Between hype and criticism – aware_ takes a close look at NFTs and examines their sustainability
Hardly any other topic is currently being discussed as much as crypto, bitcoin & co. Now another one has joined them: Non-fungible Tokens, or NFTs for short. Since their introduction in 2014, NFTs have become increasingly popular: as a way to buy and sell digital artworks and other digital assets. As a result, an incredible $174 million has been spent on NFTs since November 2017 (Forbes). Brands and celebrities are embracing the trend as they see this as a new way to connect with their fans. The most hyped area is NBA Top Shot, a place to collect non-fungible tokenized NBA moments in the form of digital cards. Some of these cards have already sold for millions of dollars. In another example, Co-Founder and former CEO Jack Dorsey tweeted a link to a tokenized version of his first ever tweet, writing “just setting up my twttr.” The NFT has already been auctioned off for up to $2.5 million (Investopedia).
However, NFTs are also repeatedly criticized – especially because of their high energy consumption. aware_ has taken a close look at the new digital art form and examined its sustainability.
To understand the hype around NFTs, we should first look at what NFTs are: NFTs are non-fungible tokens that are unique and cannot be replaced by anything else. While a digital file can be copied an unlimited number of times, NFTs are designed to transfer ownership of a work only once. Compare this to collecting physical art: anyone can buy a print by a famous artist, but only one person can own the original. Ownership is managed by the unique ID and metadata, which cannot be replicated by any other token. The creator of the NFT may intend to make each NFT completely unique, or they may make several thousand replicas, for example for an event. This information is all public. So, an NFT can also be like a trading card, of which there are 50 or hundreds of numbered copies of the same work.
From digital art like GIFs, collectibles, music, or videos to real-world items like car sales contracts, tickets, tokenized invoices, legal documents, or signatures, NFTs can be anything digital. Moreover, NFTs can function like any other speculative asset, where you buy them and hope that their value will one day rise so you can sell them for a profit.
Most NFTs are part of the Ethereum blockchain. Ethereum is a cryptocurrency like Bitcoin, but its blockchain also supports such NFTs, which store additional information that changes the way it works. The difference with Bitcoin is that Ethereum is not a pure cryptocurrency, but also a platform for creating, managing and executing decentralized programs, such as crowdfunding or online voting. There are several marketplaces where NFTs can be bought and sold – such as OpenSea, Rarible, Nifty Gateway and many more. Unlike cryptocurrencies, NFTs cannot be traded or exchanged for an equivalent value. This distinguishes them from fungible tokens like cryptocurrencies, which are identical to each other and can therefore be used as a medium for commercial transactions. In addition, content creators can sell their work anywhere and have access to a global market. They can also retain ownership of their own work and receive royalties directly for resale (The Verge; ethereum.org; Investopedia; Forbes; Haus von Eden).
Like any technological advancement, NFTs, as an evolution of the relatively simple concept of cryptocurrencies, bring some notable advantages: The most obvious benefit is market efficiency. By converting a physical asset into a digital one, processes are streamlined, transactions are simplified, intermediaries are eliminated, and new markets are created. NFTs, which represent digital or physical artworks on a blockchain, eliminate the need for middlemen and allow artists to connect directly with their audience. They are also ideal for identity management: smart contracts enable the addition of detailed attributes, such as the owner’s identity, rich metadata, or secure file associations. The ability of non-fungible tokens to immutably prove digital ownership is an important advance for an increasingly digital world. The trustless security promised by the blockchain could be applied to the ownership or exchange of almost any asset (Investopedia; Decrypt).
Despite increasing popularity, this promising new technology is also facing constant criticism. Because NFTs use the same blockchain technology as some power-hungry cryptocurrencies, they also consume a lot of energy to maintain their qualities of decentralization and security. NFTs are largely issued on so-called Proof-of-Work (PoW) networks, of which Ethereum is the largest. This mechanism is used to store large amounts of data and verify that transactions are legitimate. It is this PoW mechanism that leads to the incredibly high energy consumption of the Ethereum network. In addition, the devices consume a lot of electricity and generate significant amounts of heat, resulting in CO2 emissions. The electricity used to mine Bitcoins is often generated using fossil fuels. Add to this the incredible masses of e-waste generated by millions of server computers worldwide, which are replaced on average every 18 to 24 months (The Verge; ethereum.org; Haus von Eden; monopol; Binantrader).
But the first solutions for sustainable blockchain technology are emerging, albeit tentatively: Alternative mechanisms such as Proof-of-Stake (PoS) are much simpler regarding computational power and therefore much less harmful to the climate in terms of energy consumption and carbon footprint. These methods are already used by several blockchains that also support NFTs – such as Polygon, Snark.art, and Tezos. Ethereum is also currently undergoing a series of upgrades known as Eth2. These are designed to eliminate computational power as a security mechanism and reduce Ethereum’s carbon footprint by about 99.95%, making it more energy efficient than many existing industries.
Many processes associated with NFTs also use renewable energy sources or unused electricity in remote locations. Movements that advocate for more attention to green technologies and the development of sustainable NFT systems or investing in lesser known blockchain technologies that focus on sustainability from the start are other approaches. The conservation organization WWF, for example, wants to use the hype around NFTs to raise awareness about the plight of endangered species. In the process, the WWF is selling the works of ten artists who deal with endangered species; the proceeds of the Non-Fungible Animals campaign will benefit WWF projects to protect endangered species months (ethereum.org; Haus von Eden; Utopia).
It remains to be said: As things stand today, NFTs are only CO2-neutral if they are used in the right context, for a sustainable purpose, generated with renewable energies or subsequently compensated. It is to be hoped that new technologies like those presented before will experience the same enthusiasm as the hype surrounding NFTs in general.
by Marie Klimczak