Climate Change and NFTs

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:

  1. 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.
  2. 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.
  3. 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

 

 

 

 

 

 

 

EquityBot got clobbered

Just after the Dow Jones dropped 1000 points on Aug 24th (yesterday), I checked out how EquityBot was doing. Annual rate of return of > -50%

Screen Shot 2015-08-24 at 11.20.25 PM

Crazy! Of course, this is like taking the tangent of any curve and making a projection. A day later, EquityBot is at -32%.

Screen Shot 2015-08-25 at 8.57.06 AM

Still not good, but if if you were to invest yesterday, you could be much richer today.

I’m not that much of a gambler, so I’m glad that EquityBot is just a simulated (for now) bank account.

EquityBot Goes to ISEA

EquityBot will be presented at this year’s International Symposium on Electronic Art at Vancouver. The theme is Disruption. You can always follow EquityBot here: @equitybot.

EquityBot is an automated stock-trading algorithm that uses emotions on Twitter as the basis for investments in a simulated bank account.

This art project poses the question: can an artist create a stock-trading algorithm that will outperform professional managed accounts?

The original EquityBot, what I will call version 1, launched on October 28th via the Impakt organization, which was supported the project last fall during at artist residency.

I intended for it to run for 6 months and then to assess its performance results. I ended up letting it run a little bit longer (more on this later).

Since then, I’ve revamped EquityBot about 1 month ago. The new version is doing *great* with an annual rate of return of 10.86%. Most of this is due to some early investments in Google, whose stock prices have been doing fantastic.

equitybot-isea-8emotions-1086percent

How does EquityBot work? During stock market hours, EquityBot scrapes Twitter to determine the frequency of eight basic human emotions: anger, fear, joy, disgust, anticipation, trust, surprise and sadness.

equitybot-8emotions

The software code captures fluctuations in the number of tweets containing these emotions. It then correlates them to changes in stock prices.  When an emotion is trending upwards EquityBot will select a stock that follows a similar trajectory. It deems this to be a “correlated investment” and will buy this stock.

equitybot_correlation_graph

The ISEA version of EquityBot will run for another 6 months or so. The major change from version 1 was that with this version, I tracked 24 different emotions, all based on the Plutchik wheel.

Plutchik-wheel.svg_1

 

The problem that I found was this was too many emotions to track, both in terms. Statistically-speaking, there were too few tweets for many of the emotions for the correlation code to properly function.

The only change with the ISEA version (what I will call v1.1) is that it now tracks eight emotions instead of 24.

popular-emotions

How did v1 of EquityBot perform? It came out of the gates super-strong, hitting a high point of 20.21%. Wowza. These are also some earlier data-visualizations, which have since improved, slightly so.
equitybot-nov26-2021percent

But 1 month later, by December 15th, EquityBot dipped down to -4.58% percent. Yikes. These are the vicissitudes of the market and a short time-span

equitybot-dec15-minus-458percent

 

By January 21st 2015, EquityBot was almost back to even at -0.96%.

 

equitybot-jan21-minus096percent

Then by February 4th, 2015, EquityBot was back at a respectable 5.85%.

equitybot-feb4-585percent

And on March 1st, doing quite well at 7.36%

equitybot-march1-736percent

I let the experiment run until June 11th. The date was arbitrary, but -9.15% was the end result. This was pretty terrible.

equitybot-jun11-minus915percent

And which emotions performed the “best” — the labels aren’t on this graph, but the ones that were doing well were Trust and Terror. And the worst…was Rage (extreme Anger).

equitybot-investing-results-jun11

 

How do other managed accounts perform? According to the various websites, these are the numbers I’ve found.

Janus (Growth & Income): 7.35%
Fidelity (VIP Growth & Income): 4.70%
Franklin (Large Cap Equity): 0.46%
American Funds (The Income Fund of America): -1.23%
Vanguard (Growth and Income): 4.03%

This would put EquityBot v1.0 as dead last. Good thing this was a simulated bank account.

I’m hoping that v1.1 will do better. Eight emotions. Let’s see how it goes.

