NFTs, blockchain, and the environmental impact of innovation

It says something about our attitudes and collective consciousness toward sustainability that the flood of attention around NFTs was followed by article after article about how much energy it takes to mint each one.

In short: a lot. Creating an NFT, on average, has a carbon footprint equivalent to driving a car 500 miles.

But it’s hard to dismiss a technology that has already helped independent artists and musicians find a new way to make a living from their work. It’s even harder to dismiss it when performing arts venues are already experimenting with NFTs and are already using blockchain to gain more control over their ticketing.

What we need to consider instead is how these technologies will be used. That starts with the value of awareness, education, and decision-making.

Growing awareness of the impact

Everything has an environmental impact, including you and me. Often, it’s surprising. For example, just 15 of the largest shipping vessels in the world emit more noxious oxides of nitrogen and sulfur than all cars combined.

The first step in understanding the environmental implications of NFTs and blockchain is awareness of what that footprint is and where it falls.

For example, NFTs don’t just use energy when they’re created. The multiple bids, the multiple editions artists create, the frequency with which they change hands, and the total transactions over the lifetime of the token all compound the carbon footprint of NFTs.

Blockchain ticketing also has an impact, but a much different one. Instead of thousands of transactions over the course of decades, you might have just three transactions per ticket — issuance, transfer, scan.

The impact really depends on the methods and architectural choices the builders are making. Is the consensus proof of work or proof of stake? Are you using a generalized data object construct on Hyperledger Fabric or a token-based model on a public cryptocurrency protocol? While these decisions need to be optimized for a particular use case, energy consumption should absolutely factor into the calculus. And once you’re aware of that impact, you can start to educate yourself on what exactly that impact means.

Learning the costs of widespread adoption

Fred Wilson, a partner at Union Square Ventures, wrote about the effect of NFTs and cryptocurrency on the climate in a recent post. He pointed out that blockchains are moving toward proof of stake, a less energy-intensive version of proof of work, and that much of the energy being used to support proof of work is from clean sources like hydro, solar, and wind.

All of that would certainly have an impact on the carbon footprint and efficiency of blockchain transactions. But we also have to keep in mind the economic incentives those changes might activate.

Energy efficiency tends to increase consumption. In 1865, the increased efficiency of coal burning in England led to wider use of coal in a variety of industries. Now known as the Jevons paradox, this phenomenon shows that new technology and efficiency fuels consumption

Feeding energy-intensive blockchain proof of work transactions with clean energy certainly produces fewer carbon emissions than burning coal, but it could also ramp up the energy needed as more industries adopt this technology.

Performing arts venues are already exploring NFTs for a variety of purposes, from the financial opportunity it represents to the more connected and supportive arts community it can enable. The recent pandemic exposed a critical need to do both in the arts and events space. NFTs could be a way for venues to diversify their revenue streams or connect with an avant garde digital artist to build a bridge between their two audiences and communities.

There’s a lot of potential to be tapped and the more efficient the transactions, the lower the cost, the wider these technologies will spread.

Making decisions for finances, community, and the planet

What we ultimately need to decide is whether the benefits outweigh the costs. With many NFTs being produced today, the costs win out.

While there have been plenty of headline-grabbing million-dollar auctions of NFT art, the number of buyers has decreased as more people join the frenzy. A month after the number of unique buyers of NFTs peaked at 4,107, it had shrunk to 1,527. Brendan Ciecko, CEO of Cuseum, put it succinctly, noting that there was an “incredible saturation of items with no real demand/value.”

As the market wobbles to some kind of steady state, we’ll have to keep an eye on how many NFTs are minted compared to how many are actually transacted.

On the other hand, if we can find ways to reduce friction, to reduce the energy burden or find benefits commensurate with the costs, then we might have something.

It all comes down to macro and micro decisions and how we influence those decisions.

At a macro level, are we prioritizing the best technologies and applications? Are we finding the 20% of uses that are creating 80% of the impact? Could we retrofit those 15 shipping vessels with hybrid engines, for example, to achieve the same outcome with a lower cost?

At a micro level is consumer choice. Think globally, act locally. It’s taking that awareness and education and applying it to the decisions we make every day.

We’ve seen these decisions influenced in the past by incentives. The solar investment tax credit led to a 76% compound annual growth rate in solar installations since 2006. Electric vehicle incentives were so successful that first Tesla and then GM hit the maximum 200,000 vehicles the incentive could be applied to.

There’s a lot to consider and no easy answers. What’s important is that we have a growing awareness of the environmental impact of technology, that we educate ourselves in the various ways that technology will grow and evolve over time, and make decisions where the costs and benefits align. That’s the kind of approach that will benefit everyone, from artists and musicians to performing arts venues to VCs to consumers, and of course, the environment.