NFTs: Creating Artificial Value at a Very Real Cost

By Sedi Caine, Law and Policy Clerk

What are NFTs?

Non-fungible tokens (NFTs) are a relatively new type of collectible on the market, one that’s entirely digital. They can be anything from drawings to music and even tweets, but the current craze centers around the sale of digital art. The idea of an NFT is to create a unique identifier for digital art that creates scarcity and value in the original product. Even if others have access to copies of the digital file, only one person owns “the original.”

NFTs are primarily minted on the Ethereum blockchain (you may be more familiar with “Bitcoin,” which uses a similar process). Blockchains are database systems which allow for secure transactions over the internet through a very long and complex series of transactions. A wide network of computers is constantly at work, checking to make sure the chain stays the same and that only authorized additions occur. These transactions are used to verify that the digital item in question is the true, unique work. Think of it as a non-transferable “sticky note,” or a “certificate of authenticity” attached to a digital item which marks it as the “one true” version.

Take, for example, the popular internet meme, Nyancat. Follow that link and you’ll find yourself at a website where you can watch a continuous GIF of Nyancat as he runs across the night sky. The website, maintained by the owner of the meme, is completely legal and accessible by anyone. But a GIF of Nyancat sold in early 2021 for $660,000. So why can we still view it? Selling an NFT only gives the owner exclusive right to the sticky note, not the use of the digital piece. It’s a market centered around the inherent value of owning an original piece, for whatever that’s worth ($69 million for this collection, apparently).

The Environmental Impact of NFTs

The concern around the NFT market is the large and detrimental environmental impact associated with the process of creating, buying, and selling NFTs. This impact is essentially undisputed, with even Ethereum itself acknowledging the system is bad for the environment. The Ethereum blockchain uses an intentionally inefficient process called, Proof of Work, to verify transactions occurring within the network. The proof-of-work protocol requires “miners” (computers running software) to go through an intense race of trial and error to generate a new block to add to a chain. The block contains a record of these transactions, and only one block will be considered a canonical edition to the chain. The process is entirely random which makes the system very secure and ensures the legitimacy of transactions taking place within it. The lucky owner of the machine that generates the canonical block is due to make a hefty profit, while everyone else who competed gets nothing despite the energy consumption of their efforts.

Because the payoff functions this way, the process encourages people to utilize as many computers as possible when mining. Think of it like playing the lottery. Every lottery ticket purchased has the same statistical chance of winning, but a person with 1,000 tickets is more likely to be a winner than a person with one. The way the system functions encourages people to increase their activity within the system, which in turn increases the overall carbon footprint by Ethereum. Currently, a single Ethereum transaction is estimated to use the same amount of energy consumed by an average US household over 4.19 days. Multiply this by the thousands of transactions that occur daily and the energy consumption becomes a lot more worrisome.

NFTs come into the picture because their value is connected to the authenticity assured by use of the Ethereum blockchain. It is not actually the NFT itself which causes the emissions, but the transactions and verification occurring through the system. However, as the NFT market grows, the incentive for additional miners grows as well, and this is where the problem lies. A lucrative market will encourage new entrants, and with record-breaking heatwaves across the Pacific Northwest and an unprecedented snow storm in the South last February, we’re not in a position to encourage such energy-intensive, climate-altering endeavors.

What Next for NFTs?

Despite the negative impacts of NFTs, there is an appeal to the market, particularly for artists. Art has an inherent value and artists deserve to be compensated for their work. NFTs create a new model of ownership for artists which can greatly benefit them in terms of profit. Unfortunately, society is not prepared to handle the costly environmental impacts of the crypto-currency market, and encouraging the production and sale of NFTs will only make the issue worse.

There are technical difficulties to addressing this problem politically. On the one hand, a ban on mining or a tax on the activity may help local governments meet their climate initiatives and encourage more efficient technologies. At the same time, this may encourage miners to outsource their activities, giving foreign markets an advantage over domestic market growth while continuing to harm the environment.

There may be a time when things like Bitcoin, NFTs, and other crypto-based items can be freely exchanged with little to no environmental impact, but we’re not there yet. At a time when we are trying so hard to combat climate change and keep our planet hospitable, engaging in activities with such a large carbon footprint is not in our best interest. Ethereum and Bitcoin have proposed switching to a different mechanism or using renewables to reduce their impact, but as long as NFTs and crypto-currencies continue to operate at their current energy consumption levels and carbon emissions, things aren’t looking great for our climate initiatives. Continuing to produce and encourage the production and sale of NFTs, with the current system in place, is simply unethical and harmful to us and the planet.

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