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The environmental impact of NFTs

A discussion of environmental impact of NFTs and attempts to address or minimise these impacts.
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© RMIT 2022

To understand the environmental impact of an NFT we need to look at the carbon footprint of the blockchain on which an NFT is minted and transferred. There are many factors involved in both processes that make this a complicated, if not impossible, endeavour to fully understand.

Calculating the carbon footprint of a blockchain

NFTs compete for block space alongside other transactions and rely on the underlying ledger to show ownership. However, making a causal connection to the production or transfer of an NFT and the environmental footprint of the blockchain is fraught.

Let’s take the Ethereum blockchain as an example. NFTs as we commonly think of them originated through the creation of an Ethereum standard (ERC721). During Ethereum’s Proof of Work era, some claimed that “driving a car 100 miles releases just 20% of the emissions of the average NFT sale”.

However, it is not possible to calculate the environmental footprint of a single NFT because one NFT doesn’t directly translate to an increase in hash power for the Ethereum blockchain. The process of ordering transactions into blocks and proposing that they be added to the ledger is done by miners in a Proof of Work blockchain (or by validators/stakers in a Proof of Stake blockchain). Miners’ participation is based on economic incentives. Under Ethereum’s Proof of Work model (based on Bitcoin’s consensus mechanism ), miners would scale up their operations when it was profitable for them to do so. The algorithm was designed to deliver value by creating scarcity, so that mining a new block becomes more difficult as more computing power enters the network referred to as the “hashrate”.

The electricity use of this system depends on the number of miners who compete to mine blocks. Under Proof of Work, there is no need for more miners when transactions increase, or when gas fees are higher. An easy way to think of this is like a bus or tram that will run regardless of how many passengers are on it. Miners will propose blocks with or without NFTs.

There’s an argument to say that congestion will push up transaction fee prices (‘gas’ on Ethereum), which might incentivise more miners to get involved (or the same miners to run more hardware to improve their chances of receiving mining rewards in the form of ETH). However, NFTs make up only a small portion of the total transactions, so boycotting NFTs is unlikely to lead to a reduction in miners. In addition, some NFT-related marketplaces such as are using layer 2 solutions, effectively batching NFT transactions so that they use less gas.

Another thing to keep in mind is that Ethereum has recently moved from Proof of Work to Proof of Stake, which has reduce the electricity use of the network by 99%. Under Proof of Stake, those who wish to participate in ordering transactions and proposing blocks must deposit Ethereum into a smart contract. Like mining, these ‘validators’ receive rewards for their service, but they are randomly chosen to propose blocks rather than in proportion to the amount of computational power they have expended.

Other factors that impact carbon footprint

Most studies into the environmental impact of blockchain focus on the Bitcoin blockchain, which, aside from coloured coins that were first proposed for the Bitcoin blockchain in 2015, plays a minor role in the NFT arena. Such studies also tend to overlook the practices of miners.

The first thing to note is that energy use is not the same as carbon footprint. Many frequently cited models – such as those that equate the carbon footprint of Bitcoin to that of a medium-sized country– do not look at the sources of electricity that each miner is using. Rather, they will attempt to locate where mining is occurring and assume that the miner is using whatever energy mix is available from the electricity grid in that location. Aside from the fact that many miners obscure their IP addresses through the use of VPNs, a miner’s electricity use is not a good indicator of their carbon footprint. For instance, if a blockchain’s consensus protocols require mining and all miners are using 100 per cent renewable energy, then the carbon footprint of that blockchain is much lower than it would be if they were all drawing energy from a grid where there was a mix of renewables and fossil fuel used to generate electricity.

To fully know the carbon footprint of a Proof-of-Work blockchain, we would need to measure the type of energy consumed by each miner. As Bitcoin becomes an increasingly capital-intensive process, miners are incentivised to find the cheapest sources of energy they can, which in most cases is renewable energy. The Bitcoin Mining Council, an initiative through which Bitcoin miners self-report their energy consumption, found that members used 66% renewables in its power mix in Q4 2021, “making Bitcoin one of the most sustainable industries globally”. Members of the Bitcoin Mining Council make up 46% of the total Bitcoin hashrate.

To add even more complexity to this, some miners use energy from natural gas that is produced as a waste product during other industrial processes. While converting this gas into electricity carbon dioxide is released into the atmosphere as a less harmful greenhouse gas than if that waste was burnt through a process known as gas flaring.

Wider benefits for the environment

When considering the environmental impact of blockchain, it is also important to keep in mind that the technology can enable faster, more efficient renewable energy markets. It can also provide visibility over energy use and infrastructures, assisting with carbon accounting. Currently, when companies make claims about their environmental credentials, we are asked to take their word for it. With blockchain technology, including platforms such as EnergyWeb, these claims can be verified. As the Filecoin example shows, incentives can be built into the design of protocols and applications that encourage those interacting with the blockchain to behave in an environmentally responsible manner. NFTs are an important component in that wider system, such as when used to represent renewable energy credits such as ZeroLabs.

In summary, NFTs undoubtedly come with a carbon footprint, but that is being minimised through various developments including Ethereum’s move to Proof of Stake. Any holistic assessment of the environmental impact of NFTs also needs to take into account how blockchains and NFTs in particular are being used to bring greater transparency to energy use, and in the development of easier, more accurate renewable energy markets.

© RMIT 2022
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