Non-Fungible Tokens (NFTs) are unique digital assets that serve as proof of ownership and authenticity of real-world objects like art, in-game items and music. Essentially, NFTs create digital scarcity. They are held on a blockchain, which is a form of distributed ledger that records transactions across a network, similar to a bookkeeping system. Ethereum is the most widely used blockchain to create NFTs, and its cryptocurrency Ether is one of the most popular cryptocurrencies in the world. Many blockchains, including Ethereum, use a Proof of Work (PoW) consensus algorithm for validating transactions and mining new tokens.
Public attention around NFTs exploded in 2021 when the market experienced record sales, including the most expensive NFT sold to date, Beeple’s Everydays: The First 5000 Days, which sold at Christie’s for the USD 6.3 million. As NFTs continue to gain popularity, it may only be a matter of time before NFTs are sold for over US $100 million. But is this a bursting bubble? Regardless, behind the veil of excitement and exclusivity lies the ‘true cost’ of NFTs, which extends far beyond monetary value.
The Future of Art Vs. The Future of Our Planet
Under the Proof of Work model, ‘miners’ or supercomputers compete by solving complex puzzles to verify a transaction. This requires immense computing power and electricity. Researchers have estimated that, on average, creating an NFT on a PoW blockchain produces over 200 kg of CO2 – equivalent to driving approximately 600 miles in a standard gasoline-powered car.
To add fuel to the fire, unlike other technologies, the mining process on a PoW blockchain doesn’t become more energy-efficient over time. Solving the puzzles becomes more competitive and difficult as interest grows and more people start mining. In 2011, a desktop computer could mine with just a few seconds’ worths of household electricity. A decade on, at least 13 years of typical household electricity is consumed per mined coin. Overall, the electricity usage of cryptocurrencies is close to 0.5% of global electricity consumption; a staggering tenfold increase in just five years.
The list of negative impacts does not end here; a significant volume of e-waste is also produced. On average, performance-specific hardware becomes obsolete every 18 months. E-waste has many social and environmental consequences, ranging from irreversible health effects for exposed workers to high levels of toxic contaminants leaching into the environment.
The ‘Green’ Disguise
By now, it should be clear that marketing an NFT, transacted via a PoW blockchain, doesn’t paint the most environmentally-friendly picture. However, many companies, even those who continue to promote ESG values, are still entering the NFT space.
But, are brands aware of this paradox? Several organisations have attempted to defend their actions by using carbon offsets and/or charitable donations. For example, Adidas revealed its first collaborative NFT with Prada earlier this year (see below). Most of the profits were donated to climate-focused charities, however, the NFT was auctioned on the carbon-guzzling Ethereum blockchain.
Fundamentally, the use of carbon offsets or charitable donations to ‘counter’ the environmental impacts is an inherent contradiction; to use a common expression, it’s like papering over the cracks. Therefore, without a shift away from the Proof of Work method, deep-rooted issues will remain.
Proof of Stake: The Future of NFTs?
Aside from Proof of Work, there are several smaller blockchains, like Tezos and Algorand, that use a Proof of Stake (PoS) consensus mechanism. Users of these blockchains do not have to solve complex cryptographic puzzles. Instead, they must prove their trustworthiness by locking away a certain number of crypto coins. As a result, the PoS method requires significantly less computing power, hence less energy.
Ethereum announced that they will ‘merge’ their current Proof of Work system with the Beacon Chain – a new, Proof of Stake blockchain – marking the end of PoW for Ethereum and the full transition to PoS. This merge will be the spine that supports the much-anticipated transition toward ‘Ethereum 2.0’ (ETH 2.0). The launch date, which was originally planned for 2019, could be set to go live in just a few months. ETH 2.0 is estimated to use 99.95% less energy than its PoW blockchain – a staggering reduction and exciting prospect.
It’s worth noting that the energy consumption of different PoS blockchains is surprisingly divergent, so keep in mind that the ‘99.95%’ figure is not universally applicable across all PoS systems.
Other Sustainability Considerations
It is important to remember that adopting a comprehensive perspective of sustainability requires considering more than just the ‘E’ in ESG (Environment, Social & Governance). To this end, while ETH 2.0 will use dramatically less energy, there are other considerations and possible downfalls of PoS to underline.
Some critics argue that the Proof of Stake model exacerbates inequalities. This is because it favours validators who already hold a large wealth share, thus creating an inequitable barrier to participation. To add to this, many researchers predict that ETH 2.0 will lift Ether prices – Ethereum’s cryptocurrency – at least in the short term, because the amount of Ether in circulation is expected to decline, due to a combination of factors. The predicted rise in Ether prices will heighten the inequitable barriers to participation. Also, the Merge is set to cut off the earnings of 1 million people, many of whom will suffer a complete loss of income.
In summary, when it comes to analysing different blockchain protocols, there’s a compromise to acknowledge (like most sustainability-related matters), between the ‘E’ and ‘S’ in ESG. Therefore, more research is needed to better understand the environmental and social impact of non-PoW protocols. Nevertheless, with Ethereum 2.0 fast approaching, the sustainable development of NFTs is definitely a space worth watching.