Why Are NFTs Bad for the Environment?

Just as we're finally getting a handle on what exactly cryptocurrencies are and how they work, a new crypto cousin has emerged. Enter non-fungible tokens (or NFTs). And, unfortunately, the environmental impact of NFTs isn't pretty. But before we dive into that, first comes NFTs 101.

NFTs, Simplified

Simply put, NFTs are unique digital tokens that—through a series of computer transactions—give someone ownership of a piece of art, like a video, song, or image. Traditional cryptocurrencies, like Bitcoin, are identical and can be exchanged with each other. NFTs, on the other hand, represent unique pieces of digital art. (Similar to how you could easily convert a $20 bill for two tens, but couldn't trade a Picasso for a Monet.)

The market for buying and selling NFTs is rapidly expanding. Especially because of COVID-19. “The pandemic has increased the amount of time people are spending online, making digitally native products like NFTs more attractive, as we’re living digitally now more than ever before,” Aubrey Strobel, head of communications at Lolli, a Bitcoin rewards app, told Bankrate. Just this week, a collage of futuristic illustrations sold for $69.3 million—the third-highest price received by any living artist.

Clearly, there's serious money at play. And the non-virtual art world is taking note. Artists with a previous track record of work are beginning to create NFTs, and renowned art auction houses like Christie’s are hosting sales. Increasingly, it looks like NFTs are a new component of the 21st-century art world.

Why Are NFTs Bad for the Environment?

NFTs share one harmful trait with their cryptocurrency cousins: they both use a ton of energy. Bitcoin ‘mining’ already generates 38 million tons of CO2 per year, more than the carbon footprint of Slovakia. And a 2018 study published in Nature Climate Change found Bitcoin emissions alone could raise Earth's temperature by two degrees.

"Bitcoin is a proof-of-work blockchain, meaning it uses a proof-of-work (PoW) consensus mechanisms to secure the blockchain and verify transactions. PoW means that miners compete against each other to mine a block," says Susanne Köhler, a PhD fellow and sustainable blockchain technology researcher at Aalborg University in Denmark. "In these competitions, specialized computers generate several trillions of guesses per second to try and win. You could call it a brute-force approach. This is what requires a lot of electricity."

To put this into perspective, the daily carbon footprint of Bitcoin is the equivalent of watching 57,000 hours of YouTube videos. And, its daily electricity usage is equivalent to the amount of power an average American household uses over the course of 25 days. The environmental impact of NFTs is similar, as it uses energy-intensive computer transactions to authenticate and sell the art.

"NFTs require transactions on a blockchain—to create NFTs, to bid, to pay for the NFT after winning the bid, or to transfer the ownership," Köhler says. "So you could associate the share of transactions NFTs need to their share of electricity consumption and associate environmental footprint. With an increased interest in NFTs and more people buying and selling NFTs, their associated impact increases."

The energy used for these transactions is a problem, too, as Köhler says miners are generally incentivized to use cheap electricity to maximize profits (like fossil fuels). There's also the topic of the technology used: "Production and recycling of the hardware only makes up a small share," she adds. "That being said, using specialized computers for mining that can become unprofitable within a few years creates large amounts of e-waste."

Can NFTs Ever Be Sustainable?

While it's clear NFTs currently have a hefty environmental impact, Köhler says there are some ways for them to become more sustainable in the future. Starting with reducing the impact of the blockchain that's being used.

"Most NFTs operate on Ethereum, which is a proof-of-work blockchain. Ethereum is moving away from proof-of-work to proof-of-stake to secure their blockchain and verify transactions, which will by association make NFTs more sustainable," she says. "However, this is no trivial task and takes time. Using a different (non-PoW blockchain) could also address this."

A second way for NFTs to become more sustainable is reducing the number of transactions they need on blockchains. "This can be done by building on 'layer 2,' meaning not every transaction needs to be on the blockchain," Köhler says. "For example, an auction could be entirely held off-chain on layer 2, and then be submitted to the blockchain as batches. This is a solution that can be implemented more short-term."

But in a world where most energy production is still derived from fossil fuels, critics say cryptocurrencies and NFTs will continue to contribute to global warming if change doesn't happen soon.