A beginner’s guide on the hidden costs of NFTs and their environmental impact

A beginner’s guide on the hidden costs of NFTs and their environmental impact

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Increasing awareness of global ecological damage and climate change caused by technological progress has led industry experts and artists to question the environmental impact of nonfungible tokens, or NFTs. Despite the extraordinary rise of these types of digital assets in the last year, it’s still too early to obtain valid data to assess the environmental risks of NFTs. While some figures are appearing, none of this data has been reviewed by outside experts and can be considered reliable yet.

Nonfungible tokens are blockchain-based technology that makes digital assets unique and one of a kind. Photos, videos and music creations can be copied digitally in an infinite way, but blockchain smart contracts make sure that one piece of artwork or a video, for instance, is the only representation that exists of that item.

Moreover, the tech allows the user to transact in a trustless environment, so there’s no need for third parties to verify their validity.

These reasons make NFTs valuable and are at the foundation of their rise across different fields, especially in the arts. Their environmental impact has also become a primary concern for artists who have taken various actions to combat climate change and reduce their NFT carbon footprint.

Are NFTs bad for the environment?

Digital artist Beeple, who sold his work “Everydays: The First 5000 Days” for a staggering $69 million bid at Christie’s, believes in a more sustainable future for NFTs and pledged that his artwork would be carbon neutral. He thinks he could offset emissions from his NFTs by allocating some of his funds to renewables, conservation projects and developing technology that cuts CO2 emissions.

With a simple tool like Offsetra to help artists calculate their footprint, Beeple could calculate that in order to offset the emissions from one of his collections, he needs to contribute $5000 to offset his environmental impact. Beeple and other leading artists decided to join forces to sell carbon-neutral NFTs and raise funds for Open Earth Foundation. The non-profit organization encourages sustainable development and solidarity through art and education.

These specific funds went to the development of blockchain technology for climate accountability. Each artist and artwork received 60 carbon offsets committing to compensate for their NFT footprint to create a net positive climate impact.

What is the carbon footprint of an NFT?

While it’s somewhat impossible to establish the ecological cost of crypto art precisely, different estimates can give us an idea of the carbon footprint of an NFT. For example, the weight of a single-edition artwork on Ethereum is 220 pours (100Kg) of CO2, equivalent to a 1-hour flight.

Digital artist Memo Akten analyzed about 18,000 NFTs and found that the average NFT’s carbon footprint is equivalent to more than a month of electricity usage for the average person living in the European Union.

The impact of technology on the environment leads us back to the industrial revolution when new manufacturing processes were facilitated by technological advancement. Such progress also marked the rise of environmental damage, which, closer to our days, have found data centers and crypto mining particularly harmful for the environment.

Data centers are an infrastructure of networked computers that organizations like Google or Amazon use for remote storage, processing, or distribution of large amounts of data.

When we send an email or a WhatsApp message, our information goes through one of these data centers and requires high energy consumption to operate efficiently and to cool down the equipment.

Data centers account for 1% of the global energy demand. It has been estimated that increased internet usage during the pandemic has raised emissions by up to 3.2 million metric tons of carbon dioxide equivalent. To understand the impact of such an assessment, think of one metric ton as the approximate weight of a car or the equivalent of CO2 produced by driving from San Francisco to Atlanta.

Every digital process consumes energy. According to a NASDAQ research report, the global banking industry, for instance, consumes about 263.72 Terawatt hours per year in power.

Bitcoin (BTC), on the other hand — the world’s most popular but also the most energy-intensive blockchain and cryptocurrency — consumes a bit less than half of that.

Cryptocurrency mining is another source of concern for environmental consequences. Its impact is similar to that of data centers. While more data has emerged in recent years, especially around the mining of Bitcoin, it’s not yet possible to estimate the actual environmental impact of the overall blockchain technology because it relies on different measures, causes and processes used.

For instance, there is a significant difference between blockchain technology powered by a proof-of-work (PoW) consensus algorithm and proof-of-stake (PoS). We’ll take a deeper look at the difference a bit later in the article.

Most NFTs are traded and stored in the Ethereum network based on the proof-of-work mining process. PoW is the type of consensus algorithm that requires the most energy consumption, and this is where climate experts spark the debate around the environmental effects of NFTs.

Digital artists choose Ethereum for their digital art sales because it is the second more stable and reliable cryptocurrency after Bitcoin. Moreover, it was designed to transact data beyond cryptocurrency transactions using smart contracts, making it an appealing platform for different types of usage.

How harmful are the NFTs stored on Ethereum?

Different studies exist on cryptocurrency energy consumption, but they all report different figures. It is fair to assess that between 30% and 70% of cryptocurrency mining comes from renewables, but that’s a vague and broad estimate and not explicitly directed at Ethereum.

