Climate Change and NFTs - Scott Kildall

NFTs and Climate Change
Aren’t NFTs disastrous for the environment? How can I reconcile being an environmentalist with being a proponent of NFTs?

There is a path here. Let’s get into it.

NFT 101
A non-fungible token (NFT) is a unique and non-interchangeable unit of data stored on a blockchain. NFTs can be used to represent photos, videos, audio, and other types of digital files as unique items, essentially acting as a certificate of authenticity. The blockchain technology establishes a verified and public proof of ownership for them.

This Medium article has more detailed information, if you want to glean a deeper understanding of them.

Here are a few critical aspects for better understanding of what NFTs are:

Each cryptocurrency has its own blockchain, consisting of verified, decentralized transactions that are publicly-viewable. So, Bitcoin, Ethereum, Tezos, Dogecoin, etc all have their own blockchains, each of which have unique features related to consensus, security, speed, scalability and other factors.
An NFT is generated (“minted”) using what is called a smart contract. This computer code is stored on a blockchain and executes automatically when certain conditions are met.
Since NFTs are on the blockchain, they are immutable, public, decentralized and much more secure than most other financial transactions.

Energy and NFTs
The production of NFTs, on their most used blockchain (Ethereum), currently require large amounts of energy, consumed by computers to verify the transactions. There is no question that this tangibly contributes to the problem of climate change, and it is a deep concern of many in the NFT community.

Also there are several things to keep in mind about misinformation, energy mixtures and how the future is unfolding for NFTs and this is where things get complex.

(1) Bitcoin ≠ NFTs
First off, NFTs pretty much don’t use the Bitcoin blockchain. Bitcoin doesn’t have the smart contract architecture of Ethereum or other cryptocurrencies necessary for minting and distributing NFTs.

The dominant blockchain/cryptocurrency that people are using for NFT collecting is Ethereum. It uses about 13.5 times less power/transaction than Bitcoin.¹

And for now, we’ll talk about Ethereum instead of Bitcoin in terms of NFTs (there are other blockchains that support NFTs, which we will cover later), since it is the dominant blockchain out there that NFTs get minted and distributed on.

So let’s stop passing those Bitcoin headlines around and pretend like they’re accurate for NFTs.

(2) Energy ≠ Carbon Emissions

We can’t extrapolate calculations of carbon emissions without knowing the precise energy mix of the various energy sources used by the computers used for transactions on Ethereum.

For example, one unit of hydro-electric energy will have much less environmental impact than the same unit of coal-powered energy.

The statistics are not readily available for calculating the climate change impact but various sources have this anywhere from 40% to 75% renewable energy used for mining operations.² By contrast, the United States is at ~12.5% renewable sources.³

(3) Many blockchain transactions use what are called stranded energy

My research is from a Harvard Business Review article⁴ and so I’m summarizing one of their key points.

Hydro-electric exemplifies how stranded energy works. In China during the wet season in the Sichuan and Yunnan provinces, enormous quantities of renewable hydro-electric energy are wasted every year. The production capacity simply outpaces local demand and the battery technology is not there yet to efficiently store and transport energy from these rural regions into the urban centers of demand.

According to their well-researched article, these regions probably represent the single largest stranded energy resource on the planet, and as they are responsible for almost 10% of global Bitcoin mining (and presumably Ethereum) in the dry season and 50% in the wet season.

(4) Ethereum is moving to a much more low-consumption of energy model
Ethereum 2.0 will use what is called a Proof-of-Stake mechanism for validating transactions, with estimates being summer of 2022.⁵ This is a huge deal for the future of NFTs and what will get NFTs into a green space.

Currently, both Etherum and Bitcoin use what is called Proof-of-Work (PoW) consensus algorithms to verify transactions. And, right now, many other blockchains use Proof-of-Stake (PoS) models.

PoW verifications require huge amounts of computing power to solve problems and verify transactions. This requires significant energy to power computers. Ethereum and Bitcoin were not originally intended for scaling to the point they are now and this is one reason why we are in the predicament of cryptocurrency impacting the climate in a hugely negative way.

With PoS mechanisms for verifications the computers need much less power with energy requirements that would be 1/10000th of what they are now, which will mitigate, by orders of magnitude, the impact of NFTs on Climate Change and by extension, all the crypto transactions on Ethereum.⁶ The PoS mechanism also will be able to run many more transactions per second, making it a more efficient form of exchange.

With this shift to Ethereum 2.0, the energy requirements for all of the Ethereum would be that of a small town (2100 people).⁷ That seems pretty reasonable for what it offers.

Ethereum-based NFTs are not good for the environment now, they soon will be very low-energy in terms of consumption.

(5) There are currently many “green” blockchains that people are using for NFTs.

While Ethereum is the dominant blockchain for NFTs and the one that is used for many high-end collectibles, there are thriving markets on alt-blockchains such as Tezos, Flow, Cardano, Solana and Polygon which use Proof-of-Stake mechanisms for their transactions.

The collectibles here are often lower-priced, such as NBA Top Shots, on the Flow network, which are often priced in the $5 range. The transaction fees (“gas costs”) are very low and so they have this advantage from an economic standpoint. From an energy consumption viewpoint, it’s also quite low.

For my first NFT project, a collaboration with Nathaniel Stern called NFT Culture Proof, for this very reason, we are using Polygon, which is a PoS blockchain and a side chain of Ethereum and will offer a future bridge to Ethereum.

Summary

Yes, currently many NFTs are not very energy-efficient since they use Ethereum

Ethereum will soon move to a much more energy-efficient model (Ethereum 2.0)

There are many other blockchains where artists and creators can mint NFTs that are energy efficient. If you’re an artist and concerned about the environment, you may want to consider those, at least until Ethereum 2.0 is released.

Footnotes/References
¹^{https://blog.ethereum.org/2021/05/18/country-power-no-more/

2 https://www.nytimes.com/interactive/2021/09/03/climate/bitcoin-carbon-footprint-electricity.html}^{3 https://css.umich.edu/factsheets/us-renewable-energy-factsheet

4 https://hbr.org/2021/05/how-much-energy-does-bitcoin-actually-consume

5 https://cryptonews.com/news/ethereum-merge-estimated-in-may-june-2022-developers.htm

6 https://www.businessinsider.in/cryptocurrency/news/heres-how-ethereum-2-0-cryptocurrency-promises-to-be-green-scalable-and-far-more-efficient/articleshow/83003150.cms

7 https://decrypt.co/71353/ethereum-foundation-eth-2-0-will-use-99-95-less-energy}