Although NFTs have been around since 2014, these blockchain assets only started to gain mainstream adoption in 2021 when celebrities like Stephen Curry and Eminem changed their Twitter profile pictures to Bored Ape NFTs. Today, everyone, from world-famous tennis players like Serena Williams to your Joe next door, wants to know why someone would pay $600,000 to own a rainbow cat meme.
While these NFTs are popular for their unique nature, they’ve also received criticism for the environmental impact mining (a process of adding data of a digital file to the blockchain) has on the planet. This was a problem that Ekta was acutely aware of when the company was first established, and the team was determined to find a sustainable, long-term solution.
We’ve compiled a complete guide that explains how NFTs work, elaborate on the aspects that make NFTs harmful to the environment and share solutions that can make NFTs more sustainable.
To understand what a Non-Fungible Token (NFT) is, you first need to understand what it means for an asset to be “fungible”. If something is fungible, it means it can be replaced with another item in the same category without changing its value. For example, a $1 note is a fungible asset. If you trade a $1 note for another $1 note, you will still have a note with the same value.
NFTs, on the other hand, can’t be replaced by any other png, mp3, or mp4 file. It consists of the digital public record of transactions that tracks the NFT each time it’s sold or bought.
In simple terms, if you own an NFT asset, it means you own rights to a unique collectible or art by an artist. Since we can’t stop people from making digital copies of an image, video, or audio file, owning the NFT is equivalent to owning an original painting while copies are similar to replicas or cheap poster prints. NFT assets can be traded, but this is not the case with copied NFTs. This is due to the fact that the ownership of a copied file can’t be changed without the permission of its current owner, leaving the file with no value.
To put things into perspective, digital artists make NFTs through a process called “minting”. During this process, the artist generates a unique code that represents the asset on the blockchain and tracks every time the asset is sold, bought, or traded, along with the details of current ownership.
At the moment, most NFT marketplaces use the Ethereum blockchain, so when someone buys an NFT, the buyer deposits ETH, which includes the price of the NFT plus service fees known as “gas fees” to the current owner or the marketplace. The seller then receives this NFT in their digital wallet and the gas fees go to the network to confirm transactions on the blockchain. However, Ekta will soon be launching the Ekta NFT Marketplace, an affordable, environmentally friendly alternative to current products available on the market.
Mining is an essential part of circulating and recording NFT transactions into the ledger (a centralized database that allows all users to access information regarding the transaction). Validating transactions and minting new crypto tokens forces systems to solve complex problems using energy-intensive computers. This adds a new block of verified transactions to the decentralized blockchain.
These operations require copious amounts of resources and power. Chris Precht, a well-known personality specializing in creating ecological architecture, calculated the energy usage of 100 copies of three of his NFTs and concluded that they consume the same amount of electricity as a European household in two decades.
Currently, platforms like Ethereum and Bitcoin use a Proof-of-Work (PoW) consensus algorithm that consumes a large amount of energy to do the minting. And as the price of ETH increases, so do the gas fees — increasing the total number of transactions on the PoW system. Companies that strive to maximize profits by switching to cheaper electricity like fossil fuels are worsening the overall environmental impact of NFTs.
Does this mean NFTs can never be sustainable?
The answer is no. As blockchain technology evolves, new alternatives are becoming available allowing companies to pivot towards more sustainable alternatives. Here are two solutions that can help create environment-friendly NFTs:
One solution that can help reduce the environmental challenges associated with NFTs is to create a second layer or Layer 2. This would allow users to transact outside of the blockchain and batch-process the transactions all in one go.
“For example, an auction could be entirely held off-chain on Layer 2, and then be submitted to the blockchain as batches. This is a solution that can be implemented more short-term” explains Susanne Köhler, a PhD fellow and sustainable blockchain technology researcher at Aalborg University in Denmark.
Although the Proof-of-Work (PoW) consensus algorithm is one of the most reliable methods that major cryptocurrencies use, it’s not scalable as it offers limited performance in terms of transactions per second (TPS).
This is because before a new block gets added to the blockchain, it needs to be verified and approved by the majority of the network nodes. PoW slows down the entire process and limits its potential to be used on a large scale.
This is where Proof-of-Authority comes into the picture. Proof-of-Authority (PoA) is the latest consensus algorithm that offers fast performance and high fault tolerance and Ekta’s choice consensus algorithm. With PoA, only the nodes, which are referred to as “Validators”, with high authority can generate new blockchain on the platform. This may require them to pass an automated preliminary authentication stage where validators run software validating all the blocks before adding them to the blockchain.
Since PoA relies on only a few block validators, it’s a highly scalable system that pre-approves participants before having them make any transaction. This way, unless the risk is beyond 51%, PoA benefits from high-risk tolerance and sustainable, fast transactions.
The third solution to reduce the environmental impact is to donate a set amount of profits made from NFTs, to carbon credits or contribute to projects that are improving the environmental footprint.
It’s clear that although NFTs have received criticism for their environmental impact, the blockchain and cryptocurrency industry is constantly evolving, unlocking new opportunities to apply the technology in more sustainable ways. We now see that there are new solutions to help make NFTs more sustainable like switching up the production process and being mindful about how we use the profit. And in true Ekta tradition, we’ll continue to search for long-term solutions that benefit humanity and our natural world as a whole.