Are NFTs bad for the environment?

Non-fungible tokens are much more than expensive gifs and digital versions of physical art for the wealthy crypto elite. These unique digital assets range from music releases to in-game purchases, and even entire real-world houses. Currently, the NFT market has a cap of more than $11.3 billion. By 2030, that market cap is expected to rise to $231 billion.

With such massive growth expected, how do we ensure that non-fungible tokens have a sustainable future?

Decentralized networks across the crypto space are focusing increasingly on using renewable energy sources and reducing their carbon emissions. Pre-Ethereum 2.0, most NFTs on the market were being minted and transferred on its energy-intensive blockchain network.

Before September 2022, Ethereum used a proof-of-work consensus mechanism and had an energy consumption peak of 94 TWh per year. After switching to a proof-of-work mechanism, its carbon footprint has shrunk by a reported 99.992%.

The change from PoW to PoS, called the Merge, has had a huge impact on NFT's energy consumption. In this article, we’ll explain why.

NFTs and energy

The first thing to note about NFTs’ energy use is that it’s not a perfectly traceable thing. NFTs operate by a multi-step process. First, the tokenized item has to be minted, or published on the blockchain. Once there, the digital file can be auctioned or traded. And none of those transactions has an inherent energy use. Instead, it’s the validation of this information where energy is expended and greenhouse gas emissions might be generated.

There are many methods to validate transactions on a blockchain network, which we explain in greater detail in other articles. But two key consensus mechanisms are the proof-of-work system and the proof-of-stake system.

Proof of work is where blocks of amassed data must be verified by completion of an assigned mathematical puzzle. Whoever solves it receives a profitable bounty, and there is stiff competition to get the answer first. This process, called mining, depends on having more processing power than everyone else. Massive amounts of electricity are being used around the world for powering mining operations.

So we know blockchain mining is energy intensive, but how much energy is actually being used? According to one estimate, transferring ownership for one NFT required as much energy as running a refrigerator for a month.

Ethereum – The Merge

Most NFTs, like most smart contracts and major cryptocurrencies, live on the Ethereum blockchain. Thankfully, Ethereum’s electricity consumption has radically plummeted since its switch to using a PoS consensus mechanism. So how much energy is being expended by NFTs now?

The switch to a PoS system cut Ethereum’s energy use by over 99.998%. Ethereum’s PoW mining process had comparable annual energy costs to a small country. Now, their PoS system only costs 0.0026 TWh annually — that’s the amount of energy used to heat a sports arena for a year.

Proof of stake is somewhat like proof of work. It still has a math puzzle that needs solving, and it still maintains the distributed ledgers’ accuracy and security. But instead of a global, energy intensive free-for-all competition, PoS assigns one node to solve the puzzle at a time.

This eradicates the need for massive mining operations. Instead, anyone’s standard laptop or smartphone should be able to solve a block’s puzzle. Mining operations’ electricity use, and the electronic waste created by the technological arms-race, are obsolete with PoS.

Other energy friendly systems for NFTs

Ethereum 2.0 isn’t the only environmental ally of crypto art. Many NFT marketplaces prioritize carbon neutrality and, in Hedera’s case, even carbon negativity. Here are some techniques and case studies of how platforms can reduce their environmental impact.

Green energy

One way to reduce a blockchain network's carbon footprint is for its consensus mechanism to be fueled by renewable energy. For Bitcoin, that’d mean having mining operations relocate their warehouses of computing power to areas with plenty of clean energy. However, using renewable resources doesn't negate the fact that more energy needs to be produced for mining operations.

Batching

The preliminary workings of NFT transactions don’t need to be stored directly on the blockchain. “Batching” is the process of using side chains or second layers to run alongside the primary blockchain.

Let’s say a piece of digital art is up for auction and 100 people bid on it. Normally, each individual bid would be stored as a data point on the blockchain. But with “batching,” those bids are instead bundled onto a side chain, reducing from 100 data points down to one. Many NFT transactions can be reduced to a single blockchain transaction without necessarily influencing processing speed or gas fees.

Hedera

Hedera uses the most energy-efficient consensus mechanism possible, through its directed acyclic graphs (DAGs) form of distributed ledger and proof of stake consensus algorithm. Hedera pledged in 2021 to become carbon negative through quarterly carbon offset purchases, while still offering stable transaction fees.

IMPT

IMPT is a new NFT marketplace that uses a carbon credit ecosystem to contribute to environmentally friendly efforts. Consumers can buy their tokens, which are NFT carbon offsets, and then trade these carbon credits on the secondary market.

Coorest

Coorest is a market that is innovating carbon sequestration by digitizing tree planting initiatives. Every NFT that you buy on Coorest is the real-world equivalent of planting 10 trees. By their estimates, one NFT purchase will absorb 250 kg of CO2 emissions each year.

Are NFTs bad for the environment? We think not.

The non-fungible token industry hasn’t had a great track record for environmental consciousness. With most platforms operating off the Ethereum blockchain, NFT markets and artists were limited to trading on a carbon-intensive system.

Even pre-Merge, corners of the crypto world have been pioneering means to minimize their carbon footprint. Hedera and others are going further, focusing efforts on being more energy efficient and even removing carbon from the atmosphere.

Now a PoS system underlies most NFT transactions, and environmental consumers continue to push marketplaces in the right direction. And as more innovations arise, NFTs will, bit by bit, keep growing greener.