seconds.

Tezos

Tezos uses a variant of POS known as Liquid Proof-of-Stake (LPoS). The blockchain can process over 40 transactions per second with a confirmation time of about 15 minutes. You pay 10 cents to mint or transfer an NFT on the Tezos blockchain.

Tron

Tron uses delegated proof-of-stake (DPoS) consensus mechanism. It can process over 2,000 transactions per second with a confirmation time of about 1 minute. It charges less than a dollar to mint or send an NFT.

Avalanche

Avalanche uses Direct Acyclic Graph Tangle (DAG). Like POS, this consensus mechanism does not consume a significant amount of electricity. The blockchain can process up to 4,500 transactions per second.

Minting or transferring an NFT on the Avalanche blockchain costs about a dollar.

The argument that NFTs pose a threat to the environment is only viable when we don’t consider that Ethereum is transitioning to the Proof of Stake consensus mechanism and all the other blockchains on which you can mint NFTs are designed to be efficient with energy consumption.

Image courtesy of Pixabay.