How the NFT ecosystem is trying to lighten its energy footprint

Although some NFTs take a more virtuous approach from an ecological point of view, they are still far from being considered responsible investment instruments.

Like many assets, NFTs (“non-fungible tokens” in French) do not escape this green wave, which consists in distinguishing sustainable and responsible investments from traditional investment instruments. More and more companies are striving to surround the creation of their tokens with a set of eco-friendly beliefs to enable NFT holders to boost their investment portfolio while making sense of their investments.

But having a virtuous approach is one thing. Being able to qualify as a responsible investment is another. Especially since on paper there is not a single definition to explain what a green NFT is. It further brings together a set of approaches aimed at making NFT manufacturing processes more environmentally friendly.

An energy-intensive creative process

Unlike money, for example, NFTs are not fungible, in the sense that they are unique and therefore not interchangeable. NFTs indicate one certificate digital authenticity (or digital title) attached to a digital file. More specifically, NFTs have the form of tokens issued on one blockchain. Each NFT is unique and can not be rendered. The digital file alone is said to be “fungible”. The associated NFT is therefore non-fungible. NFTs are used in the arts, luxury sector or for trading cards in sports.

But what poses a problem with NFTs is not so much their composition, but much more their process of creation. Like cryptocurrencies, NFTs suffer from an ecologically catastrophic image. Firstly, because cryptocurrencies are necessary for the purchase of NFTs, and the latter already have a rather large impact on the environment. To return to the example of bitcoin, its mining (its creation process) involves significant energy consumption.

According to real-time estimates from the University of Cambridge, the current annual electricity consumption of bitcoin is almost 153 TWh. In comparison, the global demand for electricity in 2021 represented 26,444 Twh according to the latest estimates from the International Energy Agency (IEA). Bitcoin would therefore weigh around 0.58% of global electricity consumption.

However, most NFTs are instead supported by the ethereum blockchain. This corresponds to an annual electricity consumption of around 106 Twh, according to estimates from Digiconomist’s technology analysis site. That is about 0.4% of global electricity consumption. Of this amount, it is difficult to know exactly what the NFT ecosystem at ethereum represents in terms of electricity consumption (as many non-NFT projects also use blockchain). But its environmental impact is far from insignificant.

The mechanism for producing NFTs is actually very energy intensive. To transform a digital file into NFT, its holder must go through a step called “minting” in English (“frappe” in French). Implementation is the process of copying a digital file to a server and then creating a cryptographic token that contains a link to that file on a blockchain. So between the creation and sale of NFT, the environmental bill can reach the top.

According to business magazine Quartz, printing a work of art would generate 2.5 kg of CO2 emissions, while creating and selling an NFT would require emissions 100 times higher. Under these conditions, it is also difficult to link the concept of environmental responsibility to NFTs. But from there to curb investor enthusiasm for this support, that is not the case.

A $ 40 billion market

In 2021, investors spent almost as much on digital art as they did on traditional art. The NFT market is now estimated at more than $ 40 billion, according to cryptocurrency analysis group Chainalysis. And this only in terms of the amounts paid on the contracts for the ethereum blockchain. This does not include other blockchains such as Solana. According to Gauthier Zuppinger, COO of NonFungible.com (a site specializing in NFT market data), the NFT market should even weigh $ 100 billion by the end of the year.

By comparison, the world market for classical art last year was valued at just over $ 50 billion, according to Art Basel. This shows the interest of investors and especially individuals in NFTs.

Faced with this increase, but also taking into account this increasingly significant desire of investors to make sense of their investments, a number of players have taken aim at the ecological problem in an attempt to remedy it.

Less energy-intensive solutions

Among the options considered as green NFT support, there is one that consists of doing without the ethereum platform. The idea is to place the works on other platforms like Cardano. Which platform uses a different authentication system (technical “proof of effort” rather than “proof of work”). Which is much less energy consuming.

An initiative that, above all, allows us to take stock of the fact that today a new generation of NFTs is emerging which, because they are designed differently, are less harmful to the environment. Other observers, for their part, believe it is up to blockchain developers to commit to trying to reduce the environmental footprint of their technology. In addition, the ethereum blockchain in 2022 will experience a major development that goes from “proof of work” to “proof of effort”. According to an estimate from the Ethereum Foundation, a non-profit organization in favor of the development of this cryptoactive, this should reduce Ethereum’s electricity consumption by more than 99.9%.

In addition, there are other projects that focus on techniques aimed at limiting the embossing of new crypto assets. A so-called “lazy” embossing idea, where an NFT would not be embossed before it was purchased, for example, is starting to emerge. This in turn would limit the environmental impact of these assets.

In the end, it is not relevant to think that we are investing responsibly by playing on NFTs. To make an investment portfolio greener, it is better to avoid relying on these tokens. But as with other asset classes, the ecosystem is trying to improve.

Initiatives for green production processes are underway and may, given investors’ appetite for green investments, increase in the coming years.

Julie Cohen-Heurton

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