No. Crypto-Mining and NFTs are NOT Killing Our Planet: An Analysis

While NFT enthusiasts hail it as the next big thing in asset ownership, the Internet is vehemently vocal about its adverse impacts on the environment. Especially against the backdrop of energy inefficiency and carbon emission.

Will NFTs spell the end of the world? Or is it all just a part of a hate campaign?

Here is an unbiased look.

The Growth of NFTs to Stardom

Much like how cryptocurrencies revolutionized transactions, NFTs have given a new digital face to the world of collectibles. Since transactions are recorded on blocks, you can tell apart the original from its replica. This will come as a massive relief in industries that are blighted with disputes over asset ownership, royalty payments, and plagiarism.

Although the concept around Non-Fungible Tokens poked cropped up as early as 2014, the success of digital collectibles and meme trading proved that NFTs were relevant to the growth of the crypto industry. The trend slowly picked up and evolved to cater to a range of users.

However, the big break came in 2020 when the market grew by 299%. Thanks to the celebrity-induced buzz, in 2021, the combined market cap of top NFT projects increased by 1,785%. Although the recent crypto winter diminished their allure, they continue to mark their presence across industries with an array of use cases.

Are NFTs Leaving a Massive Carbon Footprint?

NFTs run on blockchain — the same technology behind Bitcoin and Ethereum. Both have been notorious for their massive energy consumption and skyrocketing transaction fees. If we get to the bottom of it, we will see that the blockchains are not to blame but the consensus mechanisms they adopt. Both Ethereum and Bitcoin blockchains have adopted the energy-intensive proof-of-work consensus mechanism to power their nodes.

When Satoshi Nakamoto took to creating the first-ever digital currency, double spending was a major conundrum he had to tackle. Since digital files can be copied, people can use the currency over and over again. That would render the concept futile.

In the traditional financial system, centralized financial institutions watch out for double-spending through a centralized ledger. When it comes to blockchain technology, the ledger is essentially decentralized. This meant the challenges were also bigger.

He combined mining and proof-of-work to verify transactions on the blockchain. The former requires high-powered computers to guess a long string of random digits to unlock the digital codes and verify transactions. If your computer does it first, you are rewarded in cryptocurrencies.

As the prices of cryptocurrencies scale new heights, the competition also gets fierce because of the incentivization. People start plowing money into mining warehouses where computers run day in and day out to reap profits, guzzling up energy.

Although efficient alternatives have emerged in the market, Ethereum still rules the NFT market. A major share of the NFTs is minted on the Ethereum blockchain. This is what has caused the internet to erupt. They are positive the outrageous growth of NFTs, and the subsequent increase in blockchain transactions could potentially bring the planet to a halt.

The hoo-ha around NFTs has been a subject of the ongoing debates on global warming and the subsequent rise in sea level, extinction of species, weather changes, and whatnot. Let’s take a look at the numbers and see if there is any truth to the claim.

Debunking the Myth With Math

Most of the time, the discussions around the energy consumption and carbon emission of cryptocurrencies fail to get the larger picture. They single out the crypto industry and project its environmental impact without talking about what it replaces.

Cryptocurrencies, DeFi, and NFTs present a decentralized alternative to the traditional financial system. Studies on the environmental impact of cryptocurrencies and NFTs are irrelevant if they don’t touch upon the environmental impact of traditional financial industries. So, here is an analysis of the energy consumption of the gold mining, finance, and insurance industries when compared to Ethereum.

Finance and insurance industries vs. Ethereum

Facilities: 309 TWh (6.3%) Procurement: 253 TWh (5.1%)Total: 4,939 TWh | 44.49 TWh (0.9% of the finance and insurance industries) | | Emissions | 1,368 MtCO2 | 14 Mt CO2 (1.02% of the finance and insurance industries) |

A study published by ARK Investment Management reveals that the Bitcoin blockchain consumes less than 10% of the energy required for the traditional banking system. In fact, the comparison between the annual greenhouse emissions of Bitcoin, gold, and the banking system is pleasantly shocking.

Blockchain is a relatively new technology. It has its shortcomings. The good news is, it is fast-evolving to meet the demands of the market. Many blockchains like Solana, Cardano, Polkadot, and Polygon have emerged in recent years, exploring beyond the proof-of-work consensus to bank on energy efficiency.

That has prompted Ethereum to address the issues of rising gas fees and transactions as well. The team aims to tackle the scalability trilemma in its upcoming version by moving to a proof-of-stake consensus mechanism.

Although that may be in the distant future, the energy consumption of the crypto industry can be brought down by opting for renewable sources of energy. And that is underway. As in all industries, profit from mining can be maximized in two ways: By increasing the production or decreasing the cost of production. When the competition grows, people will look for cheaper, greener energy resources like hydropower and solar power to stay ahead of the game.

NFTs are Getting Greener

In the grand scheme of things, blockchain transactions are time and energy-efficient. Given the revolutionary shift NFTs will bring in asset ownership and transfer, the mainstream adoption of NFTs is fast approaching. As the industry grows and technology evolves, cryptocurrencies and NFTs will emerge to replace their centralized counterparts with a cleaner, greener approach.