Are NFTs bad for the environment?

NFTs give power to the creators while securing transparency in transactions, and many artists choose to sell their art and audio NFTs independently from labels and curators. However, the environmental impact of NFTs has been widely discussed, and this is what we are taking a closer look at in this article.

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@enter.artPUBLISHED 2ND MARCH 2022

Are NFTs bad for the environment? NFTs have seen surges in popularity over the last few years, but their emergence has been met with skepticism and outright anger by some. One of the new technology’s most common criticisms is its environmental impact. Many skeptics claim that energy consumption concerns far outweigh the benefits of NFTs. These claims have merit, but the truth of the situation is more complicated than it is on the surface. Let’s dive into these concerns and see what solutions are available.

The proof-of-work model

To understand environmental concerns about NFTs, we need to zoom out and look at the bigger picture. NFTs aren’t the root cause of energy consumption issues. The problem lies in the blockchain technology that supports them. More specifically, excessive energy consumption happens due to the model some blockchains use to validate their transactions. 

The proof-of-work model was the default first method blockchains used. Bitcoin, the first blockchain network, pioneered the model back in 2009. When a transaction occurs on a proof-of-work system, all computers connected to the network race to solve an extremely complex problem. The first of the computers to solve this problem gets to confirm the new block on the chain. The miner who operates this computer receives gas fees and other rewards as an incentive to participate.

So what’s the problem?

This system incentivizes miners to invest in increasingly powerful computers to increase their chances of receiving rewards. A race to the top ensues, with mining operations growing as quickly as they can manage. More computer power means these operations use more energy. When energy comes from greenhouse gas-emitting sources, this harms the environment, especially when there is nothing to offset emissions.

Bitcoin is the least efficient of all proof-of-work systems, and experts at the Cambridge Center for Alternative Finance estimate that the Bitcoin network alone uses as much power as countries like Sweden or Malaysia. Ethereum, the blockchain where the vast majority of NFTs are sold and purchased, used roughly half of that amount before they switched to Proof-of-Stake in September 2021 and reduced their energy consumption by 99,5%.

The proof-of-stake model

In a proof-of-stake model, anyone who owns a given amount of cryptocurrency in a given blockchain has the opportunity to validate transactions, no matter how powerful their computer is. Users who hold coins have the option of staking them. Staking is the process of these users offering coins to be used for validation purposes. When you stake your coins, they are temporarily locked, but they can be unlocked when you choose to trade them. It’s an excellent option for those who plan to hold their coins for a while.

When coins are staked, validator nodes are created. The amount of coins pledged is proportional to the number of validator nodes a user gets. When a transaction is in need of validation, a node is selected, and the owner of that node is rewarded. Nodes are chosen primarily through random chance, but some networks favor coins that have been staked for longer. Instead of incentivizing computer power, the proof-of-stake model incentivizes buying, holding, and staking as many coins as possible. As a result, the environmental impact of a given transaction is a tiny fraction of that of a proof-of-work system.

Ethereum and proof-of-stake

Most noteworthy blockchains have already either adopted a proof-of-stake model or were designed from the beginning to use them. BNB Chain,  Polkadot, Avalanche, and Solana are among the most popular. However, when it comes to debating NFTs, all heads turn toward Ethereum. It makes sense since Ethereum hosts the vast majority of all NFT transactions.

The developers of Ethereum were well aware of the problem, and in September ‘21, the long-awaited Ethereum 2.0 finally went live on Ethereum Mainnet, and the blockchain shifted to a PoS consensus mechanism. Learn all you need to know about Ethereum 2.0 in What is The Ethereum Merge? and 5 Misconceptions About The Ethereum Merge.

Blockchains vs. other financial industries

It’s easy to criticize blockchain energy consumption in a vacuum, but the truth is that every industry on the planet consumes energy. Because blockchains seek to compete with established financial industries, it’s worth comparing them. Let’s specifically compare it to gold mining and banking.

Roughly 3,500 tons of gold were mined in 2020, and 1,300 tons were recycled, which corresponds to roughly 265 TWh of energy. When you total up energy used by the banking industry in physical branches, ATMs, data transfer, and materials used, you get about 254 TWh in a typical year. By comparison, Bitcoin consumes about 114 TWh per year—less than half of just one of these industries, or, to put it another way: 0.1% of world greenhouse gas emissions. It’s also worth noting here that, according to the Bitcoin Mining Council, almost 60% of all Bitcoin mining is powered by sustainable energy. 

The comparison isn’t perfect. It doesn’t account for other blockchains or the more widespread adoption of traditional competitors, but it puts energy consumption in a perspective that is often lacking when people have this debate.

PoS adoption in the NFT space

Ethereum wasn’t the first blockchain to utilize PoS, and they probably won’t be the last. There are plenty of other blockchains operating with PoS, or a variation thereof, and at the time of writing, PoS has become the industry norm for the NFT space. The only notable blockchain for NFTs that still utilizes PoW for transaction validation is Bitcoin through their Ordinals protocol, which launched earlier this year. While the NFT activity on Ethereum still vastly outpaces the Ordinal activity on Bitcoin, the rise of Ordinals could mean a rise in energy consumption from NFTs.
Some of the most promising PoS alternatives to Ethereum are Avalanche and BNB Chain. They both benefit merchants and buyers through dramatically lower fees and faster transaction times, and the environment through the use of a proof-of-stake model. These are some of the reasons that we initially started enter on BNB Chain and later expanded to Avalanche. 

The future of NFT sustainability

It’s important to acknowledge the problems and shortcomings when it comes to blockchain and NFT sustainability, but it’s also important to realize that the technology is new and that those in the crypto space are working on new solutions every day. While the energy consumption of the NFT space is lower today than ever, the rise of Bitcoin Ordinals could mean a surge in energy consumption and greenhouse gasses associated with the NFT space. On the other hand, Bitcoin mining with energy from renewable sources is on the rise, and it may very well be that renewable energy adoption will outpace the rise of Ordinals. 

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