Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


NFTs: The hot new investing trend with hidden environmental costs

Vikram Barhat  |  21 Apr 2021Text size  Decrease  Increase  |  
Email to Friend

The soaring popularity of non-fungible tokens (NFTs) has drawn multi-million dollar trades and celebrity attention. But in addition to generating buzzy headlines, it’s also creating an unintentional byproduct that’s keeping environmentalists up at night: massive energy consumption adding to the overall carbon footprint created by cryptocurrencies, Ethereum in particular.

NFTs are Ethereum-based tokens that are part of the Ethereum blockchain. Platforms that sell NFTs typically need buyers to use Ethereum to make their purchases. It is claimed, the digital token already uses about as much electricity as the entire country of Libya. Greater demand and more NFT transactions indicate profit-making opportunities for the miners which could then lead to increased emissions. The underlying argument is NFTs could significantly drive up the value of Ethereum, thus incentivizing more intense, and considerably energy-hungry, mining for profit, thereby multiplying the number of machines miners use. And more machines often means more pollution.

NFTs: the next big thing

NFTs are touted to be the new frontier in the high-growth crypto investment space. Considered as the digital equivalent of collectibles these tokens have already hoovered up millions of dollars worth of investments in a variety of NFTs and NFT-related products. As their mass appeal grows and trading momentum accelerates, it is feared NFTs’ environmental impact could be considerably damaging. Against the backdrop of the current discussions involving climate change and sustainability, the wider adoption of NFTs makes the issue of the energy consumption of blockchain technology, and carbon emissions resulting from it, more real and relevant.

NFTs and the environment

According to the Digiconomist website, a single Ethereum transaction consumes more than 70.32 kWh, enough to power 1 US household for 2.5 days. This is equivalent to a carbon footprint of around 34 Kg of carbon dioxide (CO2). Compared with traditional sources of consumption, this carbon footprint is equivalent to watching more than 5,700 hours of YouTube video or over 76,000 credit card transactions. Ethereum consumes more energy per year than all of Denmark and has a carbon footprint the size caused by Lithuania, according to the site.

“With electricity consumption of cryptocurrencies being more than several countries, the rush towards NFTs has further increased this issue,” says Devesh Mamtani an NFT expert at Century Financial in the UAE. “This is very concerning.”

The major reason is transactions in the Ethereum blockchain, he says. The increase in NFT users has exacerbated the problem. “NFTs’ computation requirements are notably higher due to various stages involved including minting, bidding, selling and transferring process,” he says, noting the energy cost of minting an NFT on Ethereum is 332kWh.

Bitcoin, Ethereum and many other cryptocurrencies are secured by a mechanism called proof of work (PoW), which is an energy-intensive mining process. This means these blockchains are energy-intensive by design, says Johannes Sedlmeir, a research assistant at the Fraunhofer Institute for Applied Information Technology in Germany.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

One of the reasons there is “considerable energy consumption for these blockchains is that there are many nodes that all redundantly compute the same transactions,” says Sedlmeir, who co-authored a report on the energy consumption of blockchain technology. “To incentivize miners spending energy and money, they are sometimes rewarded with newly created (or mined) cryptocurrency units (block reward) and transaction fees for their computations.”

The higher the price of the cryptocurrency, the higher the incentive to participate in the computations, which in turn become more complicated and require more energy, he argues. The NFT market growth and the resultant surge in energy consumption are even more unsettling when you consider Sedlmeir’s claim that “the energy consumption of Bitcoin increased by three to four times and of Ethereum by about 10 times in the last year. “In the long run the energy consumption would converge towards the upper bound,” he says.

While the issue of NFT-related emissions is virtually overshadowed by the dazzle of wealth generation, it comes at a time when environmentalists and climate experts have been sounding the alarm about the unprecedented rise in temperature, sea level, species extinction, severe weather events and other hallmarks of global warming.

Time to act is now

The NFT market is in its infancy and the data on the ecological cost specific to NFTs is scarce. In December last year, artist Memo Akten created a website (which has since been taken down) and analyzed 18,000 NFTs. He found that the average NFT has a carbon footprint of around 211 kg of CO2 equivalent. “That's the same as an EU resident's electric power consumption for more than a month or driving 1,000km, or a flight from London to Rome,” says Switzerland-based Sascha Gianella, art advisor and the founder of We, The Muse, a visual artist professional support platform.

Notably, this does not include the energy consumption used in the creation of the work, its storage, or the website it's hosted on.

As fast-growing as the NFT market is, there is also growing pressure from artists and green-minded collectors for transparency, for platforms to commit to lower-carbon systems and to offset emissions. “From an art world perspective, it would be great to see crypto art and NFT platforms publicly and transparently address sustainability issues and commit to subsidizing the ecological footprint and donating to carbon credits,” says Gianella, who is currently writing a paper on the subject.

A good way to tackle the environmental impact of NFTs is to secure “a commitment from collectors, developers, artists and investors to explore and move to more sustainable alternatives other than the Ethereum blockchain. “If there were to be a way forward, it would be to create a system where the mining process can be somehow tracked back to a company that makes its energy consumption transparent,” asserts Gianella.

Proof-of-stake is the way

It is true that many cryptocurrencies are at the moment based on proof of work (PoW) or mining, and are not using energy very effectively, but this will change, assures UK-based Viktor Prokopenya, fintech investor and founder of trading platform capital.com and currency.com

“One hundred years ago, people made the first car, which had very big carbon emissions,” he argues. “That did not mean we stopped creating cars - we improved the technology and [today] society has zero-emissions cars, and we are moving towards a world where all cars will be clean.”

Cryptocurrencies, a young technology still, are evolving in much the same way. “We are moving from 'proof of work' to 'proof of stake' technology,” says Prokopenya, calling it “the Tesla of cryptocurrency,” in terms of emissions. 

He assures it will not take humans a hundred years to develop clean technology, as it did with the automobile. “It will probably take five years,” he adds.

Prokopenya points to other areas of modern technology to prove there’s always room for improvement when it comes to energy efficiency. “Machine learning and AI also consume lots of energy, but this does not mean they are bad,” he asserts, adding that zero-emission technology is just a few years away. 

“The ideas are already there, and this problem will disappear in five years,” he contends.

A Toronto-based financial writer, Vikram also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend