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NFTs and its impact on the environment

Author: Gaurav Shanker, Managing Partner, Yamini Mishra, Associate and Harshul Garg, Trainee Associate |

Article by Business Law Chamber

Non-fungible tokens (NFTs) have undoubtedly taken the digital world by storm, involving transactions worth of millions of dollars and giving an outlet for the artists to generate revenue for their artwork in the form of a ‘digital asset’.

However, one of the major pressing concerns that NFTs brings with it is promoting global warming by increasing the carbon emissions in the world. This occurs because NFTs and the related transactions are recorded on a blockchain technology, which is an energy intensive process. To simplify, NFTs are harmful to the environment because blockchain transactions use a mechanism called "proof-of-work", computers doing constant calculations to verify transactions, which consumes a great amount of energy.

Understanding ‘Proof of Work’

‘Proof of work’ basically involves solving a complex cryptographic mathematical puzzle using computer that is time bound with several other miners/competitors, the miner who solves the puzzle first gets to add the block to the chain and receives crypto in exchange as a reward. In less technical language, every block of transaction in a blockchain has its very own specific hash and in order to generate the target hash in relation to the block and that is done through computational devices. These devices consume energy incessantly in order to generate the hash. This target hash is then used to verify the transaction in the ledger of the blockchain, therefore, is known as the proof of work (the work employed in order to generate the target hash is thereby a proof of the legitimacy of the transaction).

This technique has quoted benefits as being extremely secure and prevent any hacks and alterations in the chain and provided a decentralized setup to verify transactions. However, this competition leads to millions of devices simultaneously engaging in the same task to generate a single target hash and thereby quadrupling the associated energy consumption

Understanding this, the way NFTs contribute to this excessive energy consumption is that these NFTs are minted majorly on the ethereum blockchain, which is a proof of work blockchain and thereby every NFT sold, minted, resold, etc., requires more and more mining of these blocks of transactions. This makes NFTs a direct contender and contributor to the environmental damage caused. Also, it is notable to mention that the cost of these mining is charged from the NFT owner/seller in the form of ‘gas fees’ that is charged by the platform.

Currently, ethereum claims that the way the platform keeps funds and assets secure is currently energy-intensive but it's about to improve, once improved, ethereum's carbon footprint will be 99.95% better, making it more energy efficient than many existing industries. The platform is aiming to transition to a more energy efficient “proof-of-stake” system, however it is yet to happen.

There have been several alternatives that are being employed to constantly make NFTs environment friendly:

  • There is another way to operate cryptocurrencies. It is the upcoming ‘proof of stake’ model which generates new blocks of transaction simply by providing them to existing stakeholders and manipulation is avoided by locking in the existing stake or lot of the individual’s crypto holdings. This technique avoids mining and therefore is being advocated by the environmentalists across the globe. Ethereum plans to launch its PoS version known as Ethereum 2.0 soon.
  • Another concept to reduce the environment concerns is to employ the concept of lazy minting, which is basically to showcase your asset and the minting is done only when it is purchased, thereby avoiding the creation of a useless data block (in case the NFT is never sold).
  • Interoperability within various blockchains is also deemed to be an important feature to reduce the environment concerns as transference to more sustainable cryptos should be facilitated in order to make the transition free from loss of data. This ecosystem involving interoperability is one such alternative to reduce the carbon emissions.
  • A general awareness among artists and investors regarding the disastrous consequences of using ethereum shall also lead to a more conscious shift to using blockchains such as Tazos or Polygram which have a significantly lesser carbon footprint than their other counterparts.

Evidently, NFTs are hampering our environment, however, considering the current craze for NFTs, it seems like this technology is here to stay. Though it has huge effects on the environment, but the relevant blockchain platforms are constantly working towards making NFTs a environmentally sustainable option and a shift from ‘proof of work’ to ‘proof of stake’ might be the best alternative the digital world is looking forward to.