 

Blueprint for EquityBot

For my latest project, EquityBot, I’ve been researching, building and writing code during my 2 month residency at Impakt Works in Utrecht (Netherlands).

EquityBot is going through its final testing cycles before a public announcement on Twitter. For those of you who are Bot fans, I’ll go ahead and slip you the EquityBot’sTwitter feed: https://twitter.com/equitybot

The initial code-work has involved configuration of a back-end server that does many things, including “capturing” Twitter sentiments, tracking fluctuations in the stock market and running correlation algorithms.

I know, I know, it sounds boring. Often it is. After all, the result of many hours of work: a series of well-formatted JSON files. Blah.

But it’s like building city infrastructure: now that I have the EquityBot Server more or less working, it’s been incredibly reliable, cheap and customizable. It can act as a Twitterbot, a data server and a data visualization engine using D3.

This type of programming is yet another skill in my Creative Coding arsenal. And consists of mostly Python code that lives on a Linode server, which is a low-cost alternative to options like HostGator or GoDaddy, which incur high monthly costs. And there’s a geeky sense of satisfaction in creating a well-oiled software engine.

The EquityBot Server looks like a jumble of Python and PHP scripts. I cannot possibly explain it excruciating detail, nor would anyone in their right mind want to wade through the technical details.

Instead, I wrote up a blueprint for this project.

ebot_server_diagram_v1For those of you who are familiar with my art projects, this style of blueprint may look familiar. I adapted this design from my 2049 Series, which are laser-etched and painted blueprints of imaginary devices. I made these while an artist-in-residence at Recology San Francisco in 2011.

sniffer-blue

A Starting Point: Distributed Capital

I’m doing more research on EquityBot —the project for my Impakt Works residency, which I just started a couple of days ago.

EquityBot is a stock-trading algorithm that explores the connections between collective emotions on social media and financial speculation. It will be presented at the Impakt Festival at the end of October.

It will also consist of a sculptural component (presented post-festival), which is the more experimental form.

Many of you are familiar with Paul Baran’s work on designing a distributed network, but many others may not be. He worked for the U.S. Air Force and determined that a central communications network would be vulnerable to attack, and suggested that the United States use a distributed network.
baranInterestingly, there is a widespread myth that the Internet, derived from APANET, was designed to withstand a nuclear attack using this model. This isn’t the case, just that the architects of the internet transmission protocol heard of Rand’s work and adapted it for packet use. Yet, the myth persists.

On a side note, perhaps military technology could be useful for the public good. If only we could declassify the technology, like Baran did.

The distributed network reminds me of a 3D polygon mesh I think this could be a good source of 3D data-visualization: Distributed Capital. I’ll research this more in the future.

But EquityBot isn’t about networks in the formal sense, it is a project about constructing a predictive model of stock changes based on the idea that Twitter sentiments correlate with fluctuations in stock prices. Screen Shot 2014-09-17 at 6.08.23 AM

Do I know there is a correlation? Not yet, but I think there is a good possibility. One of my reading sources, The Computational Beauty of Nature, sums up the value of simulated models in its introduction. The predictive model might fail in its results but it will likely reveal a greater truth in the economic system that it is trying to predict. Thus, knowing the uncertainty ahead of time will provide a sense of certainty. EquityBot may not “work” but then again, it may.

compbeautyofnatureMy source of dissent is the excellent book, The Signal and The Noise: Why So Many Predictions Fail — but Some Don’t by Nate Silver. After reading this, last summer, I was convinced that any predictive analysis would be simply be noise. I was disheartened and halted the EquityBot project (previously called Grantbot) for many months.

la-ca-nate-silver

However, now I’m not so sure. It seems likely that people’s moods would affect financial decisions, which in turn would affect stock prices. With studies such as this one by Vagelis Hristidis, which found some correlation to Twitter chatter and stock, I think there is something to this, which is why I’ve revisited the EquityBot project.

I’ll follow the Buddhist maxim with this project and embrace its uncertainty.