NFTs, or non-fungible tokens, have grown in popularity over the past couple of years. Primarily used as a means of conveying ownership of digital art and collectibles, NFTs have sometimes reached the level of fine art.
But there is an additional hidden cost with NFTs – the environmental impact of using blockchain to transfer assets. The energy consumption of cryptocurrency and its impact on the environment has become a hot topic lately. The increase in NFTs only fuels the flames.
How NFTs Work
A non-fungible token uses blockchain technology to certify ownership of an asset. NFTs contain specific information that makes them work a little differently from cryptocurrencies. More importantly, you cannot replace an NFT with a similar NFT because they are not fungible. Any Bitcoin (CRYPTO: BTC) worth the same as any other Bitcoin, but not with NFTs.
Most NFTs use the Ethereum blockchain to transfer ownership. When someone buys an NFT on the Ethereum blockchain, they send Ether (CRYPTO: ETH) to the current owner or marketplace supporting the transaction. In return, they receive the NFT in their wallet. Part of the payment includes âgasoline chargesâ or service charges associated with the transfer. These fees go to the owners of the network of computers used to confirm transactions on the blockchain.
If you own a TVN, it’s like owning the rights to a collector’s item or a work of art. It is virtually impossible to prevent anyone from making a digital copy of a publicly displayed jpeg or video file. Owning the rights, however, is more like owning an artist’s original painting, while the copies are more like owning a cheap poster. The original has value; printing is virtually worthless.
How do NDTs affect the environment?
The environmental challenge for NFTs is the one plaguing the entire crypto industry.
As mentioned earlier, the majority of NFTs use the Ethereum blockchain, which uses a proof of work system to confirm each new block. This means that all computers on the network (that is to say, miners) race to solve a complex problem. The first computer on the network to resolve it receives the right to confirm the block and receives the gasoline charge associated with each transaction in the block, along with a reward.
As the price of Ether goes up and gas costs go up, so does the value of fixing this issue in the Proof of Work system. As a result, miners are incentivized to invest in more computing power, which draws an increasing amount of energy from the electrical grid. If this energy comes from sources that emit greenhouse gases or are otherwise harmful to the environment with nothing to compensate for it, it will negatively affect the environment.
But determining how NFTs specifically affect the environment is difficult to understand. NFTs represent a small portion of transactions on the Ethereum blockchain. It’s not clear whether they’ve made a significant difference in terms of the amount of computing power miners are adding to the network to solve these complex problems. While it is likely that NFTs will have a non-zero impact, their impact might not be as large as the wider adoption of crypto and decentralized finance (DeFi) in general.
Environmentally friendly NFT
There are several ways to make DTVs more environmentally friendly.
First, there is a movement within the crypto space to use more renewable energy sources for mining. But this solution poses its own problems of continued pressure on the electricity grid, not to mention the fact that renewables could likely be used for other more urgent needs, like keeping the lights on.
Other options involve changes to the underlying technology for NFTs. Using a blockchain that relies on a more energy efficient proof of stake system can reduce consumption and greenhouse gas emissions attributed to DTVs. With a proof of stake system, miners block a certain amount of cryptocurrency, which gives them the opportunity to confirm the next block on the blockchain. The power of the computer no longer matters.
Several blockchains already use the proof of stake system and support NFTs, including Cardano (CRYPTO: ADA) and Solana (CRYPTO: SOL). Ethereum has been working to migrate to a proof-of-stake system called Ethereum 2.0. However, he has been working on the change for years and there is no specific date for the change.
Another solution to the environmental challenge is to use a second layer on top of the blockchain. A second layer would allow anyone to transact outside of the blockchain and then batch process them all at once into a large transaction on the blockchain itself. There are various âlayer 2â solutions for all kinds of blockchains, one of the most notable being the Bitcoin Lightning network.
What future for NFTs?
Artists and collectors go to great lengths to make DTVs more environmentally friendly. Not only that, but the entire cryptocurrency industry is also under pressure to reduce the environmental impact of crypto assets.
If the market demands a more environmentally friendly way to buy, sell and collect DFTs, the industry will be up to the task. Solutions already exist and many marketplaces and NFT platforms promote respect for the environment of their services. We can see more NFT projects migrating to these platforms and moving to blockchains that use the proof of stake system to confirm transactions.
But no other blockchain that supports the smart contracts needed by NFTs has the reliability and reputation of Ethereum. So bigger NFTs, such as one-off creations from artists like Beeple, may still want to use the Ethereum blockchain. For this, it is on the Ethereum network to migrate to Ethereum 2.0 or to develop a reliable layer 2 solution for NFTs on the Ethereum blockchain.
Should you consider investing in NFTs?
If NFTs have sparked your interest, but you are concerned about the environmental impact of buying and selling on blockchain, you may want to do some additional research before investing. Finding NFTs that use a proof of stake blockchain is not difficult, but you will be excluded from some of the more popular projects if you refuse to use the Ethereum blockchain.
Most importantly, consider the volatility of NFTs. Their value can fluctuate even more sharply than cryptocurrency and, due to the fact that they are not fungible, they can be more difficult to liquidate because a buyer must demand your specific NFT. If you have to sell, you may need to accept a lower price than market value or wait for a buyer to meet your price.
If you are considering investing in NFTs, be sure to purchase something that you will be proud to own, as you could end up stuck with it. The good news is, if you never sell it, it won’t impact the environment anymore.