What are NFTs and what is their impact on the environment?
I'm sure you've heard of them: NFTs have been on everyone's lips (at least on the internet) since March 2021, when graphic designer Mike Winkelmann sold a piece of digital artwork at auction for $69 million, but what exactly are NFTs? And, more importantly, what is their impact on the environment?
NFTs, what are they?
A non-fungible token, or NFT, is equivalent to a digital certificate of authenticity associated with a specific file, usually an image, a GIF or a video, which, through blockchain technology, guarantees the uniqueness and ownership of the file. Blockchain technology, in turn, is the same technology used by cryptocurrencies as a decentralization method: in short, all the information of all transactions of all cryptocurrencies exists at the same time in a large number of computers (mining equipment) connected to the chain, which makes the system infallible (since, even if a computer connected to the system is attacked, all the information is safeguarded in thousands of other computers at the same time).
The difference between cryptocurrencies and NFTs is that the former are fungible and the latter are not. In other words, while an amount of Bitcoin, for example, can be exchanged for an equivalent amount of Bitcoin, an NFT file is unique and there is no other exactly like it. The value of NFTs stems precisely from the scarcity principle.
What is the environmental impact of NFTs?
Their scarcity quality, coupled with novelty, has made the NFT market an extremely profitable one: during 2021 NFT sales passed the $17 billion mark, and are estimated to grow by an average of 40% over the next few years. Superficially, NFTs are great news for digital artists finding a new market in which to market their work, but the story is quite different for the environment.
The environmental impact of NFTs stems from the same point that makes cryptocurrencies unsustainable: blockchain technology. Specifically, the energy demand required by this gigantic planetary-wide interconnected network of information to function generates an extraordinary carbon footprint. Just to give you an idea, the annual carbon footprint associated with Bitcoin transactions is close to 37 billion tons of CO2, equivalent to that of the whole of New Zealand.
In the case of both cryptocurrencies and NFTs, the energy expenditure of blockchain technology comes from the validation system it uses for each transaction, called Proof of Work (PoW), according to which, when a transaction is made, the system sends each connected computer a highly complex problem; the first computer that manages to solve it, is awarded the transaction, as well as the transaction fee. If we consider the astronomical volume of daily cryptocurrency and NFT transactions, it is understandable why this energy expenditure comes to generate a really considerable impact on the environment.
According to artist and digital activist Memo Akten, one of the most influential voices in the crypto-art world, each NFT purchase brings with it a carbon footprint of about 48 kilograms of CO2, the equivalent of driving a car for 190 kilometers.
Can NFTs be sustainable?
In theory, yes (in theory, cryptocurrencies could also be sustainable). The most straightforward way to think about a sustainable NFT market, which in turn benefits from the unquestionable advantages of blockchain technology, is through conversion to clean, renewable energy sources, as well as technological advances that reduce the energy demand of mining equipment using the Proof of Work system.
Another way is to use alternative systems to validate ownership of NFTs, such as Proof of Stake (PoS), which is under development and estimated to be operational by the end of 2022, which uses a network of validators who contribute their own cryptocurrencies as collateral for each transaction, eliminating the need to troubleshoot the PoW system and thus reducing the energy consumption associated with each transaction.
Finally, many NFT markets are adding the ability to offset the carbon footprint associated with transactions, a strategy borrowed from other highly polluting sectors, such as air transportation.
In the end, although NFTs are still far from being sustainable, the current trend aims to reduce their environmental impact and turn this emerging market into what it should be: a safe, clean space for digital art and creativity.