The Environmental Externalities of NFTs
BY KENISHA MARTINS / JUNE 26, 2021
NFTs can revolutionize the way we conduct transactions, but what is the environmental cost behind them and can they be made sustainable?
udicrous as it sounds, the flying cat GIF was sold for 580,000 million USD making Non-Fungible Tokens (NFTs) the next big thing in finance.
Non-fungible means they cannot be traded or exchanged for one another, unlike traditional money or cryptocurrency which can be exchanged. This is tokenized in the blockchain similar to having a digital certificate. They signify a new way for monetization, with the help of NFTs, artists can tokenize their work. One of the most expensive NFTs, was an artwork by Beeple, called ‘Everyday’, and was sold for 69.9 million USD with the original bidding starting at only 100 USD.
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Pictured : Michael Joseph Winkelmann, professionally known as Beeple, Creator of the NFT artwork titled 'Everyday' via Unknown
Currently, NFTs are traded with the help of a cryptocurrency called Ethereum, which works as a virtual ledger that keeps a record of all transactions, but instead of having a centralized entity like a bank making entries, the entire process is completely decentralized. The entire decentralized network is secured and impossible to hack due to a technology called the blockchain technology that employs miners which are basically highly specialized computers that can run roughly 27 million math equations every second, solving complex mathematical functions that help secure the network. Ethereum uses blockchains but expands on it by allowing users to use it for not only simple transactions but also for an application called smart contracts, that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.
Currently, every Ethereum transaction costs 96.02 kWh of energy which is equivalent to the power consumption of an average U.S. household over 3.25 days and has an annual electrical energy consumption of 48.38 tWh which is higher than countries such as Singapore and Denmark.
Though this technology is revolutionary, it comes with an enormous amount of power consumption due the energy intensive design of the blockchains. Currently, every Ethereum transaction costs 96.02 kWh of energy which is equivalent to the power consumption of an average U.S. household over 3.25 days and has an annual electrical energy consumption of 48.38 tWh which is higher than countries such as Singapore and Denmark. Within the last year, Ethereum consumption has increased tenfold. A single Ethereum transaction has a carbon footprint of 48.09 kgCO2 which is equivalent to 106,584 VISA transactions or watching 8,015 hours of YouTube.
Pictured : Consensual Hallucinations, NFT artwork by Australian artist Serwah Attafuah. Courtesy: the artist
Annually, it has a carbon footprint which is comparable to the carbon footprint of a country like the Dominican Republic. As more and more people participate in cryptocurrencies, the more difficult these computations become which in turn increases power consumption.
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Even though a lot of cryptocurrencies claim to have mixed renewable energy resources for their consumption purpose, a Cambridge study found that renewable energy only makes up 39% of miners’ total energy consumption. Moreover, about 75% of crypto mining is done in China in provinces like Xinjiang where miners use coal fired electricity. The reason behind using this non-renewable and polluting form of energy is the cheap electricity it provides and its relatively easy access to manufacturers who make specialized hardware. However, this might change soon as the Chinese government has decided to crack down on bitcoin mining and trading behavior. This will just lead miners to find another cheaper source of energy somewhere else .
With a growth rate of 2100% in just the first quarter of 2021 alone, the NFT market is booming and it is crucial that this technology becomes as sustainable as possible. This might include encouraging the use of renewable energy while mining. The problem with this is the issue of feasibility within renewable energy resources. Hydropower being the most accessible, becomes the number one source of energy for mining used at 62%, followed by wind and solar energy used at 17% and 15% respectively. Compared to fossil fuels, hydropower suffers from seasonal variations as it is cheaper to use during the monsoon season. Once the season is over miners tend to migrate back to regions with cheap electricity powered by coal. Therefore, other than using more renewable energies, developers have come up with a more sustainable alternative model to verify the transactions called the “proof of stake”.
With a growth rate of 2100% in just the first quarter of 2021 alone, the NFT market is booming and it is crucial that this technology becomes as sustainable as possible.
Pictured: ‘Distance’ by Chris Precht via nytimes
With proof of stake, miners will be able to create new blocks but instead of competing with each other, the algorithm chooses randomly from people who hold a certain stake in Ethereum. Even though this entire process is far from perfect, it takes far less computational power. This technology will be used in Ethereum 2.0 which has plans of launching by the first half of 2022 according to the creator of Ethereum, Vitalik Buterin. This transition, however a huge one, will not be developed by a single party but instead, a robust developer ecosystem with 5 different client releases which will require lots of testing for safely implementing an entirely new way of securing their network while maintaining the existing blockchain.
The underlying technology behind NFTs is not inherently bad, it has the potential to revolutionize gaming, collectibles, digital art and many other sectors. However, with the climate crisis looming over us and electricity production becoming the second largest cause of greenhouse gas emissions, it is vital now more than ever that we invest in sustainable NFT models for the future. If we continue using existing NFT models which consume monstrous amounts of energy, it could end up becoming one of the leading causes for our ever rising greenhouse gas emissions. NFTs might be the next big thing in finance but is it a good enough trade off for our future?
Keywords
GIF, Nyan cat, NFTs, Digital ownership, Beeple, Cryptocurrency, Ethereum, Sustainable, Blockchain, Hydropower, Singapore, Denmark, Xinjiang, Vitalik Buterin
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References
Cuen, L. (2021, March 21). The debate about cryptocurrency and energy consumption. TechCrunch.
https://techcrunch.com/2021/03/21/the-debate-about-cryptocurrency-and-energy-consumption/
Anwar, H. (2021, June 4). How To Buy And Sell NFTs. 101 Blockchains. https://101blockchains.com/buy-and-sell-nfts/
Barhat, V. (2021, April 23). Are NFTs Hurting the Environment? Morningstar.
https://www.morningstar.ca/ca/news/211282/are-nfts-hurting-the-environment.aspx
Huang, R. (2021, January 4). The ‘Chinese Mining Centralization’ Of Bitcoin And Ethereum. Forbes. https://www.forbes.com/sites/rogerhuang/2021/12/29/the-chinese-mining-centralization-of-bitcoin-and-ethereum/?sh=391ccfab2f66
Blandin, A., Peters, Dr. G., Wu, Y., Eisermann, T., Dek, A., Taylor, S., & Njoki, D. (2020, September). 3rd Global Cryptoasset Benchmarking Study. Cambridge Centre for Alternative Finance.
Harm, J., Obregon, J., & Stubbendick, J. (n.d.). Ethereum vs. Bitcoin. The Economist.
https://www.economist.com/sites/default/files/creighton_university_kraken_case_study.pdf
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