NFT — Power Up or Power Down in the Climate Crisis?
NFTs are a strongly controversial topic with climate and environmental advocates.
NFTs are one of the fastest growing assets within crypto and web3. Most people know non-fungible tokens, or NFTs, as pieces of digital art. CryptoPunks or CryptoKitties are some of the most famous collections. NFTs are non-fungible tokens — non-interchangeable units of data of which the owner can be traced and identified; this owner is unique as is the NFT. This means, one NFT cannot be easily exchanged for another, similarly to an original Picasso. This means that NFTs offer several use cases across various sectors such as the energy or supply chain industries, intellectual property rights, etc.
Energy intensity of NFTs
NFTs do not have a good reputation when it comes to their energy intensity.
Especially the process of creating the NFT used to be very energy intensive. If you have already educated yourself about the Blockchain, you may have come across the term “mining”. This is also key in the creation of NFTs. NFT artwork is sold on particular marketplaces, i.e. OpenSea, which is backed by Ethereum, a particular Blockchain. Ethereum proofs transactions via “mining”. Miners compete to create a unique artwork, or NFT, requested by a buyer. The miner first to the finish line receives a commission; the others are out of luck, but used a lot of energy in the process — and all of their individual energy uses accumulate to a not so small amount.
Estimates say that one NFT transaction uses the same amount of energy that the average U.S. household consumes in 1.5 days, so around 48 kWh, says Inhabitat. Across the average lifetime of an NFT, it is likely to be around 75 kWh, according to NFTexplained.info. This refers to the consensus mechanism used. For example, a Blockchain using the Proof of Stake (PoS) consensus mechanism consumes less energy than a Blockchain backed by the Proof of Work (PoW) consensus mechanism. Ethereum just implemented PoS in a process called The Merge, executed on September 15th, 2022. So, it does make a difference on which Blockchain the NFT is minted (“created”) and new numbers on energy use will follow soon.
PoW is the oldest consensus mechanism used and thus, most estimations for energy intensity refer to it. Due to the set-up of the PoW consensus mechanism, the energy intensity of current transactions is a lot higher than those in the beginnings of Blockchain in the 2010s. This differs in PoS, which does not ask all miners to be involved in a transaction anymore, but only one. We are likely to see a surge of PoS backed systems in the near future.
With NFTs (and cryptocurrencies in general) becoming mainstream, you can imagine that there is a high amount of transactions using a significant amount of energy, making our data centers run hot.
NFTs and the Climate Discussion
The digitization process in general sees our data centers needing to process more and more data from day to day and year to year. They literally run hot and use a lot of power to be cooled (which keeps our data safe). So, NFTs are not the only challenge on this front, but also our use of online videos, podcasts, e-mails, you name it.
The energy transition process sees the energy industries moving from strongly centralized energy to strongly decentralized. A centralized industry can easily be monitored and protected, for example by the government; however, this is increasingly difficult when more players join the party. Thus, fraud has happened in the renewable energies industries with people claiming to sell green electricity, which actually is not green, or people receiving remuneration for green energy they are not actually selling.
As startup FlexiDAO explains, NFTs can be a trump for moving from conventional to renewable power sources because they are unique. They prove on an hourly basis where you bought your energy from and whether this actually is the green energy you signed up and thus, rather than the monthly basis that Energy Attribute Certificates (EACs) currently are the state-of-the-art. “EAC is a digital attribute that specifies and certifies for one megawatt hour of electricity the production site — which implies location and technology type — and the month it was produced,” as startup FlexiDAO says. In the energy transition, it is important to “[create] a tradable and immutable digital asset” — or NFT — “that can be audited and used to report 24/7 Carbon-free Electricity achievements” or Granular Certificates (GC).
This potential does not go unnoticed. The European Investment Bank (EIB) states in 2021 that Artificial Intelligence (AI) and Blockchain will not only “disrupt the financial system, but [will] also help us track and report greenhouse gas emissions better, optimize commercial transport and create genuine data privacy protection.” The UN Commission on Science and Technology for Development agrees in its landmark document Harnessing blockchain for sustainable development: prospects and challenges.
So, the energy intensity of NFTs does not automatically exclude them as a use case for the energy industry. Rather, they can support us in managing an energy transition where the electricity we buy, support and advocate for really is green and that at constant and regular intervals. We will see at COP27 in Sharm el-Sheikh in November, whether the sustainable potential NFTs bring to the table is recognized by governments and political institutions around the world.
Janika Collatz is part of the NFT Talents program offered by the Frankfurt School Blockchain Center. She believes that Blockchain and web3 offer a lot of potential for a just und sustainable energy transition.
