Cryptocurrencies and NFTs (non-fungible tokens) are exciting technologically advanced currencies and investments, but that doesn’t mean they are good for the environment. Bitcoin and Ethereum receive negative attention for the massive amount of electricity they consume. That could have you wondering about the NFT environmental impact. Here’s a deeper look at the sustainability of NFTs and cryptocurrency.
What Is the NFT Environmental Impact?
Cryptocurrencies and NFTs both operate using blockchain technology. With a blockchain, every asset has a clear owner tied to a digital wallet. And the blockchain tracks each asset from inception using a system of distributed ledgers. With a distributed ledger, multiple computers track the ownership of every on-chain asset. And this enables the entire network to operate.
Each blockchain uses a consensus mechanism. This set of rules governs how new transactions are added to the blockchain and tracked. The best-known blockchains, Bitcoin and Ethereum, use a consensus mechanism called “proof of work.” With this system, computers called “miners” compete to add the next block and earn a reward. This process uses a lot of energy.
As of this writing, Bitcoin uses about 93 terawatt-hours of electricity per year. The entire country of the Philippines uses about that same amount. Ethereum, which is home of most NFTs, uses about 68 terawatt-hours. Austria uses less.
The energy used by cryptocurrency and NFT blockchains is a serious concern and for good reason. But before you turn anti-crypto for environmental reasons, it’s important to understand how crypto and NFT transactions use energy and the potential opportunities to lower energy consumption by blockchain networks.
How Does Ethereum Relate to NFTs and the Environment?
To get a better idea of the sustainability of NFTs, take a look at how NFT transactions work. Understanding that can give you a better idea of why Ethereum uses so much energy and how we can use less energy in the future. (Bitcoin uses a similar transaction method but isn’t widely used for NFTs.)
When you buy an NFT or any other token or currency on the Ethereum network, you pay network transaction fees. When you clicking the button to initiate the transaction, you’re sending a public notice to the entire Ethereum network that an asset is moving from one wallet to another. Every miner records the transaction in its copy of the public blockchain ledger. But only one of those computers earns a transaction fee for verifying the block.
Every computer on the network does similar work to record the transaction. But those with the most computing power have the best chance of earning the mining reward. That incentivizes people worldwide to plug their computers into the network, using more and more power to verify each transaction and run the network.
It doesn’t matter if you’re sending ethereum to a family member abroad, buying an NFT or sending cryptocurrency from your exchange account to your hardware wallet. On the network, transactions are handled similarly and use similar amounts of power.
Improving the Sustainability of Cryptocurrency
When the Industrial Revolution began, the world began burning coal, oil and other fossil fuels to kickstart a new era. But now we’re moving to more environmentally friendly and sustainable methods. Cryptocurrency is going through a similar revolution. But it came about far faster than it did with cars and the power grid.
Proof of work, where miners compete for a reward, isn’t the only way to run a blockchain. Ethereum is currently undergoing a major upgrade to Ethereum 2.0. This uses a consensus mechanism called “proof of stake.” With proof of stake, computers use a different algorithm and work together instead of competing to create a new block. And this should lead to much lower energy use.
Long-term Sustainability of Crypto and NFTs
Proof of stake isn’t a brand new concept. You can see proof of stake in action with blockchains Cardano, Tezos, and others. These platforms may be able to handle NFTs in addition to the currencies they’re best known for. With the big Ethereum 2.0 upgrade, it will join these currencies with a much lower energy requirement per transaction.
The future of blockchain and cryptocurrency networks is an exciting one. Cryptocurrency and NFTs use a ton of electricity today. But that looks to be improving in the very near future.
>>> Find out more: How to Get Started with ESG Investing