Ethereum mining employs less than half the energy of Bitcoin mining. The latest accurate estimate in 2018 calculated that the platform uses approximately the same electricity as Iceland.

Every year, Ethereum apparently consumes roughly 44.94 terawatt-hours of electrical energy, equivalent to the annual power consumption of countries like Qatar and Hungary. It releases approximately 21.35 metric tons of carbon dioxide into the atmosphere, comparable with the carbon footprint of Sudan.

Each Ethereum transaction is executed using Ether (ETH) as gas transparently recorded on the blockchain, depending on the amount of transaction data, the gas percentage varies and so does its emission impact. NFTs are data-heavy digital items due to the several transactions involved in its process including minting, bidding, trading and transferring of ownership. The transaction transparency allows for a straightforward assessment of an NFT’s footprint.

What’s up for debate is to what extent NFTs significantly impact Ethereum mining emissions or whether these would be generated anyway. NFTs are certainly more energy-intensive than a simple money-transfer transaction on Ethereum, and Ethereum mining was already functioning and polluting the environment before NFTs were created. As a comparison, we could think of a plane or train running regardless of the number of people on board.

On the other hand, if an increasing number of people create, trade, and store NFTs, a rising number of energy-intensive transactions would have to be generated with a consequent rise in carbon emissions. In essence, how much NFTs are impacting Ethereum transactions and hurting the environment is no straightforward matter.

Proof-of-work vs. proof-of-stake energy consumption

Blockchain technology allows NFT investors to buy, sell, or store digital assets with no need for an intermediary. However, these transactions currently require some tech-savviness, as they might be challenging to execute.

For this reason, marketplaces like Opensea or Rarible are favorite choices for artists who seek a seamless and straightforward experience. However, these, and most other marketplaces, are based on the proof-of-work Ethereum blockchain, which is highly energy-inefficient and has generated high fees since NFTs have populated the platform.

More sustainable blockchains alternatives to PoW have emerged based on the proof-of-stake consensus algorithm, which consumes 99% less energy than PoW blockchains and identifies with more ecological NFTs. However, these blockchains are perceived as riskier since they are generally newer in the market and more susceptible to getting hacked, for example.

This is the main reason why these networks are less attractive to art buyers who want to ensure their artworks won’t disappear or won’t be supported one day. Besides, these platforms do not yet have a significant volume compared to their less sustainable counterparts, making it more difficult for artists to buy or sell quickly.

As more artists become increasingly aware of other more energy-efficient alternatives, in the future, we might see a surge in usage of these platforms and also in developing more eco-friendly and transparent marketplaces. Some of these chains using proof-of-stake include Algorand, Tezos, Polkadot and Hedera Hashgraph, to name a few of the most popular.

​​Ethereum announced years ago that it would eventually switch to proof-of-stake through the Ethereum 2.0 upgrade. That way, Ethereum’s energy consumption would drop drastically, and artists hope this will happen soon.

Other NFT platforms use private blockchain technology and are already fully functional like Flow, for example. However, private blockchains are highly centralized and diverge from the actual blockchain concept, which implies the decentralized system does not require the intervention and trust of an intermediary.

What other steps can be taken to improve NFTs’ carbon footprint?

We mentioned Ethereum could switch to the proof-of-stake consensus algorithm and that would make it much less energy-intensive. However, the platform’s development team has maintained it for years but the process has never materialized so far, raising legitimate doubts about this achievement.

Ethereum developers could reduce carbon emissions and costs by building systems on layer two built on top of the existing blockchain. Through these systems, a lot of energy could be saved because all transactions occur off-chain, which means an eventual phase out of the energy-inefficient proof-of-work mechanism.

For instance, Bitcoin’s Lightning Network is a protocol built on layer two of the blockchain, and it’s now considered Bitcoin’s payment system. It is scalable and environmentally friendly, as it does not rely on the base chain proof-of-work consensus function.

Following the Lightning Network process example, people or organizations that want to trade NFTs could open a second layer channel to virtually make unlimited trading until they are ready to settle the total transactions back on the PoW blockchain base layer, or layer one. This way, instead of engulfing the base blockchain with unlimited transactions, only the net result will be time-stamped on the blockchain, saving an enormous amount of data-intensive transactions that will use a lot of energy to complete.

Here are some of the other ways that can be taken to allow the NFT market to flourish without damaging the environment significantly.

That said, renewables have yet replaced the current entire power generator infrastructure, and it’s not wise to rely entirely on them. Climate experts and blockchain and cryptocurrency detractors argue that the energy coming from renewables is still extremely scarce and precious and could be used for more urgent applications like heating and lighting.

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