Understanding the environmental impacts of NFTs and exploring greener alternatives
NFTs are hot right now but are they also making the planet hotter? We examine the impact of NFTs on climate change and how to make the shift to green NFTs.
By Mohammad Musharraf
Non fungible tokens (NFTs) had a stunning bull run in 2021, with fresh estimates suggesting a total market value of over $40 billion. It isn’t surprising that Collins Dictionary chose NFT as the 2021 Word of the Year, beating close contenders ‘crypto’ and ‘metaverse’.
But not all of this was good press. Numerous media reports have raised concerns about the environmental impact of NFTs and how the tokens are contributing to climate change
These concerns are legitimate: an average NFT transaction on the Ethereum blockchain consumes 238 kWh (kilo Watt hour) of energy. To put this in perspective, 100K VISA transactions utilize 149 kWh.
But while this may make it seem like NFTs are highly energy-intensive digital assets, there’s a bigger picture that needs to be understood. Before examining the environmental impact of NFTs, it is necessary to understand the underlying technology that powers them.
NFTs in a nutshell
A non-fungible token is a unique and non-interchangeable digital asset that leverages blockchain technology to immutably store data. NFTs can represent physical as well as virtual assets like artwork, in-game collectibles, personal identity, and documents. Since NFTs are non-fungible, they are fundamentally indivisible assets. However, certain innovations have experimented with fractionalizing NFTs, mainly to diversify ownership and bring more liquidity.
The technology behind NFTs
Non-fungible tokens come into existence through a process known as minting. To mint NFTs, blockchains leverage a consensus mechanism such as Proof of Work (PoW) and Proof of Stake (PoS). While the former relies on energy hungry mining operations, the latter runs on an environmentally-friendly technology.
In a Proof of Work blockchain, miners compete to solve complex mathematical problems to validate NFT transactions. Those with very high computing power get to solve the puzzle faster and thus successfully add a new block on-chain. When the mining process is complete, miners get tokens as a reward for adding a new block with valid transaction data.
The Proof of Work system deliberately consumes a lot of energy in order to keep malicious actors from tampering with the ledger. The overwhelming electricity consumption makes it practically impossible and economically unviable for hackers to overpower a Proof of Work chain. For example, Bitcoin mining, which uses Proof of Work, consumes 2,107 kWh of electrical energy for a single Bitcoin transaction.
On the other hand, in a Proof of Stake blockchain, validators need to stake (lock) their assets to validate NFT transactions. Staking ensures that validators have skin in the game and will not approve dubious transactions. If validator nodes successfully add a new block, they receive proportional rewards but lose their staked assets for validating fraudulent transactions.
Since miners don’t compete against each other in a Proof of Stake system, it is not very energy intensive. By using negligible computing power, the Proof of Stake model reduces energy consumption to a bare minimum. For example, the Flow blockchain, which runs on Proof of Stake, consumes only 0.18 GWh of energy annually. Effectively, it means minting an NFT consumes less power than a Google search.
However, the Ethereum blockchain, which runs on a Proof of Work system, is the most popular chain in the whole NFT ecosystem. Thus, the following section will elaborate on Ethereum NFTs and assess whether they are environmentally friendly.
The environmental impact of the Ethereum network
The Ethereum blockchain was the first to introduce smart contracts in the crypto space. Eventually, it became the second-largest network after Bitcoin with a total market cap of $386 billion. Some of the most famous projects in the NFT ecosystem such as Bored Ape Yacht Club, Cool Cats, World of Women, and 1989 Sisters reside on the Ethereum network. In fact, the Ethereum NFT Market got off to a spectacular start in 2022 with monthly sales surpassing $5 billion.
But since Ethereum transactions are based on Proof of Work, the network is excruciatingly slow and incurs exorbitant gas fees. During periods of high network congestion, minting an NFT can cost between $60-$250, with transaction finality in over half an hour.
In addition to carrying expensive gas fees, transacting NFTs on Ethereum is also highly energy intensive. A single transaction consumes energy that can power an average American household for over nine days. Annually, the energy consumption of the entire network is equivalent to the total power consumption of the Netherlands.
These transactions consequently have a tremendous carbon footprint, releasing approximately 150 kgs of carbon dioxide into the atmosphere (to put this in perspective, a Boeing aircraft releases 90 kgs of carbon dioxide per hour). Ethereum’s annual carbon emissions amount to 62 Mt (metric tonne), equivalent to the carbon emissions of the entire country of Belarus.
Thus, in assessing the environmental impact, the obvious question to ask is whether to continue to support NFTs. In light of climate change, would it be prudent to continue to trade NFTs and further increase greenhouse gases?
Are NFTs bad for the environment?
An anecdote about French artist and climate activist, Joanie Lemercier, may help assuage concerns about NFTs. Lemercier’s environmentally conscious plan to progressively reduce his annual energy usage by 10% amounted to nothing because of his NFT drop. Since he put them on the energy-guzzling Nifty Gateway, the NFTs used up 8.7 megawatt-hours of energy. Soon after learning about his energy consumption, he canceled two NFT drops and later shifted sales to a Proof of Stake marketplace.
So, are all NFTs bad for the climate? Definitely not. NFTs per se do not pollute the environment. Rather, the blockchain’s security mechanism determines how much energy an NFT will consume. Susanne Kohler, a Ph.D. Fellow in Sustainable Blockchain Technology at Aalborg University, explains that minting is only one part of the entire process. Users make competitive bids for an artwork, flip them to make quick profits, and transfer ownership from one chain to the other. Cumulatively, it adds up to the energy costs.
Kohler suggests that shifting from a PoW to a PoS blockchain will significantly bring down the energy expenditure. After all, NFTs are a great way to eventually move towards a sustainable future. Presently, transportation of artworks through air cargo, maintenance of exhibition halls, and chemicals for preservation and restoration all contribute to environmental pollution. A shift towards digital art will ultimately be good for the planet.
