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. logo
@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 on the horizon.

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 most blockchains—including Ethereum, the most popular blockchain for purchasing NFTs—use to validate their transactions. It’s worth noting that NFTs represent only a fraction of transactions on the Ethereum blockchain, but they can’t exist there without its transaction validation system.

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 network in which the vast majority of NFTs are sold and purchased, uses roughly half of that amount. It’s better, but it’s far from perfect. Luckily, Ethereum plans on addressing this very soon.

The proof-of-stake model

Thankfully, the proof-of-work model isn’t the only method of validation that’s been developed for blockchain systems. In 2012, the developers of a blockchain called Peercoin developed a new system called proof-of-stake, and it’s being used by a lot of blockchains today.

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 amount 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

Some noteworthy blockchains have already either adopted a proof-of-stake model or were designed from the beginning to use them. BSC, Cardano,  Polkadot, Avalanche and Solana are among the most popular. However, when it comes to debating NFTs, all heads turn toward Ethereum. It makes sense. Not only does Ethereum host the vast majority of NFT transactions, it also still uses a proof-of-work model.

The developers of Ethereum are well aware of the problem, and they’ve been working on a shift toward a proof-of-stake model for several years. As of the writing of this article, the shift to Ethereum 2.0 is still planned for an unspecified date in 2022. This is speculative, however, as the shift has been delayed several times already. In the meantime, Ethereum has transitioned a lot of its energy to renewable sources, as much as 39% according to a Cambridge University Study.

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.

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.

Alternatives to Ethereum

Ethereum may be working on switching to a more sustainable model, but that doesn’t mean we have to wait for it. As mentioned, there are plenty of other networks already operating on a proof-of-stake model, and some are already more beneficial for those wanting to buy and sell NFTs.

One of the most promising options is the Binance Smart Chain. The BSC network benefits merchants and buyers through lower fees and faster transaction times, and it benefits the environment through use of a proof-of-stake model. These are some of the reasons that we initially started enter on the BSC.

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. The direction is clear. Energy consumption from NFTs is moving toward increased efficiency and renewable energy.

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