NFTs (non-fungible tokens) have taken the digital art world by storm. Paris Hilton is the latest celeb to attach herself to the crypto after selling more than $1.11 million in her NFT collection. Despite their popularity, NFTs have an unintended consequence—they're bad for the environment.
With tangible objects like plastic taking much of the blame for the climate crisis, it can be difficult to understand how a digital asset impacts the planet. Still, NFTs and the entire blockchain system play a critical role.
NFTs' environmental impact, explained
Most NFTs trade on the Ethereum blockchain, which is the most actively used blockchain in the world of crypto, according to Bloomberg.
At the core of cryptocurrency is the idea of decentralization. Instead of being dependent on a single institution, blockchains operate through a system of computers. These computers aren't your average laptops, but rather something called "mining nodes" that must continuously solve complex puzzles to prevent blockchain takeovers in a peer-to-peer system. This process is called "proof-of-work."
The bitcoin blockchain consumes 133.65 terawatt-hours of electricity per year, which is more than the entire country of Sweden. Of that, 39 percent comes from renewable energy sources. A single NFT on the Ethereum blockchain can use as much as 8.7 megawatt-hours of electricity, which is more than double what one U.K. household uses in a year.
Will NFTs be able to shrink their carbon footprint in time for assets to grow their value?
The Ethereum blockchain currently uses an energy-guzzling proof-of-work system, but that might not last. Alternative options for blockchain security could be on the horizon, one of which is called "proof-of-stake." This new process wouldn't use mining nodes, but rather "validators" that require traders to deposit a sum with growth potential in order to participate in the system.
It's much more complex than the existing system, so it would be hard to implement. It would also be tricky to convince traders of the system's soundness with a new, complex system—especially when it has been working so well (environmental impact excluded). However, it could drop the blockchain's environmental impact to zero overnight if successfully implemented.
Until validators take the place of mining nodes, NFTs might only have one out—renewable energy. Given the slow rate of renewable energy infrastructure development, this might not be the most time-efficient model.
Another potential consequence: NFT money laundering
A hefty carbon footprint isn't the only downside of NFTs. In 2017, initial coin offerings were popular, but then the SEC determined that they were a common avenue for people to launder money. NFTs could suffer the same fate.
Cryptocurrency is made up of bare assets that make it difficult to hide illegal activity. However, NFTs function in a way that allows the owner of the code to resell the asset at a higher rate later on. This could pave the way for money laundering, which would be bad news for those who've invested heavily into NFTs and digital art. No one has been caught yet, but it's a possibility that crypto enthusiasts should be aware of before putting all their assets in one crypto basket.