There are multiple options to migrate towards green NFTs that operate on clean energy and consume less electricity.
How can NFTs use less energy?
Shifting towards a Proof of Stake system
The Proof of Stake system is the most energy-efficient mechanism in the existing blockchain ecosystem. As already explained above, PoS relies on staking nodes to validate transactions. Thus, even Ethereum is upgrading to a Proof of Stake system that will reduce its energy consumption by a staggering 99%.
The Merge to Ethereum’s Proof of Stake protocol happened in September, 2022. Eventually, Ethereum will have 64 shard chains connected to a Beacon Chain, which will serve as the consensus layer that will coordinate the network. With most NFTs on Ethereum shifting to PoS, crypto art will start polluting less than it does now.
Utilizing renewable energy sources
To reduce the environmental impact of burning fossil fuels for electricity, technologies must shift towards renewable sources for generating clean energy. Emissions-free renewable energy from hydropower, wind energy, and solar energy can go a long way in protecting the climate.
Digital artists like Beeple dedicate a small portion of profits from their crypto art sales to funding clean energy projects. In fact, for a very long time, the crypto community has been investing in renewable energy to power their blockchain transactions.
Funding conservation projects
Apart from renewable energy, several experimental techniques and technologies exist that help offset the detrimental effects of high-energy transactions. For example, carbon capture can effectively isolate carbon dioxide from the atmosphere, collect it, and pump it into underground reservoirs for storage.
NFT investors can choose to purchase carbon offset credits as certifiable financial instruments to fund carbon reduction projects. Moreover, blockchain-based Green Bonds will further accelerate the shift towards greener projects and climate-friendly initiatives.
Leveraging off-chain solutions
Another method to reduce energy usage is to build a second layer on top of the blockchain and take most NFTs off the main chain. Thus, NFT sales can happen on layer-2, through specially designated channels between users. These channels can host innumerable transactions without significantly adding energy costs.
Finally, users can update the ledger status with all the bundled transactions through a batch process. For example, the Bitcoin Lightning Network uses similar technology to scale the network as well as reduce electricity consumption.
The following blockchains are extremely efficient, consume very little electricity, and pollute less.
Solana has a theoretical transaction speed of 65,000 TPS with a block finality time of 400-500 milliseconds. However, it can process around 2000-3000 TPS in real-time with transaction finality in 21-46 milliseconds. Solana consumes just 0.00051 kWh (1,836 Joules) of energy for one NFT transaction, expending less energy than two Google searches.
In comparison, a LED bulb consumes 36K Joules and a refrigerator consumes 810K Joules of energy per hour. Annually, Solana consumes 11,051,066 kWh in total, equivalent to the consumption of just 1038 American households. It releases 935 tonnes of carbon dioxide into the atmosphere every year.
Cardano has a transaction speed of 250 TPS with transaction finality time of around ten minutes to over an hour. The layer-2 Hydra update will improve this performance by scaling up the network to process 1 million TPS with instantaneous block finality.
For one NFT transaction, Cardano consumes 0.5 kWh of energy. To put this in perspective, a freight truck consumes 130 kWh while an electric scooter consumes 1 kWh of energy per 100 km.
Cardano’s annual carbon emissions are 284 tonnes per year. Users can buy energy-saving NFTs from Cardano NFT marketplaces like Galaxy of Art and CNFT.
Tezos can process around 40 TPS with a block production time of around one minute. Each transaction on the Tezos network consumes 30 Wh of energy with annual consumption of up to 60 MWh. The blockchain has a continuous drawing amount of seven kilowatts of energy.
Tezos powers the popular NFT marketplace Rarible, which is host to environmentally-friendly NFTs.
Algorand can theoretically process 1,200 TPS with instant block finality. In practice, however, it has 20 TPS with a transaction finality time of four to five seconds. According to a report from Crypto Carbon Ratings Institute, Algorand consumes 2.7 Wh of energy per transaction.
With around 190 million transactions annually, the network consumes 512,671 kWh of electricity every year. Consequently, it releases around 243.5 tonnes of carbon dioxide annually.
Algorand powers Aorist, the sustainable NFT marketplace for climate-conscious artists and collectors.
Immutable X is an Ethereum layer-2 scaling solution for buying and selling NFTs with 9000 TPS and almost instantaneous finality time. Immutable X follows a carbon-neutral strategy by offsetting the carbon emissions with certifiable climate partners Trace and Cool Effect. Trace has offset 1,000 tonnes of carbon dioxide and planted 5,714 trees to neutralize any NFT-induced pollution.
Cool Effect facilitates the purchase of carbon offsets and uses the funding to support clean energy projects.
Greener NFTs are the future
The NFT craze is not going to subside anytime soon–the total trading volume in Q1 2022 alone surpassed $12 billion.
At the same time, an overwhelming number of global consumers are becoming climate-conscious and making a shift towards more sustainable purchasing decisions. These consumers are even willing to pay a premium to keep the earth clean, to the extent that Environmental, Social, and Governance (ESG) criteria are emerging as crucial factors for screening projects.
NFT investors who care for the environment can now assess ESG standards before adding them to their portfolios. The NFT market is now full of green alternatives that do not pollute the environment as much. Users can choose to use a PoS blockchain along with carbon-neutral technology to participate in the NFT market without harming the environment.
At MoonPay, we continue to bring green NFTs to our consumers to reduce any harmful effects on our planet. We’ve even pledged to become carbon neutral by 2025 by offsetting emissions and investing in carbon reduction strategies. This is just a start for us, but with our ambitious and enthusiastic team, we will continue to do our part to protect our precious planet.