An Unsolved Puzzle: The Environmental Impact of NFTs and Cryptomarkets

While discourse on the destructive effects of crypto mining on the environment has been well underway, the rise of Non-Fungible Token (NFTs) in particular has brought in a whole new customer base- art collectors. Attempts to raise awareness about the impact of NFT purchases are often met with arguments adjacent to “everything we do consumes energy, how is this any different?”, a valid question, but a deeper understanding of the matter can equip us better to look for solutions. The more we consume, the more resources we deplete, and at the rate at which crypto mining burns through energy, shying away from conscious consumerism is a disaster waiting to happen.

As explained in this article by Shivansh Raman, the purchase of the receipt of an NFT does not entail the purchaser’s ownership over the article, but the owner of the certificate of the article. With the seemingly mysterious rise of crypto assets and the uncertain foundation for their valuation, several questions have been raised regarding the stability of their market. If you still don’t know what NFTs are and are in the mood for a laugh, Jack Harlow might be able to help you (no promises).

Concerns over their environmental impact are less talked about, especially because they present a new space for unestablished artists in various communities to earn from their work- fanfiction, for instance. In late October of this year, a group of popular Young Adult fiction authors announced Realms of Ruin, a world consisting of character NFTs that fans could purchase, create and monetize narratives with. Twitter was ablaze- it wasn’t just the prospect of marketing crypto assets to young audiences, or the fact that this felt dangerously close to a multi-level marketing scheme. One of the most prominent criticisms of Realms of Ruin was that it was more than likely to be an energy guzzler. Even though it was set to operate on Solana, a more environmentally friendly, Proof of Stake blockchain (as opposed to the predominant Proof of Work system), the project was shelved within hours. Let’s take a closer look at why NFTs consume so much energy, the different kinds of blockchains, and the efforts to minimize their destruction.

Why do NFTs consume energy?

Most crypto exchanges operate on blockchains that use a Proof of Work or PoW system, famously used by Bitcoin. Under this mechanism, NFTs and other crypto assets are sold through the process of mining- where the bidders for an NFT are given a mathematical problem to solve, that usually involves several rounds of computation and trial and error.

Once a person has successfully computed the problem, they broadcast the solution for other miners to verify. In exchange for the verification process, these miners are rewarded in cryptocurrency.

Image Credits- Gitconnected

Once the solution has been verified, the miner is rewarded with their block reward- in this case, the reward is the NFT they were bidding for. The block of this transaction is then added to the blockchain and carries a block hash, which is essentially a unique transaction number that represents the computational work done by the miner.

The process of computing the problem, the broadcasting of the solution, and its verification constitute the process of minting. This process consumes energy through electricity consumed by the computational systems, rising carbon emissions, and generating heat.

As studied by artist Memo Akten, Computing the energy costs is more complex than just accounting for the process of minting an NFT. It also includes the energy and heating spent by all the other bidders of an artwork, the subsequent resales of the artwork, and also the modifications and new editions of the same artwork released by the artist themselves.

Each of these steps burns through electricity at an insanely fast rate. The Ethereum blockchain, which is by far the most used cryptocurrency blockchain for NFTs like crypto art, uses an estimated 48.14 kilowatt-hours of energy per transaction. To put this in perspective, this is well over two and a half times the energy consumed by the average Indian in a day (17.66 kWh), according to 2020 estimates. As the market for crypto assets grows at an incomprehensible pace (as of November 8th, 2021, the value of the world cryptocurrency market has quadrupled from its year-end 2020 value), its consumption of energy skyrockets. If this wasn’t alarming enough, there has been the rise of crypto mining farms that essentially generate electricity for crypto exchanges- some with characteristics as hilariously suspicious as marijuana farms. Even if crypto markets didn’t pose a real threat to the environment three years ago when they weren’t so popular, they absolutely do now.

In early 2020, Akten launched Cryptoart.WTF to help prospective crypto art buyers make informed decisions about the ecological impact of their purchases, much like the abundance of readily available information on the carbon emissions associated with any other industry. The site allowed its users to estimate the ecological costs associated with any NFT they were interested in, essentially the equivalent of carbon emission calculators for air travel. According to Akten, his intention behind creating the tool was never to shame or humiliate the actors in the Crypto art market, but to allow for more reflection and conscious decision-making. When he found his contribution being used to smear artists and buyers, he took down the calculator. For the curious, a shortlist of educational resources is still up on the original site.

Environmental-Friendly Reforms

In light of the concerns regarding the platform’s harm to the environment, Ethereum announced its upgraded platform, Ethereum 2.0, in late 2020. As opposed to the Proof of Work system of smart contracts, Ethereum 2.0 will operate on a Proof of Stake system that eliminates the practice of mining altogether.

Let’s try to understand the Proof of Stake blockchain system without drowning in jargon. In contrast to the miners in the Proof of Work system, this technology involves the participation of validators or members of the community that deposits varying amounts of their own Ethereum (ETH2). These deposits become their stake in the transaction, and for each block to be added to the blockchain, the system chooses only one validator to verify the transaction.

The validator is chosen by the magnitude of stake on the platform- the higher the stake, the higher is the chance of them being chosen to validate the transactions in the block and their chance of being paid. The idea behind introducing this system as a replacement is to eliminate excessive energy consumption by competing miners, and restrict the verification process to just one.

This may sound like it favors those able to afford the highest amounts of Ethereum, and it does. However, the Proof of Work system has fiscally regressive implications for miners as well- those able to install large-scale mining equipment are likely to earn more by partaking in more transactions.

Similar to the Proof of Stake system, a Proof of Capacity method has been devised, where the party pays with hard-disk space occupied by large data sets. The more plots of data set the user holds, the higher is their chance of finding the next block on the chain. For the curious, the Blockchain Council has a list of other alternatives to the Proof of Work System.

While non-skeptics maintain that a large magnitude of these transactions are powered by renewable energy sources, in a world that still operates primarily on fossil fuels, consuming such high volumes of energy for crypto exchanges seems crude. Not only are NFTs non-essential, but there are also major concerns regarding the risk of them being a market bubble with the potential for a devastating market crash. Moreover, it increases our aggregate demand for electricity. Even if 100% of crypto transactions are powered by clean energy, they increase the dependence on fossil fuels for the rest.

Mining hotspots popularly establish themselves in regions with cheap electricity rates. To combat this, local governments have started to discourage, restrict and ban crypto mining altogether. Missoula County in Montana, USA aims to shift entirely to renewable power by 2030 and maintains that accommodating crypto mining farms is antithetical to their target. The Crypto Climate Accord is an alliance of over 150 organizations involved in cryptomarkets, energy, and tech, that aim to synergize to produce a unified approach to sustainable practices within these industries.

With concerns over the impending but likely use of cheap electricity and data from formerly colonized nations to power the rapidly expanding market for NFTs and other crypto assets, it is important that we devise solutions to combat the rate through which we burn through energy.

About the author: Ananya Iyer is a postgraduate student of Public Policy and Governance at Tata Institute of Social Sciences, Hyderabad. Her interests include social conflict, economics, and welfare.